The Digital Performance Right and its Effects on Diversity in Webcasting

Abstract

In 1998, the United States Congress passed the Digital Millennium Copyright Act as an implementation of the World Intellectual Property Organization's Copyright and Performances Treaty of 1996. The DMCA, in concert with an earlier law, the Digital Performance Right in Sound Recordings Act of 1995, altered the legal balance between copyright holders and broadcasters, particularly those who broadcast on the World Wide Web. The new right granted to the recording industry as well as differences in the consideration of traditional broadcasters and webcasters suggest a broad redefinition of the role of copyright with respect to digital networks. This paper analyzes two important questions: First, how has the DMCA and related laws and rulings affected webcasting? Second, what are the implications of these developments for the diversity and future of digital broadcasting?

Introduction

SomaFM, a San Fransisco-based Internet radio station, is one of a multitude of emerging small webcasters. Created by Rusty Hodge in February of 2000, SomaFM is a prototypical underground webcaster – the station literally operates out of Rusty's basement – that is run by volunteers, eschews advertising, and is funded by the contributions of its volunteers and donations (SomaFM, 2003, about SomaFM). SomaFM runs on the love that its volunteers have for very specific styles of music, which is rewarded by the support of a sizable audience who enjoy niche programming on the 11 channels that SomaFM offers.

During the Spring of 2002 the station's staff learned about copyright arbitration negotiations that were occurring in Washington D.C. The station continued broadcasting while its members learned about the implications that recent copyright legislation had for the station and implored its listeners to voice their concerns to their lawmakers. Despite the potential threat of imminent financial disaster, hopes ran high, until, on June 20^th, 2002, the following terse statement was posted on SomaFM's Web site:

As of June 20th, 2002, SomaFM was forced to suspend our broadcasts or else pay well over $15,000 a month in royalties. We are sorry we had to do this, and continue to fight to restore our broadcasts. (SomaFM, news and events page)

Webcasting, also known as “audio streaming,” is a technology that one may use to listen to audio recordings using the Internet. Unlike “peer-to-peer” file sharing, webcasting does not leave a permanent copy of the audio file on the listener's computer.¹ [2] Webcasting is most often used for streaming music, both as rebroadcast by traditional radio stations and as Internet-only programs. Although music programming dominates, other major uses of webcasting include news, political commentary, simulcasts of events or business conferences, and anything that can be converted to an audio signal. The barriers to entry for webcasting are extremely low – all that is required is an Internet-connected computer and streaming software, some of which is free. Webcasting has increased in popularity since the introduction of streaming software in the mid-1990s to the point that it is often understood by consumers to be simply another form of radio.² [3]

The diversity in programming and the potentially large audience for webcasting has threatened traditional modes of music promotion and marketing. Copyright holders, mainly represented by major media conglomerates such as the members of the Recording Industry Association of America (RIAA), have identified webcasting and other new media as a threat to traditional revenue sources and have sought to use copyright to exert control over the new media. As with the ongoing file sharing debate, the problem posed by copyright holders is that webcasting poses a threat to music sales. Within the three year period from 1995 to 1998, United States copyright law was changed to include a digital performance right for music, thus granting a right of remuneration for artists and distributors of music when their works are played online. By 2002, compulsory license fees were established by the U.S. Copyright Office causing many small webcasters to stop broadcasting to avoid paying large, retroactive royalty payments, as was the case with SomaFM.

Although it is reasonable to entitle artists and distributors to fair compensation for their works, the veracity with which the RIAA and other copyright interests have pushed for greater royalty rates and compensation is somewhat disturbing. Smaller webcasters are at a significant disadvantage against the collusion of larger webcasters and established copyright interests in exploring this relatively new technology. Copyright interests leverage this imbalance in their favor, which forces smaller webcasters off the air and correspondingly reduces the diversity of programming that is available. Furthermore, by forcing webcasters to adopt a for-profit model in order to meet high royalty rates, the trend in webcasting may match that of traditional broadcasting, where the majority of media outlets are owned by a small number of companies, further reducing the diversity of the medium. Legislative remedies have helped to sustain small webcasters, but the debate over the future of webcasting is ongoing.

This paper analyzes two important questions: First, how have recent laws and decisions regarding digital performance copyright royalties affected webcasting? Second, what are the implications of these developments for the diversity and vitality of webcasting? The example of SomaFM is used as a case study in this analysis.

Several services fall outside the scope of this paper. One of these is subscription webcasting, or “on-demand” services. Although these services are affected by the same laws that affect non-subscription webcasters, the business model for such services is significantly different and does not warrant the same analysis. Additionally, satellite and cable services that are also categorized as digital transmissions are not covered here. This paper, however, may serve as a suitable starting point for exploration into these areas.

