Copyright Board denies SoundExchange rehearing on XM, Sirius royalties

The decision of how much performers should be compensated when their works are played on radio, drew one big step closer to a workable compromise last week, though now it's the collection agency that's raising the red flag.

In a dramatic change of stance, the US Copyright Royalties Board denied a petition from performance rights organization SoundExchange last week for a rehearing on the matter of a royalties agreement between the Board and Sirius and XM Satellite Radio. This after having been perceived throughout last year to have been firmly on SoundExchange's side in its efforts to boost royalties paid by Internet, terrestrial, and satellite radio.

"SoundExchange has not made a sufficient showing of clear error or manifest injustice with respect to the gross revenues definition or new evidence with respect to the proposed merger that would warrant a rehearing," reads the CRB's ruling (PDF available here). "To the contrary, SoundExchange's arguments in support of a rehearing or reconsideration are based on the same insufficiency of evidence that caused its similar arguments to be rejected by the Judges in fashioning their Initial Determination."

It was an uncharacteristic rebuke from an organization that seemed last year to have been in complete agreement with SoundExchange from the beginning, to such an extent that critics in various branches of the radio industry had been wondering whether the CRB had taken time to review SoundExchange's assertions about the evolving nature of radio in the digital era.

In December, the chairman of XM Satellite Radio told BetaNews that he would reluctantly accept paying a royalty fee for 2008 and thereafter that was as much as 375% what it had already been paying. But SoundExchange contended even that much was not enough: "This result once again highlights the inequity of a rate standard that forces creators of music to subsidize certain music services with below-market rates," its executive director, John Simson, said at the time.

The CRB found in its Initial Determination last month that satellite radio broadcasters should pay royalties based on their adjusted gross revenue, starting with 6.0% this year and escalating to 8.0% by 2012. But it's the "adjusted" part with which SoundExchange took issue: specifically, whether the CRB's proposed adjustments left out so many categories of potentially important revenue that the remainder to be calculated could no longer be considered "gross."

Both XM and Sirius reap a portion of their revenues through merchandising rather than airplay, and neither party believes it should pay royalties on the sale of hats and sweatshirts. The CRB would tend to agree, though it points out that SoundExchange's alternative royalty rates proposed last August doesn't appear to coherently exclude those categories. It excludes something, to be sure, but it doesn't really define what that is.

"There was no credible evidence submitted by SoundExchange during the proceeding that any of the types of revenue excluded from gross revenues in the Initial Determination currently constitute or are projected to account for an amount of gross revenues that would significantly impact the calculation of a percent of gross revenues royalty rate," the CRB determined.

Another category of revenue likely to be excluded from royalties is the incidental use of snippets from sound recordings in advertising. So if an XM ad on an XM channel plays five seconds of Bruce Springsteen, it won't find itself owing The Boss.

Legislation still before Congress, like a very old pie languishing in the refrigerator, would set royalties rates for Internet radio broadcasters like Live365 and Pandora equivalent to what satellite radio is being charged, using that example as a kind of benchmark. Since that legislation was drafted, Sirius and XM agreed to the rate hike, though even that amount is not as questionable as what the CRB had determined Internet radio should be charged.

If passed, the legislation would override the CRB's ruling. And other legislation may impose performance royalties terrestrial broadcast radio for the first time in US history, ending the exemption that, in an earlier era, radio stations were thought to have deserved.

The CRB's determination last week is an indicator that it may be willing to pre-empt Congress and reach an across-the-board compromise rate on its own, which may apply to satellite, Internet, and later terrestrial radio.