[Senate Hearing 107-914]
[From the U.S. Government Publishing Office]
S. Hrg. 107-914
COPYRIGHT ROYALTIES: WHERE IS THE RIGHT SPOT ON THE DIAL FOR
WEBCASTING?
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HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MAY 15, 2002
__________
Serial No. J-107-80
__________
Printed for the use of the Committee on the Judiciary
U. S. GOVERNMENT PRINTING OFFICE
86-043 WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware STROM THURMOND, South Carolina
HERBERT KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin JON KYL, Arizona
CHARLES E. SCHUMER, New York MIKE DeWINE, Ohio
RICHARD J. DURBIN, Illinois JEFF SESSIONS, Alabama
MARIA CANTWELL, Washington SAM BROWNBACK, Kansas
JOHN EDWARDS, North Carolina MITCH McCONNELL, Kentucky
Bruce A. Cohen, Majority Chief Counsel and Staff Director
Sharon Prost, Minority Chief Counsel
Makan Delrahim, Minority Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 9
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 1
prepared statement........................................... 122
WITNESSES
Navarro, Dan, American Federation of Television and Radio
Artists, New York, New York.................................... 16
Potter, Jonathan, Executive Director, Digital Media Association,
Washington, D.C................................................ 5
Rose, William J., Vice President and General Manager, Arbitron
Webcast Services, New York, New York........................... 7
Rosen, Hilary, Chairman and Chief Executive Officer, Recording
Industry Association of America, Washington, D.C............... 3
Schliemann, Frank, Founder, Onion River Radio, Montpelier,
Vermont........................................................ 12
Straus, Billy, President, Websound, Inc., Brattleboro, Vermont... 14
QUESTIONS AND ANSWERS
Responses of Dan Navarro to questions submitted by Senator Biden
and Senator Cantwell........................................... 34
Responses of Jonathan Potter to questions submitted by Senator
Biden and Senator Cantwell..................................... 38
Response of Bill Straus to a question submitted by Senator Biden. 41
Responses of Hilary Rosen to questions submitted by Senator Biden
and Senator Cantwell........................................... 43
Response of William J. Rose to a question submitted by Senator
Cantwell....................................................... 52
Response of Frank R. Schliemann to a question submitted by
Senator Biden.................................................. 55
Responses of Intel Confidential, Attorney Client Work Product to
questions submitted by Senator Leahy........................... 56
SUBMISSIONS FOR THE RECORD
Alben, Alex, Vice President, Government Affairs, RealNetworks,
Inc., Seattle, Washington, statement........................... 67
Cablemusic Networks, John Hilbronn, statement.................... 73
Choiceradio.com, Valerie Star, President, California, statement.. 76
CyberRadio2000.com, Salvatore Lepore, George Halstead, and Jimmy
Perna, statement............................................... 79
DH NetRadio, Mark Douglas, statement............................. 81
Free and Clear Broadcasters Association, Toby Sheets, statement.. 84
Future of Music Coalition, Jenny Toomey, Executive Director;
Michael Bracy, Director, Government Relations; Walter McDonouh,
General Counsel; Kristin Thomson, Research Director; Brian
Zisk, Tecnologies Director, Washington, D.C.................... 86
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah,
letter......................................................... 96
Independent artists and recording labels, joint statement........ 100
Internet Radio Hawaii, Robert Abbett, statement.................. 105
Intprogramming Incorporated, Robert Pullman, President, Renton,
Washington, statement.......................................... 111
Hounddogradio.com, Frank Coon, Owner and Operator, statement..... 118
Jolt Radio, Mike Kramer, Owner, CEO, Des Moines, Iowa, statement. 119
Maddog Rock Radio, Don Mangiarelli, statement.................... 124
Megarock-Radio. Com, Robert Winklemann, statement................ 125
Navarro, Dan, Major Label and Independent Label Featured
Performer, Non-Featured Performer, Sound Recording Copyright
Owner and Songwriter, statement................................ 128
National Association of Broadcasters (NAB), Edward O. Fritts,
President & CEO, Washington, D.C............................... 136
National Media Networks, Inc., Kevin H Amstutz and Dino V.
Pileggi, statement............................................. 142
Live 365 (The Netherlands), Ludwig Th. Dirsz, statement.......... 161
Potter, Jonathan, Executive Director, Digital Media Association,
Washington, D.C., prepared statement........................... 143
Radiostorm.com, Joseph Naro, statement........................... 162
Recording Artists Coalition, Don Henley, statement............... 164
Reality Radio, Inc., Glenn G. Waddell, Biringham, Alabama,
statement...................................................... 170
Rose, William J., Vice President, General Manager, Arbitron
Webcast Services, statement.................................... 172
Rosen, Hilary, Recording Industry Association of America,
statement...................................................... 175
Onion River Radio, Frank Schlieman, Founder, statement........... 192
Solvent Loud Radio, Thomas McAllister, statement................. 200
SomaFM, Rusty Hodge, General Manager and Program Director, San
Francisco, California, statement............................... 202
Spacial*Audio Solutions, Bryan Payne, statement.................. 206
Twangcast.com, Mike Hays, statement.............................. 216
WCPE, Deborah Proctor, statement................................. 217
WGOR, Lee Hauser, General Manager, statement..................... 219
Wall Street Journal, Julia Angwin, article....................... 221
Warpradio.com, Denise Sutton, CEO, statement..................... 223
Webcaster, James J. Brust, statement............................. 226
Websound.com, Billy Straus, President, Brattleboro, Vermont...... 227
Webcaster, Joslyn Tillar, statement.............................. 232
Webcaster, Elbert Dee Walston, statement......................... 233
COPYRIGHT ROYALTIES: WHERE IS THE RIGHT SPOT ON THE DIAL FOR
WEBCASTING?
