The Senate Committee on the Judiciary this morning heard from key figures in the affair of CARP-determined webcast royalties, including RIAA Chairman Hilary Rosen, DiMA Executive Director Jonathan Potter, and a webcaster from the committee chairman's home state of Vermont, Onion River Radio's Frank Schliemann.

Senator Patrick Leahy is the chairman of the committee, and Senator Orrin Hatch is the committee's ranking Republican.

The written record (that is, both the verbal and the submitted written testimony) of the hearing, as well as the archived video stream (it turns out it was archived!) are available here.

The quotes below are from each participant's written testimony, upon which their verbal testimony was based.

	Senate Judiciary Committee chairman Senator Patrick Leahy (D-VT)
Chairman Leahy: "Now that the finding has been reached ­ and is being reviewed by the Librarian of Congress ­ the industry is in an uproar. Nobody seems happy with the outcome of the arbitration and all the parties have appealed. The recording industry and artist representatives feel that the royalty rate ­ which is based on the number of performances and listeners, rather than on a percentage-of-revenue model ­ is too low to adequately compensate the creative efforts of the artists and the financial investments of the labels. Many of the webcasters have declared that this per-performance approach, and the rate attached to it, will bankrupt the small operations and drain the large ones. Such an outcome would be highly unfortunate not only for them but also for the artists, the labels and the consumers, who all would lose important legitimate channels to connect music and music lovers online. "Moreover, independent of the substantive outcome, I have heard complaints from all sides about the fairness and completeness of processes and procedures employed in the arbitration. Indeed, the concerns of many small webcasters were never heard, since the cost of participating in the proceedings was prohibitively expensive and their ability to participate for free was barred by procedural rules... "All of which brings me to the question I want each of our witnesses today to consider: Why can’t everyone ­ Congress and artists and labels and webcasters alike ­ take the CARP as a genuine learning experience, and sit down to determine what is the next best step? If the parties can avoid more expense and time and reach a negotiated outcome more satisfactory to all participants, that would surely be preferable to rampant dissatisfaction."
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	Senate Judiciary Committee ranking Republican Senator Orrin Hatch (R-UT)
Senator Hatch: "Over the past two years of litigation and some licensing activity, piracy over peer-to-peer networks has gotten worse, and the online music market has gotten more consolidated. This is the wrong direction. Consequently, Mr. Chairman, I have sent you a letter outlining my concerns and suggesting legislative items for us to develop that can help the online music market grow for music fans and help to ensure that more of the benefits of online opportunities accrue to the artists."
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	Recording Industry Association of America Chairman and CEO Hilary Rosen
Rosen: "The arbitrators had access to a huge amount of confidential financial data about the webcasting and recording businesses. They did their homework. They looked at large and small companies, their costs, their financial projections, their forecasting statements, their IPO offerings, etc. In other words, the CARP had a lot more information about the webcasters’ ability to pay than this hearing could ever unveil... "In the end, if Congress believes a subsidy for webcasters is appropriate, it should not come on the backs of the individual creators and companies who provide the webcasters with the key component of their business. Perhaps other subsidies, such as tax breaks, would be more appropriate... "It was the webcasters who insisted upon a per use fee (except at the very end of the process after final rates were proposed), and several webcaster witnesses, including their principal economic expert, testified against the adoption of a percentage of revenue rate. In the end, the CARP (relying in large part on the webcasters’ expert witness) concluded that a percentage of revenue metric was inappropriate for several reasons."
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	Digital Media Association Executive Director Jonathan Potter
Potter: "Given the care that Congress undertook in 1995 to prevent anticompetitive licensing conduct by the recording industry (including several written consultations with the Antitrust Division of the Department of Justice), Congress surely could not have intended that this new standard be more susceptible to anticompetitive behavior in the collective licensing process. Unfortunately, as documented by the CARP Report, that is precisely what occurred. Even more unfortunately, the CARP erroneously believed that its flexibility was so limited by the new standard, that its decision ultimately relied only on benchmarks from agreements that the arbitrators noted, throughout their decision, were tainted by RIAA’s willful and intentional anticompetitive behavior... "Whatever the result for this proceeding, DiMA respectfully submits that the CARP Report in this proceeding, and the negotiations chicanery undertaken by the RIAA, prove beyond question that the 'willing buyer/willing seller' standard must change. There can be no hypothetical 'willing seller' in a non-competitive market where there are no alternative sources for the same licensed works. In such a market, as shown in the CARP Report, the marketplace can too easily be manipulated by monopoly sellers so as to produce an artificial above-market rate, concocted solely as precedent for the CARP. We submit that Congress should act promptly to rescind the willing buyer/willing seller standard, to reinstate the section 801(b) factors as the relevant touchstone for the CARP determination and, to paraphrase that great rock philosopher Pete Townshend, to ensure that we don’t get fooled again."