On Promotion, Distribution, and Diversity

Before these questions are answered, it is helpful to clarify several terms as they are used in this analysis. First, promotion is considered to be the process of attributing a musical work to its performers in the interest of advocating the works of the artists or compelling the purchase of recorded musical work. Promotion in this sense contrasts with the music industry's conception of promotion, which will be broadly referred to here as marketing. Marketing is an integrative approach used to enhance not only sales of music, but to develop an overarching image that is used to sell all manner of products whether related to music or otherwise. The essential difference between promotion and marketing is that the intended effects for the former constitutes a relationship between artists and listeners, while the latter is a business model that is more concerned with the establishment and maintenance of multiple revenue streams. Understanding the conceptual difference between these two terms helps one to understand the unbalanced relationship between digital broadcasting and analog broadcasting that is described later.

Second, distribution is the act of creating a copy of an original work for the purpose of multiplying the original work for others to have. Because digital performances transfer digital data representing original works, they are considered by the music industry and copyright interests to constitute distribution of music with the potential for reducing revenue from music sales. As will be demonstrated later, not all digital data is identical nor is the quality of an original work maintained via streaming.

Third, diversity, in the context of webcasting, means a multiplicity of voices and artistic expression that is generally free from editorial control by government or the music industry. Unlike radio broadcasting, webcasting is not a limited resource, or, as Lessig would say, the webcast spectrum is non-rivalrous (Lessig, 2001, p. 21). Webcasting bandwidth is virtually unlimited, and the presence of an excess of webcasters does not in itself diminish the usefulness of the medium. Given that the webcast medium is so potentially expansive, the editorial controls that the music industry exerts on traditional radio broadcasts is not warranted, or desired.

Furthermore, the limited choices and selections that we have grown accustomed to in the rivalrous, analog broadcasting industry, where music is treated as a front-end to a massive marketing industry, clouds our perception of what is possible with music. The earliest adopters of webcasting included many genres of music that were and are under-represented in broadcasting. Often, these niche styles later influence more mainstream music, a process which demonstrates the artistic discourse of music and the benefits of diversity in broadcasting. Alternately, music is not neutral with respect to political and social problems and may reinforce other forms of expression, particularly those involving social and political commentary. Furthermore, the DJ culture that developed within the last decade treats songs not as discrete packets to be strung together end-to-end, but as a piece of a greater work of art, where songs and fragments of songs create a tapestry of music that is meant to be greater than the sum of its parts. Viewing music as an art form and a means of expression, as opposed to a packaged commodity, alters one's perspectives on copyright, especially when considering the copyright clause in the Constitution – “To promote the... useful Arts” (Article I, §8, Clause 8). For these reasons, protecting diversity in broadcast, as well as other media, is a compelling cause.

Stakeholders in the Digital Performance Right

The stakeholders in the debates over the digital performance right closely resembles those found in a number of other copyright debates. The table below enumerates the major stakeholders present in this analysis.

For	Against
Recording Industry Association of America (RIAA) World Intellectual Property Organization (WIPO) Large, commercial webcasters and aggregators	National Association of Broadcasters (NAB) Small, commercial webcasters Non-commercial, non-profit, educational, and hobbyist webcasters Webcasting listeners

Table 1 - Stakeholders in the digital performance right debate

In table 1, the political power and economic influence of the pro-performance right sphere is considerably greater than those against the digital performance right. The RIAA is estimated to represent over 90% of the copyrighted music produced in the United States (U.S. Congress, 2000, p. 121). The RIAA controls the rights to music which webcasters wish to play, which creates an unbalanced relationship when copyright is extended to performances. Because of this relationship, the virtual monopoly of the RIAA over recorded music is a considerable threat to the diversity of webcasting. Furthermore, the only stakeholders able to influence this unbalanced relationship are those webcasters that have large and diverse revenue streams that empower them to negotiate fairly with the RIAA. These larger webcasters also have an interest in policies that reduce the number of potential competitors in the webcasting market. Finally, the WIPO represents international trade interests which have considerable influence over intellectual property policies in the United States.

The largest stakeholder opposing the digital performance right is the NAB, which represents a considerable number of traditional broadcasters that retransmit their broadcasts over the Internet. The NAB performs an integral marketing function on behalf of the recording industry, but since the digital performance right includes the rebroadcasting of analog radio over the Internet, the NAB sought to exempt its members from the effects of the new rights.³ [4] The NAB does not, however, explicitly oppose the digital performance right, as long as it does not affect analog broadcasters in any way. The remainder of the stakeholders constitute far less economic power and consist of all varieties of small and non-commercial webcasters. Also included are the listeners of webcasts, most of whom would not support a digital performance right because they would rather not pay for music streaming as a result of performance royalties. Small webcasters implored their listeners to voice opposition to webcasting royalties in the months surrounding the CARP decision (SomaFM, 2003, news and events page).

