SoundExchange Saves Face in the Internet Radio Debacle: When Copyright Reform Goes So Wrong, the "Victor" Has to Save Itself

By CECILY MAK

Monday, Jul. 16, 2007

Today, July 16, is the day Internet radio providers and consumers had been dreading: the day that the new Internet radio royalty rates were supposed to take effect. It is the day, too, on which it had been predicted that thousands, perhaps tens of thousands, of U.S.- based Internet radio stations would go bankrupt and silent, as a result of dramatically increased, largely unaffordable, and retroactive statutory license fees.

Yet this day has come, and Internet radio plays on. No new fees are due, and webcasters do not seem to be lining up to declare bankruptcy.

What happened? The answer is that webcasters were granted an extension of sorts - not by Congress or the courts, both of whom were asked to intervene, but rather by the victor in the battle over royalty rates, SoundExchange, the radio-royalty-collection arm of the RIAA.

On Thursday, July 12, a single business day before it would have had the right to begin to enforce one of the greatest victories in copyright history, SoundExchange released more news about yet another offer to compromise. Even more strikingly, it issued a statement saying that it voluntarily would refrain from enforcing the new rates for at least another 60 days, while negotiations with webcasters continue.

Is this a result of successful negotiations between the Digital Media Association (DiMA) the organization representing the county's largest webcasters, and SoundExchange? In part. Is it a result of the awareness born out of the June 26 Day of Silence, and the tens of thousands of calls and letters of protest? In part. How about of the grassroots efforts of the thousands of people and entities that stood to suffer if the new rates were enforced? In part.

A more likely explanation, however, is that SoundExchange and the powers behind it realized that they simply could not effectively enforce the new rates. Thus, instead of being faced with the embarrassment and ill effects of an unenforceable victory, they have released webcasters from compliance, for now.

Dueling Press Releases and Other Recent Events

In a recent column for this site, I reviewed the events leading up to the June 26th national "Day of Silence," on which webcasters protested the hike in Internet radio royalty rates, a rate hike that threatened an entire industry. Since then, there have been several interesting developments.

A few days after the Day of Silence, SoundExchange issued a press release in which it proclaimed that it would offer certain webcasters a minimum fee cap of $2,500 per webcaster, a dramatic improvement over the $500 per station fee mandated by the new CRB rates.

While this appeared to be a step in the right direction, DiMA quickly responded with a brief but powerful clarification of this new position. According to DiMA, this cap was to apply through the end of 2008 only -- meaning that the webcasters would still be on the hook for the $500 per station fees for the remaining two years of the term. Jonathan Potter, Executive Director of DiMA was quick to comment, "Any offer that doesn't cover the full term is simply a stay of execution for Internet radio. The looming 2009 billion-dollar threat is destabilizing and inhibits investment and growth."

The real blow to webcasters came two weeks later, on July 11, when the U.S. Court of Appeals for the D.C. Circuit denied all motions to stay any part of the Copyright Royalty Board's ruling and new rates. Music blogs were littered with comments sputtering disbelief. Webcasters scrambled to come up with a plan. Would they shut down their stations by July 15, the day that the new rates were to be enforced? Would they have to declare bankruptcy to avoid liability for the hundreds of millions of dollars in retroactive fees that would suddenly be due? Would the new rates even be enforced? Enforced by whom? How?

Why The New Rates Might Never Be Enforced

In ongoing negotiations to arrive a suitable compromise, one has to wonder why SoundExchange was even willing to negotiate. After all, SoundExchange had prevailed before the Copyright Royalty Board (CRB). Webcasters' efforts to reverse their loss, in Congress and the D.C. Court of Appeals, were all unsuccessful. All SoundExchange had to do was sit back and wait for the checks to start rolling in, right?

Wrong.

A judgment is only as good as one's ability to enforce it, and this observation applies to statutory rate changes as well. A legal victory in civil court or a forum such as the CRB is meaningless if it is not enforceable. Thus, while SoundExchange may have seemed to be in an ideal position, it actually was in a terrible position.

In order to collect the billions of dollars it was now owed, SoundExchange would need to actively pursue those from who it could collect. However, there are thousands of Internet radio providers and hundreds of thousands of stations serving millions of listeners daily, and SoundExchange has a staff of fewer than 30. Moreover, among those 30 people, very few, if any, have any experience in chasing down substantial royalty checks. (Meanwhile, the only job opening on SoundExchange's website is for that of an Artist-Label Relations Representative - not a Collections Agent.) In sum, SoundExchange simply doesn't seem to be preparing to actively rake in one of the greatest windfalls in copyright history.

SoundExchange must have known, too, that if today came and went with little or no change, then the legitimacy of the new rates would be called into serious question. And this, in turn, would dramatically weaken SoundExchange's position in what we all understand to be very active negotiations.

SoundExchange's best bet, then, was to postpone enforcement on its own, so as to preserve the advantages they still retain at the negotiating table.

If the Appointed Authority Doesn't Get it Right, Someone Will

In sum, it appears that all parties involved have realized that they have to take this copyright reform business into their own hands.

By imposing rates that would, if enforced, bring a thriving industry to a screeching halt, the CRB clearly didn't get it right. Wisely, Congress and the courts seem to have chosen to stay out of the whole mess. That leaves one key question: Can the two superpowers of the Internet radio business, SoundExchange and the collective of webcasters, now find some common ground?

Let's hope so. Significantly, any settlement may not only be important in itself, but also have a strong precedential effect, in that it may lessen our collective willingness to leave jobs like this one, which inherently involving accommodating many different interests, to the CRB alone in the future.


Cecily Deane Mak is Senior Counsel, Music at RealNetworks, Inc. She is a frequent public speaker and writer on a range of topics including music rights, online media and entertainment law matters.

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