Pirate Radio KQLZ Los Angeles 100.3FM Internet Radio - My analysis of the Copyright Royalty Board decision

Analysis of the Copyright Royalty Board's decision
to raise copyright royalty fees for non-interactive
broadcast on internet radio.

Kevin Steidel, www.kqlz.org, 2007-03-09

Read the whole CRB ruling here

After reading the entire 115 page decision, spending time pondering the
arguments, then re-reading and reviewing portions a few times more, I think I
now have a good feel for the impact of this decision. My first reaction to the
news of this decision and the ensuing reaction by internet broadcasters and
web bloggers was one of extreme outrage, as this ruling almost certainly
results in the complete demise of independent small webcasters throughout
the United States.

Not wanting to totally rely on quick shot analysis derived from highly
passionate bloggers and broadcasters that clearly are unhappy with this ruling
(of which I include myself), I wanted to dig deeper and find out the true impact
myself. The place to start, the 115 page decision. Reading that truly takes
patience, stamina, and some thick skin. A lot to absorb in a single sitting, so I
spent some time mulling over what I read and started defining the topics, their
area of impact, and what they meant to me and my future as an internet
broadcaster.

After first run through of the decision I was initially encouraged by what
appeared to be the application of common sense to rules and regulations that
have confounded internet users and broadcasters to scholars and thinkers
alike. Early on, the CBR judges listened to arguments and rebuttals about the
separation of Title 17 112 empirical recording fees and 114 statutory license
fees. They concluded that the industry as a whole, both willing buyer and
willing seller (you’ll hear a lot more about that), placed little to no market value
on the empirical recordings used during the digital transmission of copyrighted
sound recordings and chose to combine these in to a single royalty rate
structure. I’m thinking this a smart common sense approach to simplify
determination and collection of royalty payments.

Another aspect of the ruling that I became more encouraged with was better
definition of quantitative aspects of internet broadcast like the mythical ATH
(Aggregate Tuning Hours). Previous rulings and settlements were vague and
all inclusive, therefore ATH was often calculated as the number of listeners
times the amount of time they were tuned in, period. In this ruling, there was
further clarification to indicate that ATH was supposed to be calculated as the
number of listeners for the total amount of time that they were tuned in and
actually listening to the direct broadcast of copyrighted material. More
specifically that broadcast of non-copyrighted material (radio talk shows, DJ
speech, etc.) and works that the station holds a signed release from the
copyright owners are not to be included in the ATH calculation.
Eureka I’m thinking, now we have a way to control and/or offset ATH with
DJ’s, ads, and building of direct copyright owner releases. This would provide
an avenue for the station to grow it’s listener base and not become buried in
mounting costs.

In other decisions the justices concluded that there was really only two models
that applied to internet broadcast, Commercial and Non-Commercial.
Therefore they would only apply one specific model to each of these areas.
They likened it to the electric companies having rates for both commercial and
residential users. This is outstanding I’m thinking, but this is were the aspects
of the ruling start to become more difficult to understand, how they evaluate
these market models, and how to choose what best applies to each sector. Not
being a market or business expert myself, these where the parts I spent most
of my time reading, pondering, and reviewing again to get a better grasp of
their thinking processes.

In short, since licencing is compulsory, it is the job of the CRB panel is to
determine what the balance would be between two parties in a hypothetical
marketplace, also known as the “willing seller, willing buyer” standard. This
is to insure that the seller is fairly compensated for a market value of their
works and the buyer is given a fair rate by which the market can grow and
survive. If the value of the works is set too high, then the market dies, too low
and the people creating these works suffer and are unable to continue their
trade.

This is where things start to fall apart. After several proposals of what market
model should be applied to each sector, rebuttals, and more arguments, the
justices settled on a simple “Pay Per Play” structure for Commercial
Webcasters and Flat Rate for Non-Commercial Webcaster. Again, on initial
glance this has the flavor of simplification and efficiency. Further, to prevent
abuse of the Non-Commercial sector the justices chose to place an ATH cap
that Non-Commercial Webcasters must stay under for their flat fee. Not too
bad, I’m thinking, as we now have a way to offset ATH we now have a fair
chance at growing the station under the cap and work out a more profitable
model before we step across the sacred Commercial / Non-Commercial
boundary.