Conspicuously absent from this debate are the recording artists. Recording artists could conceivably benefit from either side since diversity in webcasting increases promotion while a digital performance right establishes new royalty revenues for artists. The literature regarding the digital performance right and the CARP proceedings, however, makes no indication about the position of recording artists in these debates.

The Digital Performance Right

To better understand the rapid changes to copyright with respect to digital performances, one must understand the changing structure of copyright in the United States. Prior to 1971, neither copyright holders nor artists and producers of works had any right to remuneration for broadcast of their works. In 1971, Congress passed the Sound Recording Amendment (PL 92-140), which authorized a performance fee for the performance of a musical work. The performance right in this case is paid to songwriters and performers through one of the various performing rights organizations such as ASCAP or BMI (Jackson, 2003, p. 452). Since the means of performance is not considered distribution in any traditional sense, organizations that own the distribution rights for a copyrighted work do not receive similar compensation for performances of the work.

Several years later, Congress passed the Copyright Act of 1976 (PL 94-553). The 1976 Copyright Act amended title 17 of the U.S. Code, which is the law that governs copyright in the United States. Five exclusive rights are granted to creators of copyrightable works; These rights are:

(1) to reproduce the copyrighted work in copies or phonorecords;

(2) to prepare derivative works based upon the copyrighted work;

(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

(4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;

(5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly (17 USC §106)

In addition to codifying these rights, the act established the U.S. Copyright Office within the Library of Congress (LOC), and created a Copyright Royalty Tribunal (CRT). The CRT was created “for the purpose of periodically reviewing and adjusting statutory royalty rates for use of copyrighted materials pursuant to compulsory licenses.” CRTs review the compulsory licenses that were established in the 1976 act for retransmission of broadcasts over cable, jukeboxes, and “mechanical” reproductions or performances. CRTs may also convene to arbitrate disputes over the distribution of statutory royalty fees (17 USC Ch.7, §701 & Ch.8, §801).

After the passage of the 1976 act, copyright law remained essentially unchanged with respect to performance rights until the early 1990s. The first change to occur was the passage of the Copyright Royalty Tribunal Reform Act of 1993 (PL 103-198). The CRT Reform Act abolished the CRT and transferred its functions to the Library of Congress and the Copyright Office. Thereafter, the functions previously performed by the CRT would be performed by ad hoc committees called Copyright Arbitration Royalty Panels, or CARPs. CARPs will be discussed later in this paper.

The second change that is of interest to performance copyright came with the passage of the Digital Performance Right in Sound Recordings Act of 1995 (DPRA or the “Digital Audio Act,” PL 104-39). The language of DPRA reflected the growing concern the recording industry felt about the availability of digital broadcast services, particularly in existing satellite and cable music services. DPRA added a sixth exclusive right to those defined by the 1976 Copyright Act, specifically, the right, “in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission” (17 USC §106(6)). The act specifically addressed subscription-based, interactive transmissions, while omitting non-interactive, digital subscription transmissions (17 USC §114(f)). These rights addressed the concerns of distributors of copyrighted works who believed that on-demand digital transmissions could decrease sales of recorded music. DPRA granted distributors the right to collect royalties on certain transmissions to allay the concerns of copyright holders (Jackson, p. 456).

Meanwhile, the World Intellectual Property Organization (WIPO) of the World Trade Organization worked on revising international copyright agreements. The WIPO sought to harmonize the myriad of international agreements and conventions, as well as to update copyright laws in anticipation of changes caused by new technologies.⁴ [5] These negotiations resulted in the WIPO Performances and Phonograms Treaty of 1996 (WPPT). The treaty is largely prescriptive in that it allows member nations to determine the specifics about the enforcement of the treaty's terms within a more general framework that seeks to maintain a basic level of harmony in copyright among participating nations. Of particular interest to digital performances is article 15 of the treaty, entitled “Right to Remuneration for Broadcasting and Communication to the Public.” Article 15 of the treaty prescribes that performers and producers of phonograms shall be compensated for the public broadcast of their works.⁵ [6] Furthermore, the treaty prescribes that, in the absence of agreement in the proportion of compensation divided between the performer and producer, national legislation may be enacted to set the terms by which the parties will abide. Finally, article 15 defines broadcasting as both by “wire and wireless means,” which includes all traditional radio broadcasts, as well as cable, satellite, and other digital networks, such as the Internet (WPPT, Ch. IV, Art. 15).