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	Arbitron Webcast Services VP/GM Bill Rose
Rose: "If the proposed fees were applied to an over-the-air radio audience, the royalty would create an impact that would significantly alter the financial viability of an already mature and healthy medium. Broadcasters would not be able to sustain a cost that amounts to 25 percent or 50 percent of their current over-the-air revenue. The webcasting industry is still in its infancy, with little revenue and profit being generated at this stage of the market’s development. Therefore, the impact on the webcasting industry would be even more burdensome... "While webcasting’s audience is growing rapidly, it is still small compared to the traditional media. We believe that all parties should work together to enable webcasting media to grow a critical mass of audience big enough to support significant advertising revenue. A broad distribution of programming, greater competition and a diversity of voices on the Internet will help achieve this objective."
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	Onion River Radio founder Frank Schliemann
Schliemann: "As General Manager, Program Director, Engineer, and Traffic Manager, I have invested a considerable amount of time over the last sixteen months to ensure the success of Onion River Radio. I have also invested a substantial amount of money. Our audience has continued to increase, and prior to February I was convinced that Onion River Radio would not only survive, but also provide results for local advertisers. Then the Copyright Arbitration Royalty Panel recommended music licensing rates that would result in royalty fees totaling 78% of our gross revenue. "The RIAA and SoundExchange have said many times in the media that webcasters should not get a 'free ride' from record companies and recording artists. Webcasters are not asking for a free ride. We want to ensure that all creators are fairly compensated for their work. Like broadcast radio, Internet radio stations already pay royalty fees to songwriters and music publishers for the same performances of the same works. "If the CARP decision is approved by the Librarian of Congress, Onion River Radio will pay a sound recording Performance Fee of $1,880.93 for January ­ March 2002. In contrast, our performance fees for that period to songwriters and music publishers, through ASCAP, BMI and SESAC, will total $170.50."
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	Websound President Billy Straus
Straus: "It is also abundantly clear...that one size will not fit all. Websound executed its license with RIAA based on a carefully considered set of business parameters, which make sense in the context of our fee-for-service model. The terms of our license, therefore, cannot necessarily be held up as a stand-alone model for other webcasters. "It is crucial that we do not force all of the wonderfully diverse sources of music programming out of the system by creating an untenable set of royalty provisions across the board. To do so is surely to sound the death knell for one undeniable promise offered by the Internet: global access to an infinitely broad range of musical expression. To this end, it is surely not fair to subject a small, noncommercial webcaster such as San Francisco’s SomaFM.com to the same royalty requirements as a large commercial webcaster like Yahoo!, or for that matter a smaller commercial webcaster such as Websound. "To respect the rights of copyright holders while not overburdening the small webcaster, we should institute a multi-tiered approach. The thresholds can be tied, in part, to a maximum number of simultaneous listeners, or to a total monthly volume of 'performances,' for example. Accurate reporting can and will help facilitate these distinctions, and we believe that a reporting technology such as RadLog will form a part of the big-picture solution."
	Recording artist Dan Navarro
Navarro: "I discovered early on that there's little money to be made from recording albums, and I learned to place my musical aspirations alongside more practical realities in order to supplement my income. No matter what royalty arrangement I made with a record label or even when I produced my own recordings, I never made a livable income from my recording projects alone... "There has been a great deal of publicity lately about the plight of webcasters, who say that as new and small businesses they cannot afford to pay the digital performance royalty rate set by the CARP last February. Truly, fostering the growth of these new outlets for our music is of the utmost importance to performers. As the breadth and diversity of what is played on over-the-air radio shrinks, webcasting potentially offers a greater variety of music and a new way for us to reach an audience. The truth is, however, that we are also small businesses, and unless there are income streams that we can rely on to make a living, we will be unable to continue to create the sound recordings that the public wants to hear."

