BY KURT HANSON
Posted on the U.S. Copyright Office's website today is the 146-page report of the the recent Copyright Arbitration Royalty Panel (CARP) hearings on Internet radio royalties, which reveals that the fees recommended by the panel are based almost exclusively on a deal cut between the RIAA and Yahoo! in Summer 2000.

Those fees — effectively about 2¢/listener-hour for webcasters and half that for broadcast radio simulcasts, retroactive to October 1998 (see 2/20/02 RAIN here) — are perceived by most parties involved as so high that they will effectively kill Internet radio as an industry if accepted by the Copyright Office.

"The Yahoo!-RIAA negotiation was the only one to reflect a truly arms-length bargaining process on a level playing field between two major players of comparable skill, size, and economic power," the three-member panel of arbitrators said in their report.

Note that the Adobe Acrobat ".pdf" file (available via the "CARP Report" link here) contains blacked-out words and phrases on almost every page (represented as "xxxxxxx" in the quotes below, which is how it cut-and-pastes from Acrobat), representing an effort on the part of the Copyright Office to protect confidential business information (as requested by participating parties).

Unless one or more CARP participants files an objection by this Wednesday, the panel's recommendations will become law in 60 days.

We'll have a follow-up report on the document later today in RAIN, but here are some of the key interesting points:

We'll send you a brief daily summary of each day's stories with a clickable link to the RAIN home page. First name (req'd): Last name (req'd): Station/market (or company or school): E-mail address (req'd):

RIAA proposed per-song rates —
or, for B2C, 15% of revenues...
"Based upon these agreements, RIAA proposes the following rates for DMCA compliant webcasting services: (a) For basic “business to consumer” (B2C) webcasting services, either 0.4¢ for each transmission of a sound recording to a single listener, or 15% of the service’s gross revenues; (b) For “business to business” (B2B) webcasting services, where transmissions are made as part of a service that is syndicated to third-party web sites, 0.5¢ for each transmission of a sound recording to a single listener; and (c) For “listener-influenced” webcasting services, where the transmissions are partly influenced by the listener, 0.6¢ for each transmission of a sound recording to a single listener...

"RIAA further proposes a minimum fee, subject to certain qualifications, of $5,000 per webcasting service and a Section 112(e)(1) ephemeral license fee of 10% of each service’s performance royalty..."

...while Webcasters proposed per-song or per-hour, based on elaborate theoretical model
"The Webcasters’ model is fundamentally premised upon the notion that, in the hypothetical marketplace we seek to replicate, copyright owners would license their sound recording digital performance rights and ephemeral reproduction rights to webcasters at a rate no higher than the rates at which music publishers (through the PROs) have licensed their musical work analog performance rights to over-the-air radio broadcasters...

"By combining [ASCAP-BMI-SESAC] fee data with data on the Arbitron 'ratings' or listening audience of these stations, Webcasters converted the over-the-air music stations’ fees paid to the Pros into an average fee paid by an over-the-air broadcaster per 'listening hour...

"Webcasters...argue that, if royalties paid to musical works copyright owners are to be used as a benchmark for royalties that should be paid to sound recording copyright owners, an adjustment is required to account for the greater promotional benefits received by the sound recording owners relative to the musical work owners...

"To determine the appropriate adjustment, Webcasters assumed that 27% of all record album sales were directly attributable to record play on the radio... Webcasters then calculated the promotional value discount that reflects the difference in the total remuneration derived by sound recording owners and musical work owners from the sale of record albums promoted by over-the-air radio....

"Applying this discount to Webcasters per-performance benchmark of 0.02¢ and their per hour benchmark of 0.3¢, yields a proposed per-performance fee of .014¢ and a per-hour fee of 0.21¢.

... Note that the Webcasters' case, as presented to the CARP panel, took a roundabout route, starting with the ASCAP-BMI-SESAC %-of-revenues royalty rate and turning it into a per-song rate. For webcasters who were hoping for a %-of-revenues rate, that was a fatal decision. ...

Both parties failed to provide evidence
of Internet radio's effect on record sales
"We cannot conclude with any confidence whether any webcasting service causes a net substitution or net promotion of the sales of phonorecords..." (Italics theirs.)

"The evidence adduced by RIAA on this issue, consisting entirely of anecdotes and unsupported opinion testimony, is unconvincing...Indeed, RIAA did not attempt to offer any empirical evidence to support its 'concerns' that webcasting causes a net substitution of phonorecord sales.

"Webcasters also failed to present any compelling evidence. In addition to a plethora of similarly unsupported opinion evidence... they produced some unpersuasive empirical evidence... to support their claim that webcasting actually causes a net promotion of phonorecord sales.

"Most reliable benchmark rate"
was never implemented
"The most reliable benchmark rate would be established through license agreements negotiated between these same parties for the rights described. Unfortunately, the record contains only one agreement that appears to meet all three of these parameters, namely, the agreement between xxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxx. See xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxx, testified that xxxxxxxxxxx was a fully DMCA-compliant service.

"The agreement provided for a royalty rate of xxxx per performance with xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Regrettably, while directly on point this agreement can be accorded little weight because it was never implemented, and xxxxxxxxxx therefore never paid any royalties under it. Rather, xxxxxxxxxx outsourced
its streaming to a third party, which apparently deemed the agreed rate too high and elected instead to avail itself of the compulsory license rate set in this proceeding."

... What deal are they describing here? Notice that "xxxxxxxxxx" contains the same number of characters as "ClickRadio." (While "xxxxxxxxxxx" (the first instance) doesn't, "Click Radio" with a space does contain that many characters.) (If you have a better idea, e-mail me here.) ...