Subsequent to the development of the WPPT, the Clinton administration initiated the WIPO Copyright Treaties Implementation Act, later renamed the Digital Millennium Copyright Act (DMCA, PL 105-304). The DMCA implemented the WPPT treaty and amended the 1995 digital performance right. First, the DMCA created a new statutory license for the creation of an "ephemeral recording" of a sound recording by certain digital broadcasters (17 USC §112(e)). Furthermore, the DMCA revised the language of the DPRA to clarify that the digital sound performance right applies to non-subscription audio services such as webcasting (17 USC §112 & §114). Finally, the act directed CARPs to use specific standards for judging royalty rates for digital transmissions different than those that are applied to determining other copyright royalties (see the discussion about CARP below).

The DMCA did not, however, fully implement the terms of the WPPT. As mentioned above, the WPPT offers a technology-agnostic definition of “broadcast,” which includes both wire and wireless transmissions. Instead, the DMCA defines the performance right only in terms of digital transmissions. Analog transmissions of sound recordings, including broadcast radio and television, do not require royalties as prescribed by the WPPT. Rather than restructure copyright law to conform to the WPPT, the U.S. ratified the treaty with a reservation under article 15 with respect to analog transmissions (Schrader, 1998). Digital transmissions are considered to be perfect copies of the work and, unlike analog transmissions, constitute distribution of the work.⁶ [7] As will be shown, this distinction between analog and digital transmissions is a considerable source of dissensus.

Analysis of the Digital Performance Right

The copyright laws affecting music broadcasts are unbalanced in favor of traditional analog broadcasters. The DPRA and DMCA apply only to digital broadcasts due to the perception that these broadcasts constitute distribution of copyrighted works (Fausett, 2003, p. 15). Furthermore, analog broadcasts are considered by the music industry to be of greater value in promoting sales of music through traditional distribution networks than digital broadcasts (OMB Watch, 2002, DMCA & DRPA).

Each of these points, however, is not entirely compelling. First, all streaming technologies used to date implement compression for data transmission. Compression algorithms reduce the size of a digital file so that it may be streamed more effectively, particularly when the listener's computer is connected to the Internet via a low-bandwidth connection. Unlike files that are traded over peer-to-peer (P2P) networks, streamed data must be compressed and loses information in the process, thus degrading sound quality.⁷ [8] The audio quality of a Real Audio or similar stream, compressed for a modem connection (usually less than 32 kbps), is essentially comparable to AM radio signal or a weak FM radio signal. Higher quality streams over broadband connections are also compressed and cannot be considered to be a perfect copy of the original work. Even if a user were to record the resulting data, a perfect copy would not result (Hacker, 2000). Streaming technology in the future may approximate perfect transmission, but otherwise the assumption that digital performance equals distribution is flawed.

Second, the assertion that digital broadcasts have no promotional potential compared to analog broadcasts is similarly unfounded. For example, SomaFM encodes its broadcasts in the MP3 data format, which allows additional information about the track to be embedded in the data stream. Additional information about the song is sent concurrently with the stream for display on the listener's software, and the station's Web site also displays a list of current and recently played tracks. Another webcaster, Radiovalve, also posts playlists on its Web site along with links to a major online music distributor's e-commerce site that allows users to directly purchase the works that were played (Radiovalve, 2003, playlist). Although not all webcasters use such methods in their broadcasts, the promotional value of such methods is clear. For example, listeners of these sites know the exact spelling of identifying information, such as the artist and song name, as the songs are played, the accuracy of which is of immense value to those seeking to purchase music that they heard during the broadcast. Additionally, Web based playlists are more accessible than analog radio DJs when one is trying to determine recently played tracks. Finally, the ability of digital broadcasters to link directly to retail sites for the purchase of music is unmatched by analog broadcasts (U.S. Congress, 2000, p. 159).

Considering that the claims by the recording industry that digital broadcasts have no apparent promotional value fails on its merits, there must be some other reason for digital broadcasts to be treated differently than analog broadcasts. One may assume that, given the technology available at the time the DPRA was drafted, there was no indication about the ways that digital broadcasts could be used to promote music. Alternatively, one may believe that the distinction made between analog and digital broadcasts indicates that the recording industry sought to use copyright to retain the same implicit editorial influence over digital broadcasts as it has over analog broadcasts. An example of such editorial control is the “sound recording performance complement,” which is a strict set of rules that a digital broadcaster must abide by in order to be eligible for a compulsory license under the digital performance right. Among other things, the performance complement prescribes the maximum frequency of play allowed for individual artists and music releases (Gasaway, 2003).⁸ [9] The recording industry's major functions include both the production and marketing of music releases from a limited number of recording artists. The success of any particular recording artist traditionally depends upon established marketing structures, particularly that of editorial influence availed in syndicated programming and a variety of non-musical promotion venues. The potential for promotional competition from a multitude of non-syndicated, independent digital broadcasters threatens these traditional marketing networks and, thus destabilizes the music industry's business model.⁹ [10] The distinctions made between analog and digital broadcasters under copyright law appear to be unnecessarily dichotomous in light of these assertions.