Time to break out the calculator and start to crunch the numbers. Since these
fees are retro-active to the beginning of 2006, I’ll used the numbers that we
generated though last year. We averaged somewhere between 60,000 to
80,000 ATH through out the year, so I’ll use 70,000 ATH for my model. Now the
rates, $0.0008 per performance, which means that will be the cost per
performance of each sound recording for each listener. Since the average
music broadcast oriented station plays 14-16 songs (no commercials) per hour,
we’ll use 16 to error on the side of fair play. OK, $0.0008 seems like a small
unassuming number, lets do the math.

70,000 (ATH) x 16 (songs per hour) x 0.0008 (pay per play) = 896

Ok now wait one minute here, must be something wrong with my calculator.
Redo the numbers again... No Way! 896 Dollars!!! That’s more the 10 times the
amount we paid each month (which included other license payments to BMI
SESAC, and ASCAP). This is $896 to SoundExchange alone! And this is for
payment of a year that has already pasted on by. Rates for 2007 are even
higher. Things are starting to smell rotten in Denmark.

So not a problem I think, we were under 159,140 ATH (the Non-Commercial
cap set by the justices) cap each month, and we rely mainly on user donations
for income, so we must certainly qualify for Non-Commercial, right? Not
necessarily, digging even further into the portion of the ruling which will be
directly written into law I find that in order to qualify as Non-Commercial
Webcaster we must qualify for IRS Article 501 tax exempt status. Wait one
damn minute here, you mean if we don’t create a corporation, trust, or other
public domain organization we don’t even qualify here either? What happened
to the commercial and residential user (a.k.a. electric company comparison)
models you talked about, now I’m supposed to be a charity? At this point I’m
becoming downright irrate.

So I dig even more it the arguments looking for the methods, proposals, and
rebuttals that lead up to these rates. Funny, not there. You’ll find plenty of
this regarding their application of business models, and even more on why
they chose SoundExchange over Royalty Logic as the primary or “collective” as
they say, for the collection and distribution of royalty payments. But barely
one full page on the rates and almost no discussion on how they concluded
that these rates were fair and balanced for the market. Pretty much, “here’s
the rates SoundExchange wants and they can have what they want”, period.
Hmm, chose SoundExchange’s rates and the same party to officiate over the
collection, interesting. Beyond that, there is zero discussion or mention at all
about IRS Article 501 requirement for Non-Commercial Webcasters.

So now I’m left with little optimism for the future of internet radio. What just
happened here? I am only left with few logical conclusions in all this mess,
most obviously orbit around a nasty little word called “corruption”. Can’t say
for sure who, what or where, but there is most defiantly something behind the
scenes here, payola, bribes, extortion, blackmail, you name it. I bet they can’t
write them any better in Hollywood. Now why would any rational thinking
human come to this conclusion? Well, that is my exact thoughts about this
ruling. How can a panel of highly trained, well educated individuals with
years of experience and the trust of the public issue a ruling that would be so
damaging to new innovative marketplace known as the internet.

As any rational person would, let’s look at the facts.

First: the rates. There is absolutely no supporting data in the ruling as to why
these rates would even be considered as possibly being fairly negotiated in a
open “willing seller, willing buyer” marketplace. Think about it, you don’t
have to be a market analyst to understand one simple factor. Would any
“sane” business manager opt to purchase anything that he knew could never
be paid for by company income? There’s even one or more of the justices own
comments characterizing their ruling as no guaranty of market sustain ability.
Not to mention the data that now supports the assertion that these rates
would be 100-125 percent of the average (not biggest, not smallest) internet
radio broadcaster. Sound like the definition of a “willing buyer” to you?
Sounds more like the seller is “willing” to make sure the buyer shuts up and
does what he or she is told to do.

Second: if you are ruling on a very controversial issue that can have a huge
impact on peoples lives, wouldn’t think you just might need to explain your
decision just a little beyond simply saying “here’s what they want, OK”. Why
is any supporting information for these rates curiously absent in 115 pages of
discussion and rulings? I’ve got a high school diploma, a computer, and the
desire to understand your point of view. So where’s the data? To better prove
the point that big business won’t pay a fraction of what we are looking at
being slapped with, just look at the responses of AOL, Yahoo!, and others
associated with the DiMA, which was one of the groups arguing against rate
hikes. That’s right, there are few to none. AOL itself very well might get hit
with more than 22 million dollars in back fees from 2006 alone and yet there is
not a single word of disgust or outrage regarding this ruling. Maybe they
already have the inside track and know that they are off the hook.

