Last week, the U.S. Register of Copyright, Maria Pallante, released a memorandum addressing novel questions of law in “Web IV,” the rate-setting proceeding that will determine the statutory licensing rates for non-interactive digital radio from 2016-2020. The outcome included a big victory for webcasters, allowing them to introduce direct licensing agreements as “benchmarks” in the statutory rate setting proceedings before the Copyright Royalty Board.
This is a fairly significant development in Web IV. Many non-interactive webcasters, such as Pandora, operate under a statutory license in order to stream sound recordings into the United States. The license benefits both webcasters and the creators of music; the former obtaining permission from the government to stream any music they like, and the latter receiving fair market compensation for their creative contributions.
Allowing direct licensing deals to be used as benchmarks in the upcoming rate setting proceeding, however, threatens to skew the ultimate rate determination in webcasters’ favor at the expense of record labels and performing artists. This is because direct licensing deals are not always reflective of a fair market, despite arguments to the contrary.
The statutory license is administered by SoundExchange, the non-profit organization designated by the Library of Congress to collect and distribute royalties pursuant to the license. The scheme is unique in that SoundExchange distributes royalties directly – and equally – to record labels and performing artists. In contrast, a direct licensing deal between a webcaster and record label may bypass artists entirely, granting the label, as the sound recording copyright owner, sole discretion in determining whether its artists receive a cut. The result is record labels motivated to accept direct deals with webcasters below fair market value. While labels may benefit from such payouts in the short run, these deals risk shortchanging their product’s genuine long-term value.
The Copyright Royalty Judges should carefully consider the context in which the direct licensing agreements introduced into evidence were struck before affording them benchmark status in Web IV. Otherwise, opportunistic webcasters will continue to strike below-market direct licensing agreements with record labels under the illusion of a “fair market,” devaluing the very music their business wouldn’t exist without.
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Alexander Reed is an editor on the Michigan Telecommunications and Technology Law Review, and a member of the University Michigan Law School class of 2017.