The Copyright Arbitration Royalty Panel

As previously described, the CARP system evolved from the Copyright Royalty Tribunal established by the Copyright Act of 1976. The current CARP system is an ad hoc, three-member arbitration panel that is appointed by the Librarian of Congress for a particular proceeding. CARPs review statutory royalty rates every five years, or in the case of digital transmission rates, every two years (17 USC §801). CARPs are bound by several different standards when considering royalty rates (U.S. Congress, 2002, statement of Rep. Zoe Lofgren). Under title 17 of the U.S. Code, the CARP must consider the following five guidelines when evaluating or recommending royalty rates:

(1) The rate should maximize the availability of diverse creative works to the public.

(2) The rate should afford the copyright owner a fair income, or if the owner is not a person, a fair profit, under existing economic conditions, in order to encourage creative activity.

(3) The rate should not jeopardize the ability of the copyright user -

(a) to earn a fair income, or if the user is not a person, a fair profit, under existing economic conditions, and

(b) to charge the consumer a reasonable price for the product.

(4) The rate should reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication.

(5) The rate should minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices. (17 USC §801(b)(1))

These guidelines were established with the 1976 Copyright Act, but do not apply to cable rate arbitration (17 USC §801(b)(2)). Furthermore, these guidelines make clear that consideration shall be given both to the public interest of access to diverse works and a fair compensation to the copyright owner. Finally, these guidelines do not apply to the arbitration of rates for digital transmissions, for which the DMCA established the following guidelines:

The copyright arbitration royalty panel shall establish rates that most clearly represent the fees that would have been negotiated in the marketplace between a willing buyer and a willing seller. In determining such rates and terms, the copyright arbitration royalty panel shall base its decision on economic, competitive, and programming information presented by the parties, including—

(A) whether use of the service may substitute for or may promote the sales of phonorecords or otherwise interferes with or enhances the copyright owner’s traditional streams of revenue; and

(B) the relative roles of the copyright owner and the transmitting organization in the copyrighted work and the service made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, and risk. (17 USC §114(f)(2)(B))

The difference in these sets of guidelines emphasizes the underlying concern of music distributors for the disruption of traditional modes of distribution. The new standards shift the determination of fair royalty rates for digital transmissions away from considering the availability of works to the public, and towards the consideration of market value and the sustainment of traditional streams of revenue. Furthermore, determining rates in consideration of a “willing buyer and a willing seller” proved to be troublesome for the CARP that convened following the enactment of the DMCA since no reliable precedent existed for establishing such rates.

The CARP Ruling

The DMCA expanded the digital performance right but left the task of determining reasonable rates and terms to the Librarian of Congress. A convoluted, three year process began at the end of 1998 that was marked by confusion, negotiation, and delays that are summarized in this section.

As directed by the DMCA, the Copyright Office initiated a 6-month period of voluntary negotiations in November 1998 to allow copyright holders and digital broadcasters to reach agreement about royalty rates and terms. These negotiations were intended to determine standard rates for both the compulsory digital performance licenses (§114 licenses) as well as the ephemeral copy license (§112 licenses) for the two-year period from the enactment of the DMCA through 31 December, 2000.¹⁰ [11] Should the voluntary period expire without the adoption of industry-wide rates, or without an interested party filing a petition opposing the negotiated rates, the Librarian of Congress would adopt the terms of the negotiation without convening a CARP (U.S. Copyright Office, 1998, p. 65555).

Following the initiation of the voluntary negotiation period, the RIAA, representing the major record labels, entered negotiations with a number of online broadcasting services, but was unable to reach an agreement suitable to be considered industry-wide. Since no agreement was reached, the Librarian of Congress initiated CARP proceedings in order to establish initial royalty rates (U.S. Copyright Office, 1999, p. 52108). These proceedings had not yet completed when the next two-year negotiation interval began in January 2000. The Librarian of Congress initiated a second voluntary negotiation process for the years 2001 and 2002 (U.S. Copyright Office, 2000, p. 2195).