Third: there is most defiantly not a single practicing business analyst in the
world that would ever in a million years predict guaranteed market growth,
ever. Yet the adoption of these rates would be more than 10 times what we
paid as a small webcaster for a year gone by and continues to guarantee a
150% growth in 5 years with complete disregard to content quality, quantity,
economy, or marketability. My, my, the record industry seems to have crystal
ball technology and just absolutely knows that their collective works will be
worth so much more that ever before. Shall we call this “American Idol”
syndrome.

Now some might start thinking that maybe it’s not corruption here, maybe we
are talking incompetence. Can’t say I would buy that argument, these judges
are very learned individuals that have risen through the ranks, been
recognized by the public for the expertise, enough so for the Library of
Congress to recognize their knowledge relevant to copyright law and appoint
them to this panel. I’m just not buying the “they didn’t know what they were
doing” clause. They could have seen what they were doing with a 2 dollar
calculator, “what Mr. Justice, dead batteries in your calculator? Didn’t pass
2nd Grade Math?”

Besides, I’m now reading about an apparent gala event that was held after the
ruling was issued where the CBR panel judges were allegedly in attendance.
By how industry and officials are responding in this matter you might begin
thinking that the just legally wrote their own winning lotto ticket. Pretty sure
all parties involved knew “exactly” what they were doing.

Fourth: they were very careful to outline there choice of Commercial
Webcaster model which afforded them a few “easy outs”. One, the pure “pay-
per-play” model would virtually and logically eliminated any need for a smaller
or scaled classes of webcaster. Their logic, the more you use the more you
pay, simple. Wrong, in a real free market, the more I buy, the cheaper it gets.
Two, they would be better able to approve the application of SoundExchange’s
proposed rates with little to no justification. Meaning, they can reference other
internet music service models that have little or nothing to do at all with
noninteractive internet radio broadcast. By their own admission, they attempt to
compare interactive and non-interactive service models as if they were
identical, with absolutely no difference to service value at all. So why not
choose the more expensive of the two. Meaning all of you would willingly
(remember that “willing buyer” thing) pay the same price for a non-interactive
music service as you would pay for an interactive one. Yeah right, I’d love to
buy a Chevy Corvette for the price of a Ford Fiesta. What? You don’t agree,
but they both have an engine, steering wheel, and four tires, they must be the
same...

Why didn’t they apply a model more like terrestrial radio? I’ll tell you why, the
record industry has spent many long lobbing hours making sure they keep
terrestrial radio separate from the internet world for one big reason, they
already control most or all of terrestrial radio. Their argument? That there is
no way to track actual listener levels on terrestrial radio, true to a degree, but
I’m pretty confident that if you were a retail outlet trying to buy some on-air
advertisements they would break out 100's of pages of demographics and
listener levels, charts and graphs that would drown a whale. Just look at the
Arbitron rating system. But when it comes to paying royalties, well mum is
the word, “we have no idea how many listeners we have, could be 1, could be
1,000,000".

Bottom line, terrestrial radio would go out of business over night if they were
imposed with the same rate structure. We know that, they know that, but
apparently these learned expert judges have no idea the damage that they
would do. And I’ve got a bridge in Arizona I’d love to sell you. There are
already well documented figures that place the cost of a terrestrial radio
listener at about $1.50 or so a month, raising toward $2.00 a month in 2010.
The rates outlined in this ruling would start (or should I say started in 2006) at
near $9.00 and raise to over $15.00 a month for internet radio in 2010.
If there were any model more applicable to internet radio, terrestrial radio
would be it. Terrestrial radio, Internet radio, and Satellite radio, all broadcast
music in a non-interactive way regardless of the method of transmission. I
don’t care if the method is via radio signals, digital bits, satellite, or bubbles
floating up in your toilet bowl, we are all simply radio stations that broadcast
music, period. Now they will say that internet is different because it’s digital.
Wrong, not different, why? The music we stream from our station is played via
computer, enters a set of processing gear as an analog signal, then gets redigitized
for streaming. Most defiantly NOT the original recording bit for bit,
which is the basis of their argument that anyone can make direct digital copies
of the exact works. Not true.

