Behind Closed Doors: Where the New Webcasting Rates Actually Came From

The Copyright Royalty Board rate determination that has disappointed many in the artist and label community came about because the judges relied on Merlin’s direct licensing deal with Pandora and the Warner Music Group’s direct licensing deal with iHeartRadio, according to Billboard sources who have been briefed on the ruling.

That disclosure comes from those who have spoken with outside legal counsels, who relayed their interpretation of the CRB ruling to their clients -- the record labels and digital companies that were participants in the rate trial. While the CRB’s new rates are known, the full document from the CRB judges determinations are not publicly or privately available to participants -- outside counsels for each of the participants are reviewing the ruling to redact proprietary information before it's released to the public.

The CRB's directive is to set rates that would exist in a "willing buyer, willing seller" marketplace. In the previous rate proceeding five years ago, no direct deals existed to provide benchmarks for the CRB. This year there were three examples of willing buyers and willing sellers agreeing on rates.

According to sources that have been briefed on the ruling, the judges relied on the Merlin and Warner Music Group deals with Pandora and iHeartRadio, respectively, but not the direct deals that the majors cut with iTunes radio, which supposedly was more lucrative than the Pandora deals. Those sources relay that the CRB indicated in its determination that it didn’t have enough information to rely on the iTunes Radio deals.

The scenario described to Billboard by these sources makes sense given the clues the CRB dropped before the decision was announced. Seeking guidance on what's called a "novel material question of substantive law," the CRB asked the Register of Copyrights if the Copyright Act prohibited the judges from setting different rates for different types of licensees. This question was widely -- and correctly, it now seems -- interpreted as the CRB wondering if major labels might be paid more than indie labels. This is the type of question the CRB might have if it saw indie labels negotiating a lower rate than the major labels.  

Instead, the CRB relied on the Merlin deal and the WMG deal to determine per play rates for commercial and non-commercial (respectively paid subscription and ad-supported digital radio). While terms of Merlin’s deal with Pandora haven’t been disclosed, sources say that agreement used the CRB rate -- then $0.0013 and now $0.0014 -- as a ceiling, and then negotiated a discounted rate for incremental plays, a move designed to bring a greater revenue pool to independent artists and labels, apparently at the expense of the statutory rate.

At the time, Merlin was attacked by some for cutting the deal because it was feared that the CRB would look at the overall deal, including the discounts baked in, and use it as a market-negotiated benchmark in setting the current deals. But sources within the Merlin community countered that there is no way the deal could be considered a free-market negotiation because the deal used the CRB-imposed rate as the ceiling. However, the CRB apparently ignored that argument.

So, if the Merlin deal was viewed as the floor, assuming that the CRB went with the $0.0014 rate -- and not the overall diluted discount rate for indies, whatever that was -- then the WMG deal with iHeartMedia must have served as the ceiling. While iHeartMedia cast that deal as covering both terrestrial and digital, sources say that the radio syndicate just paid a lump sum that didn’t distinguish between either type of play.

"The judgement makes it clear that the ruling was based on shortsighted deals by Warner and Merlin," groused one label executive.

In any event, the CRB apparently ignored the other promotional benefits that WMG supposedly received -- such as incremental and promotional radio airplay for its music -- and only focused on the payment. While it is unknown what amount of revenue was paid to WMG from iHeartRadio digital broadcast, the CRB decision appears to have translated into about $0.0020 per play rate, because the determination set the new per-play statutory rate at $0.0017, the midway point between the statutory rate used in the Merlin deal and the suspected rate of the WMG deal. One source disputes that math, however, saying the Judges' determination states the new rate was not “an average” between the Merlin and WMG rates.

Even if the CRB went with the higher WMG rate as the ceiling, whatever that was, the label community would have been disappointed, because it seems to have been lower than the rate SoundExchange sought (a per-play rate of $0.0025). What, though, would have happened if WMG hadn’t cut a direct deal, and the CRB only had the Merlin deal in hand as part of its considerations, offers one industry source.

“The CRB decision is the latest illustration of a broken music licensing system,” according to a statement issued by the Recording Academy. “The new rates for artists and producers are below marketplace benchmarks, while the travesty of FM radio paying nothing for recordings continues. Meanwhile songwriters' rates are suppressed under a completely different licensing system. The latest news from the rate court is further proof of the need for the passage of broad music licensing legislation.”

SoundExchange itself, responsible for collecting the royalties that result from the CRB's ruling, expressed disappointment with the ruling almost immedieately. But the Future of Music Coalition, an artist advocacy group based in D.C., is upbeat about the rates. "The new rates will allow artists and independent labels to participate in this success at a higher level,” the organization’s CEO Casey Rae said in a statement. “The fundamental value of popular Internet radio services comes from music creators, and we are glad this has been recognized in a healthy rate increase for non-subscription services."

“This decision allows for competitive experimentation in the music discovery space, opening up endless options for listeners,” reads a statement from Mike Montgomery, executive director of CALinnovates, a San Francisco advocacy group for technology companies.

The new rates are less forgiving for small webcasters, however, and potential entrants that don't have the resources to negotiate directly with record labels. The compulsory license allows these types of webcasters to operate without reaching agreements with rights holders. "Getting the right number is key,” says Uri Fleming, an attorney with Kleinberg Lange Cuddy & Carlo. “We'll have to see if the rate established is such that an upstart [or] a new entrant can make a viable business model."

Future Of Music Coalition’s Rae is also concerned that the CRB did not make a distinction between large and small webcasters. "Digital music benefits from diversity, and services with more modest operations often help developing talent and niche genres find audiences, as well as contributing to the revenue pool. If there isn't an option for new entrants, we may end up with a less diverse digital music landscape," he stated.