Soon after the second voluntary negotiation period was announced, the initial CARP proceedings were suspended pending the outcome of a petition filed with the Copyright Office by the RIAA. The RIAA sought to clarify whether or not analog broadcasts that are retransmitted over the Internet were statutorily exempt from the §112 and §114 provisions of title 17 (RIAA, 2000). Because of the controversy over the RIAA's petition, the LOC stopped first proceeding to await the outcome of the resulting court case initiated by the NAB (Bates, 2002). In the intervening time, the RIAA reached agreements with 26 separate webcasters, but, again, could not agree on an industry-wide rate agreement. Consequently, the RIAA filed a petition to initiate CARP proceedings for the 2001/2002 negotiation period, contingent on the resolution of the first CARP proceeding (U.S. Copyright Office, 2000b, p. 55303). In response to the second petition and the resolution of the impasse over broadcaster determination, the Copyright Office consolidated the hearings for both CARP proceedings (U.S. Copyright Office, 2000c, p. 77393).¹¹ [12]

On 20 February, 2002, after over three years of delays and deliberations, the consolidated CARP published recommended rates and terms pursuant to sections 112 and 114 of the copyright code. The final recommendation set three different rate structures for digital transmissions under §114. For broadcasts that retransmitted AM/FM radio broadcasts, the rate was set at seven cents per song per 100 listeners (.07¢ per song per listener). For all other webcasts, the rate was set at 14 cents per song per 100 listeners (.14¢ per song per listener). A third rate was set for non-Corporation for Public Broadcasting (CPB), non-commercial webcasters in three brackets: .02¢ per song per listener for retransmissions of AM/FM broadcasts; .05¢ per song per listener for other Internet broadcasts with up to two side channels; and .14¢ per song per listener for all additional side channels. The §112 rates for ephemeral recordings was set at nine percent of the §114 fees for all brackets (U.S. Copyright Office, 2002a, App. A).¹² [13]

On 21 May, 2002, after a period of review, the Register of Copyrights rejected the CARP ruling (U.S. Copyright Office, 2002b). Subsequently, in a report released on 8 July, 2002, the Librarian of Congress set the §114 rate for retransmissions and webcasts to the same rate at seven cents per song per 100 listeners (.07¢ per song per listener) and the §112 rates for these transmissions to 8.8% of the §114 fees. For non-CPB, non-commercial webcasts, the retransmissions and webcast only rates were set at .02¢ per song per listener , the transmissions of other side channels set at .07¢ per song per listener, and the §112 rates also set to 8.8%.¹³ [14] The Librarian of Congress based these adjustments on the assertion that the rates set by the CARP “do not reflect the rates that a willing buyer and willing seller would agree upon in the marketplace.” Furthermore, the Librarian of Congress noted that the panel was arbitrary in its consideration of previously negotiated royalties as a basis for the rates (U.S. Copyright Office, 2002c, Section IV).

Reactions to the CARP Ruling

Predictably, the final ruling by the Register of Copyrights was the source of a marked dissensus among copyright holders and webcasters. Three distinct problems characterize this dissensus: 1) the CARP rates were based on rates negotiated in an unbalanced relationship between the RIAA and webcasters, 2) the CARP proceedings excluded small and non-commercial webcasters, and 3) the rates set by the CARP compel webcasters to adopt a revenue-generating business model and constitute a penalty to webcasters for success.

First, the rates were based on previously negotiated rates reached in an unbalanced relationship. Webcasters maintained that the rates were too high, while the RIAA asserted that the rates were too low (Palenchar, 2002). Each side invoked the argument that the rates do not reflect the terms that would be set by a “willing buyer and willing seller,” and with good reason: no party in the proceedings could accurately define what constituted a willing buyer and willing seller in the case of digital broadcasts. Without a basis in precedent, the rationale used by the CARP in determining the initial recommendations based the rates on those that were negotiated individually between the RIAA and 26 different webcasters. Of these 26, only the rates negotiated with Yahoo! were considered by the panel, mainly because many of the other 25 companies that negotiated with the RIAA could not maintain operations under the negotiated rates. Furthermore, the rates set by the RIAA in these agreements are believed to have been artificially inflated by the RIAA's unfair bargaining position in order to influence the CARP proceedings and stifle competition from smaller webcasters (U.S. Copyright Office, 2002a, section V).¹⁴ [15]

Second, smaller and non-commercial webcasters complained that they were left out of the CARP process and had no voice as “willing buyers.” The CARP proceedings in 2000 spanned many months and required on-site representation in Washington, D.C. Larger companies and business entities normally have little difficulty meeting the expenditures required for such proceedings, however, smaller webcasters as a nascent industry have fewer resources available and are unable to represent themselves before the CARP (Kidd, 2003). To complicate matters, in order to challenge a CARP ruling, the petitioner must have been a party to the negotiations. Because of this exclusion, lawsuits initiated by certain smaller webcasters were dismissed outright. Consequently, smaller webcasters had no means of relief and faced large retroactive royalty payments if they wished to continue broadcasting. As it happened with SomaFM, many webcasters and analog re-broadcasters simply stopped their webcasts rather than be held liable for the required payments (Kidd, 2003; Jackson, 2003; Maloney, 2002).