So why the imbalance you ask? Cause the record industry has been screaming
for decades now about all this fictitious money they’re losing. What’s fictitious
money? Well, I have a box, I say that box is worth $10.00, I put this box on
eBay to sell it (no reserve, a.k.a. open market). A week later I notice that my
box has sold, but for only $2.50, so now I run around crying I just lost 75% of my
revenue cause someone else must be selling boxes cheaper or they’ve been
illegally giving boxes away for free. There you have it, fictitious money. So
now all the RIAA has to do is reference any of 100's of studies or polls that
indicate levels of music downloads and scream that there is our lost revenue.
Like any study or poll, I’m pretty certain that we’d find some inflated numbers,
always depends on how you ask the question or log your numbers.

Here’s even another model your Honors forgot to evaluate. The public library
system. It can easily be argued that because we have libraries that allow the
public to read and consume copyrighted works for free that it would
undermine the rights of authors and copyright owners everywhere. Funny,
seems to be a book store(s) in every mall, even book clubs on the internet.
Hell, successful novels (need and example, Harry Potter) net millions and
millions of dollars annually in spite of the public library systems which offers
each member of the public FREE interactive access to copyrighted works.
Hmm, must be a fluke...

Fifth and Lastly: this all comes at a very convenient time. Face it, the power
in congress has shifted as of the beginning of 2007. SoundExchange, the
RIAA, and all relevant parties were dragging their collective feet on making
any rulings til after the elections. The panel was appointed in the beginning of
this year after the power shift so that the proper players could be selected.
The Democratic Party has been closely aligned with the entertainment
business for several decades. Blah, blah, blah, need I draw you a road map. I
typically lean more conservative, but I have to laugh when I hear people
accuse Republicans of solely being aligned with big business and big oil. Look
who’s aligned with “big business” also... Enough of my political rant.

So where does this leave us? Us independent dreamers that have embraced a
future were many can share in the dream of musical expression. I for one, as a
musician myself, feel obligated to share anything I produce with the fruits of
my labor as a internet radio webcaster with all those that have made my
dream come true as a participant in this industry possible. But really, do I owe
them everything? Is my work as a internet radio service provider amount to no
value whatsoever to the industry and artists? Does my enthusiastic promotion
of this trade earn me a death sentence, and enough financial debt to choke the
proverbial horse?

Fortunately for us we’ve been licensed through a broker to cover all our fees.
These guys might get stuck with the bill if we go off air and/or cannot find
other economic solutions. They’ve provided us with a great service, but we
simply don’t have the financial ability to continue broadcasting through the
appeals process. Don’t be fooled, this process is by design, the record industry
knows damn well that we don’t have the finances to fight them on an
individual basis. Even if they ultimately fail in the long term, they will
successfully kill hundreds of stations before all is said and done. All by design.
We are hoping that Congress, the officials we elected with the charter to
protect us (remember us? We The People...) from these injustices, will act soon
enough to save this industry, no... this art form.

My biggest fear today is that this is all falling on deaf ears, clogged with the
single minded empty ideology of corporate efficiencies and bottom dollar
thinking, leaving no room whatsoever for innovators and dreamers. This will
ruling will most certainty destroy internet radio for the sake of corporate
interests (don’t fool yourself, artists won’t get a penny more, record industry
has stolen their rights too), and furthermore this will serve as a huge injustice
for emerging artists everywhere, for from hence forth they will also have to
submit to the cooperate system that will refuse access to the ears of the public
unless they sign over their rights as well. Interesting thing about Capitalism,
it’s a system of constant re-invention, yet here we have an example of an out
dated business model’s desperate attempt to crush innovation and a truly free
market. Tell me I’m wrong, just make sure you PROVE IT!

Please, save our radio.
Kevin Steidel, rock5150@kqlz.org

Now that I've cleared my chest, tell me what you think. Please post your comments below. Love to hear what you think of my analysis (aka RANT).

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