Decision rule on rate : “Actual negotiations”
between relevant buyers and sellers
"The [Webcasters], on the other hand, contend that these agreements are fatally
tainted in numerous respects and that willing buyer/willing seller rates are best derived from the thoughtful, theoretical model developed and explicated by Dr. Adam Jaffe, a distinguished economist. In essence, the parties ask us to choose between theory and practice, with each side pointing out numerous alleged flaws in the opposing party’s presentation..."

"If we can observe agreements that willing buyers and willing sellers actually negotiated in the relevant marketplace, we would generally expect their negotiated rates to already reflect the parties’ joint perceptions of the various factors identified in Sections 114(f)(2)(B) and 112(e)(4). In that event, no further rate adjustment would generally be required to determine a willing buyer/willing seller rate." (pg. 83)

Rate for radio retransmissions
based on RIAA/Yahoo! deal
"Broadcasters note that broadcasters represent more than 1500 of the 2300 entities which filed Notices of Intent to use the statutory license... They argue that the fact that RIAA was able to negotiate agreements with only 26 webcasters, but with none of the 1500 broadcasters, demonstrates that broadcasters and webcasters represent different groups of “willing buyers,” which would negotiate different rates in the marketplace.

"Although no party has adduced a single digital sound recording performance license agreement with any radio broadcaster, the Yahoo!/RIAA agreement entails retransmissions of the same types of radio stations signals, albeit by a third party – Yahoo!. The Panel has already determined that the typical willing buyer/willing seller rate for that RR" — radio retransmission — "rate is 0.07¢ per performance.

"The Panel must now decide whether the record suggests a different rate for retransmission of an identical radio signal by the station itself -- rather than by a third party. We find the record (and consideration of the statutory factors) utterly devoid of evidence implying a higher rate and insufficient to warrant a lower rate..." (Italics theirs.)

"In sum, the Panel finds no reason to set a different rate for broadcasters (that simulcast their own signals) than for third parties that retransmit the same signals on behalf of the broadcasters. Accordingly, we determine the willing buyer/willing seller commercial broadcaster rate also to be 0.07¢ per performance." (Pg. 86)

... In other words, the deal that Yahoo! cut with the RIAA almost two years ago -- in the heat of the dotcom craziness! -- has been used to set the the rate for over-the-air broadcasters today. ...

Setting the rate for side channels
also based on Yahoo! deal
"The record is devoid of direct evidence of the willing buyer/willing seller rate for archived radio retransmissions. But the Panel must resolve which rate, of those we have already determined, should apply to these retransmissions – the 0.07¢ RR (and commercial broadcaster) rate, the 0.14¢ IO rate, or some other rate.

"In accordance with our previously articulated reasoning, the best benchmark for
determining royalty rates for the transmission of archived programming, side channel
programming, and substituted programming, is the Yahoo!/RIAA license agreement.
That agreement provides compelling record evidence of two willing buyer/willing seller
rates: (1) a rate for Internet retransmissions of AM/FM broadcasts (RR rate); and (2) a
rate for all other Internet transmissions."

This document is quite large, and there's lots more analysis to be done. Please look for follow-up stories in RAIN tomorrow -- and perhaps even in an afternoon update today.

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On Friday, we showed you the first draft of a petition letter that some industry leaders intend to send to the US Copyright Office in protest of the webcasting streaming rate recommendation of the CARP.

MeasureCast and Ultimate80s.com are the companies behind this effort. The letter has recently been updated, and is viewable here.

RAIN, on behalf of the companies above, is accepting input and ideas for the letter. When the letter is complete, we will provide instructions on how you can participate in this appeal effort. In the meantime, please keep your input and ideas coming. If you have some thoughts on the letter, please feel free to e-mail paul@kurthanson.com. Thanks.

"Practically unworkable..."

Talking about how the ruling

"Run it, and believe in it!"

Jeff Laurence has made available

From The Wall Street Journal: "Only a few years ago, politicians and regulators at least paid lip service to the idea that government should stay out of the Internet as much as possible. So why is everyone in Washington clamoring to meddle in the online world now?

"At the Federal Communications Commission, a new proposal would make it easier for the Bells to dominate high-speed Internet service. In Congress, the controversial Tauzin-Dingell bill seeks to accomplish the same thing. Meanwhile, over at the Copyright Office, they're mulling a plan that could kill the fledgling Internet radio industry. And if Sen. Fritz Hollings has his way, the personal computers of the future will be designed to congressional specifications.

"Nothing escapes government entanglement, of course. But this current flurry of activity is especially troubling for two reasons. First, technology is complicated, which makes these issues easy to get wrong. Second, all of the measures directly affect consumers -- yet consumers seem to have very little voice in these debates...

"Even as politicians and regulators profess their passion for broadband, they're busy attacking applications that could increase demand for high-speed Net access. The Copyright Office is considering an arbitration panel's report that would determine royalties for songs streamed to listeners online -- and penalize the independent Web broadcasters that give music fans an alternative to broadcast stations' endless top-40 fare and inane DJ blather...

"At Live365.com, which streams broadcasts by hundreds of Web DJs, the proposal is a huge blow. The company favors compensating artists but wants rates that won't destroy the Web radio movement before it has a chance to grow. If you want to weigh in, e-mail the Copyright Office at copyinfo@loc.gov."

This article is available in today's Wall Street Journal. If you're registered on the site, you can read it here.