Third, an indirect consequence of the ruling is to dissuade new and existing webcasters from adopting a not-for-profit model of business. As mentioned earlier, webcasting requires very little capital investment. The copyright royalties for digital performance increased the operating costs for webcasters and effectively raised the barriers to entry for the establishment of a webcasting operation. Furthermore, under a per-listener royalty rate, unbounded increases in listenership accrue large royalty payments while not affecting the revenue of the station. Many of the stations that ceased broadcasting were hobbyists and niche broadcasters that did not operate for profit or as part of a revenue-generating business model and could not sustain operations because of increased operating costs due to royalties. Even without a listener surge, these webcasters could not continue to broadcast under the new rate structure without establishing a revenue-generation model, most likely based on program formats favored by established music industry conglomerates which support well-known, heavily marketed music. Understandably, such an approach conflicts with the efforts of broadcasters whose programming caters to niche markets. In summary, the royalty rates effectively constitute a form of control by the music industry over the diversity of webcasting, made possible by the unbalanced relationship between broadcasters and music conglomerates (U.S. Congress, 2000, p. 158).

Alternatives and Remedies

SomaFM ceased broadcasting after the CARP ruling, but not entirely. The station continued broadcasting one of its channels using a new technology, peer-to-peer broadcasting, specifically, a program called Peercast. First made available in April of 2002, PeerCast, like other P2P software, creates a semi-anonymous network over the Internet that relies on connections to other computers using the same software. If implemented and used properly, PeerCast allows broadcasting stations to remain completely anonymous and thus able to avoid broadcasting prohibitions such as local laws and community standards. PeerCast can be used by dissidents to avoid censorship by repressive regimes as well as by hobbyists as a platform for low cost digital broadcasting – the software is free, and the Internet bandwidth required to broadcast is significantly less than what is required by other webcasting software (PeerCast, 2003). SomaFM sought to retain some of its audience while waiting to see what sort of legislative or judicial copyright royalty relief would occur. They would not have to wait long.

Soon after the CARP ruling and subsequent adjustment, a series of bills entered consideration in Congress to offer royalty relief for small and non-commercial webcasters. The first bill, the Internet Radio Fairness Act (IRFA, H.R. 5285, 107^th Congress) directed a CARP to determine new, lower rates for small webcasting businesses and organizations. While this bill was in committee, a second bill was introduced by Representative James Sensenbrenner (R-WI), the Small Webcaster Amendments Act (SWAA, H.R. 5469, 107^th Congress). The SWAA began by simply requiring a six month moratorium on the payment of royalties to allow for further negotiations between webcasters and copyright holders. Sensenbrenner personally took the initiative to bring the parties together for negotiations. By the end of these negotiations, the SWAA was considerably more complex having integrated the terms of the negotiations, including a revenue-based royalty model (Kidd, 2003).

The SWAA passed in the House and was immediately referred to the Senate. There the SWAA was replaced by a similar bill introduced by Senator Jesse Helms (R-NC), the Small Webcasters Settlement Act (SWSA, PL 107-321). The SWSA also prescribed a moratorium on royalty payments to allow webcasters to negotiate with copyright holders. Unlike the SWAA, however, the SWSA authorized SoundExchange, a company established to collect and distribute broadcasting royalties, to negotiate directly with webcasters.¹⁵ [16] The Copyright Office is also obliged by the act to report any such agreements in the Federal Register. Additionally, the SWSA defined two classes of webcaster, one class for non-commercial webcasters, including colleges and public radio, and another class for small commercial webcasters. The SWSA further recommended differential royalty rate consideration for the two classes of webcasters. Furthermore, the act specified that privately negotiated rates should not be considered in future CARP proceedings, which remedied some of the failings of the initial CARP proceedings. Finally, the SWSA directed the Comptroller General to report to Congress in June 2004 about the effects of the new rates on webcasters. The SWSA was signed into law on December 4, 2002.

Upon hearing about the passage of the SWSA, SomaFM announced that it would resume broadcasts. The new law allowed the station some time to raise funds to pay back royalties and potentially take advantage of any newly negotiated rates (SomaFM, news and events page). A major agreement was negotiated in December 2002 between SoundExchange and Voice of Webcasters, an organization made up of small webcasters that formed in response to the exclusive nature of the CARP proceedings. The agreement, announced on December 24, 2002, set several new terms that could be used by small webcasters instead of the adjusted CARP rates set in July 2002. Among these terms is a provision for qualified small webcasters to pay royalties on a percentage of revenue or expenses instead of a per song per listener basis. Additionally, the agreement established minimum annual royalty payments for two types of small webcasters, those earning less than $50,000 annually and those earning between $50,000 and $500,000 annually. The agreement also set new minimum retroactive payment amounts and reduced the reporting requirements for eligible stations (U.S. Copyright Office, 2002d).