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From today's Wall Street Journal: "Two weeks ago, hundreds of Internet radio stations went silent as part of a protest against proposed royalties that they say would put them out of business. But the biggest Internet radio station of all, run by AOL Time Warner Inc.'s America Online service, kept playing music all day long.

"A big part of the reason: America Online wants to keep the peace with a sister division, Warner Music Group, which is fighting for the royalties for its recording artists and labels.

"'It would appear that AOL has found itself on both sides of the table,' says Raghav Gupta, chief operating officer of Live365 Inc., one of the small Web radio stations that is fighting the royalties..."

Read the full article here (subscription required). (Or go to WSJ.com, look down the left-hand menu, select "In Today's Paper," and then scroll down to the "Marketplace" section.)

"Webcasters, Music Labels Both Say They're Underdogs"

Also from today's Wall Street Journal: "In fighting royalty rates proposed by an arbitration panel, online-radio operators are battling the major recording firms and their trade group, the Recording Industry Association of America. 'We are certainly the David against the RIAA Goliath of the five big record labels,' says Kevin Shively, director of interactive media for Beethoven.com, a Hartford, Conn., classical-music Webcaster owned by a small closely held radio company, Marlin Broadcasting LLC...

"On the other side, big record companies are also trying to pose as the underdog by playing up the plight of small, independent music companies and artists who would benefit from the online royalty payments..."

Click here for this story. (Again, subscription required.)

From The National Journal: "Members of the recording industry on Tuesday countered the claims of webcasters that have been lobbying lawmakers to pressure the Library of Congress to reduce the rate for streaming digital music over the Internet.

"SoundExchange, a royalty-collection agency established by the Recording Industry Association of America (RIAA) and now jointly run with recording artists' groups, organized meetings with lawmakers in advance of a Wednesday Senate Judiciary Committee hearing on webcasting rates.

"John Simson, [above] executive director of SoundExchange, said the recent lobbying by webcasters is designed to short-circuit an equitable decision-making process at the last minute. 'One of our main points here is that both sides presented lots of testimony [on webcasting rates] over many months, and we are now almost at the end of that process,' Simson said. 'The webcasters are tying to push special interests for a result that is not based on the evidence that was presented to the arbitrators [because] they aren't happy with that...'

"Because the 1998 Digital Millennium Copyright Act requires the CARP to set the rate based on what a 'willing buyer' would pay a 'willing seller,' the arbitrators looked closely at the Internet firm Yahoo's agreement with the RIAA to pay 0.2 cents for Internet-only streams and 0.05 cents for retransmissions. It then averaged the webcasting rate down and the retransmission rate up, based on its conclusion that both RIAA and Yahoo had an incentive to artificially boost the cost of the Internet-only streams at the expense of lowering the retransmission streams...

"On Tuesday, independent recording labels joined Simson on his rounds of most members of the Senate Judiciary Committee. 'We are not hearing bellyaching and crying and whining,' said Gary Himelfarb [above], president of RAS Records in Silver Spring, Md. 'I need to be in my office today, but I am here because they started the process of lobbying, and we need to respond.'"

This full article appeared in The National Journal yesterday.

From Wired.com: "A death rattle is now playing on Napster, the long embattled file-trading service.

"On a tumultuous Tuesday that encapsulated its stormy history, CEO Konrad Hilbers announced his resignation. Shortly after, Napster's approximately 70 remaining employees were offered two unappealing options: Quit now and receive severance pay, or take one week of unpaid leave, hoping somebody will revive the once powerful file-trading company, sources close to the situation said...

"And so closes one of the most significant chapters in Internet history. Napster, the brainchild of two college students who dreamed up a way to exchange music files over the Internet, became so big and popular that the mightiest forces of the entertainment industry -- threatened by a new-age distribution system -- had thrown all its weight toward shutting it down since December 1999...

"Hilbers and the board of directors had been locked in a battle over the direction of the company. Hilbers supported a sale to Bertelsmann AG -- the German media conglomerate where he formerly worked -- that had shelled out over $85 million in loans to Napster. The sale, employees were told, would have insured that everyone kept their jobs. However, the board of directors nixed the sale...

"After Hilbers resigned and employees had been given their options, the company issued an ominous statement. 'We deeply regret that we have not yet been able to find a funding solution that would allow Napster to launch a service to benefit artists and consumers alike,' the statement said. 'We will be looking at additional steps in the coming week to further reduce expenses.'"

Read this entire article in Wired.com here.