A second agreement was announced in May 2003. SoundExchange and a group of membership organizations representing educational, religious, and non-profit webcasters, agreed to new retroactive fees for educational, non-profit, and hobbyist webcasters that were more appropriate to the resources available to these webcasters. Additionally, the agreement set a flat annual rate for 2004 (U.S. Copyright Office, 2003a). As an alternative to the CARP rates, these agreements, made possible by the SWSA, helped to remedy some of the problems that the CARP negotiations had in excluding small webcasters.

Effects and Future Remedies

In light of the background and issues in digital performance copyright, what was the effect on webcasting in general? Despite the fact that a number of small webcasters quit broadcasting rather than pay four years worth of retroactive royalties, broadcasts by small webcasters in general have not ceased. SomaFM, having revived eight of its original eleven channels without radically altering their format or business practices, is an example of a station that has thus far avoided the potentially deleterious effects of the CARP decision. The CARP decision and subsequent rulings, then, did not defeat webcasting, however, the effects on diversity have yet to be seen. The provisions of the Small Webcasters Settlement Act set a precedent of support for the cause of small and non-commercial webcasting. These provisions will expire in 2004, however, and do not assure that small webcasters will be protected indefinitely from the RIAA and other copyright interests. The 2003/2004 negotiation period is underway as of this writing, but, so far, no significant changes have occurred. Even without new royalties and instruments of control, the long term effects of the existing royalty rates on small webcasters are yet to be determined.

Regardless of the indeterminate effects of the CARP ruling and recent digital performance copyright laws on diversity, discontent over the royalty determination process has helped to identify flaws in the system that may be remedied by legislation. For example, a bill currently in Congress, the Copyright Royalty and Distribution Reform Act (CRDR, H.R. 1417, 108^th Congress), seeks to remedy the inconsistencies and ad hoc procedures demonstrated by the CARP. The CRDR replaces the CARP panel with a permanent copyright judge having full power to make binding decisions and serving renewable 5-year terms. A permanent copyright judge remedies the arbitrary and inconsistent decisions handed down by the temporary, ad hoc CARP panels. Additionally, the CRDR makes the decisions of the copyright judge appealable to the U.S. Court of Appeals in Washington D.C. The appeals provision of the CRDR eliminates the controversy that exists over the current, exclusive CARP review system. A second bill under consideration extends the provisions of the SWSA for another year, delaying the payment of retroactive royalties and allowing more time for small webcasters to mature as an industry (H.R. 2255, 108^th Congress).

Current legislation addresses some of the immediate concerns for the diversity in webcasting, however, the assumptions on which the digital performance right is based as well as the inequities between analog and digital performances should also be addressed. As discussed earlier, digital performances offer new and innovative methods for promoting music that has the potential to exceed the promotional capabilities of traditional radio. Furthermore, the sound quality of webcasts seldom exceeds that of analog radio broadcasts. Consequently, recordings made from such webcasts cannot be considered distribution any more than recordings made from analog radio. The DRPA and subsequent legislation regarding the digital performance right failed to account for these mitigating factors. For these reasons, the unequal consideration of analog radio in deference to digital transmissions should be remedied in future legislation. Furthermore, the CARP guidelines for digital performance royalties should be altered to restore consideration of the availability of diverse works to the public in addition to fair compensation for copyright holders. Although such legislation may prove to be politically inexpedient because of the political advantage that broadcasters have in the media, the introduction of digital broadcast radio is likely to renew this debate. Congress will then be faced with one of two choices: either to continue to enforce the dichotomy between traditional broadcasters and digital broadcasters, or to redefine the performance right in a more equitable way, accounting for both diversity and fair compensation for performance.

Conclusion

As is the case with all media, diversity in webcasting supports the national interest to promote the “useful arts” and free expression in general. In the late 1990s, efforts by corporate copyright holders and the influence of international treaties succeeded in granting exclusive rights to copyright holders for digital broadcasts. The laws that created and amended these rights, the Digital Performance Right Act and the Digital Millennium Copyright Act, enforced an uneven legal landscape between the traditional broadcast industry and the emerging digital broadcasting industry.

The unbalanced relationship between these two stakeholders is characterized by two critical assumptions. First is the assumption that digital transmissions of music are equivalent to exact duplication. Second, the potential for webcasting as a promotional medium is highly understated. Furthermore, copyright royalty rates that were determined in 2002 by the U.S. Copyright office sustained these inequities and threatened to cause the failure of small webcasting operations. Soon after the royalty rates were determined, the Congress passed legislation to assist small, non-commercial webcasters and sustain the nascent webcasting industry. New efforts to assist small webcasters and reform the copyright arbitration process are ongoing, but should be expanded in order to protect diversity and eliminate the inequities in the performance right. Although webcasting did not disappear or consolidate to significantly fewer outlets as a result of the CARP decision, the overall effects on diversity in webcasting are as yet indeterminate.

Notes

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