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WEDNESDAY, MAY 15, 2002
United States Senate,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 9:38 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Patrick J.
Leahy, chairman of the committee, presiding.
Present: Senators Leahy and Hatch.
OPENING STATEMENT OF HON. PATRICK J. LEAHY,
A U.S. SENATOR FROM THE STATE OF VERMONT
Chairman Leahy. Good morning, everyone. Senator Hatch has
been delayed, but we are going to have to start because with
the later events this morning with the President, a number of
us will have to be there.
So I am going to urge all witnesses to stay to the 5
minutes. Their full statements will be in the record. Feel free
to hit us with the points you would want the most. The reason I
am saying 5 minutes--one, two, three, four, five six people
here; that is 30 minutes. If anybody goes over, unfortunately
the time will have to come from the person next to you, so
think about that.
The Internet, as we know, has become the emblem of the
Information Age. There are actually some worthwhile things on
the Internet, if one cares to search and search and search, but
it is also very helpful. I was getting e-mails last night until
after midnight from my staff, and I noticed when I logged on
somewhere between 4:30 a.m. and 4:45 a.m., there were a number
of others, as well as from constituents in Vermont.
I like the Internet. I also like the creative spirits who
are the source of the music and films and books and news and
entertainment content that enrich our lives and energize our
economy and influence our culture. I am impressed by the
innovation of new online entrepreneurs and I want to do
everything possible to promote the full realization of the
Internet's potential.
I think if we have a flourishing Internet, with clear, fair
and enforceable rules governing how content may be used, that
can benefit all of us, including those entrepreneurs who want
us to become new customers and the artists who create the
content we value.
The advent of webcasting, streaming music online rather
than broadcasting over the air as traditional radio stations
do, is really one of the more exciting and quickly growing of
the new industries that have sprung up on the Web. Many new
webcasters, unconstrained by the technological limitations of
traditional radio transmissions, can and do serve listeners
across the country and around the world.
In some of the countries ravaged by war, they put in a
telecommunications system and they kind of leap-frog everybody
else. They go into wireless systems that work far better,
sometimes because they start anew and they are not held back by
the way things have been done before.
They provide new and specialized niches not available over
the air, new and fringe artists, someone who does not enjoy a
spot on the Top 40. They can bring music of all types to
listeners who, for whatever reason, are not being catered to by
traditional broadcasters. My taste in music may be different
than others, and so forth.
We have been mindful on this committee that has the
Internet is a boon to consumers, we can't neglect the artists
who create and the businesses which produce the digital works
and make the online world so fascinating. There is not going to
be any content for the online world if our artists and
producers and those who create it aren't compensated for their
own work.
With every legislative effort to provide clear, fair, and
enforceable intellectual property rules for the Internet, a
fundamental principle to which we have adhered is that artists
and producers of digital works merit compensation for the value
derived from the use of their work.
In 1995, we enacted the Digital Performance Right in Sound
Recordings Act, which created an intellectual property right in
digital sound recordings, giving copyright owners the right to
receive royalties when their copyrighted sound recordings were
digitally transmitted by others.
We created a compulsory license so that webcasters could be
sure of the use of these digital works. We directed that the
appropriate royalty rate could be negotiated by the parties or
determined by a Copyright Arbitration Royalty Panel, or CARP. I
didn't know how apt that acronym might become later on.
Most webcasters chose to await the outcome of the
Arbitration Panel proceeding, and now that the finding has been
reached and is being reviewed by the Librarian of Congress, the
industry is in an uproar. Nobody seems happy with the outcome
of the arbitration. All of the parties have appealed.
The recording industry and artist representatives feel that
the royalty rate, which is based on the number of performances
and listeners rather than on a percentage-of-revenue model, is
too low. Many of the webcasters have declared that this per-
performance approach and the rate attached will bankrupt the
small operations and drain the larger ones. An outcome like
that could be unfortunate not only for them, but also for the
artists, labels, and consumers, who would all lose important
legitimate channels. I have heard complaints from all sides
about the fairness and completeness of processes and procedures
in the arbitration.
The Librarian of Congress can do three things. He can
approve the decision which nobody seems to like. He could order
a new proceeding, which would require considerably more time
and expense for the participants, or he could reject the
decision and set the rate himself without further input, and
any aggrieved party could appeal.
So it brings me to the question I want each of our
witnesses today to consider. Why can't everyone--Congress,
artists, labels, and webcasters alike--take the CARP as a
genuine learning experience and sit down to determine what is
the next best step? If the parties could avoid more time and
expense and reach a negotiated outcome more satisfactory, that
would be preferable, I believe anyway.
There are also lessons for Congress here as well,
especially lessons about how compulsory licenses are no panacea
and how we might reconsider the arbitration procedures and the
guidance given to rate-setters in the DMCA.
Thee is a lot more in my statement. I am not going to take
your time to read it all. We will put it in the record.
[The prepared statement of Senator Leahy appears as a
submission for the record.]
Chairman Leahy. We will begin with Ms. Hilary Rosen, who is
the Chairman and Chief Executive Officer of the Recording
Industry Association of America.
Ms. Rosen, you are no stranger to this committee and all of
us benefit from it when you are here.
STATEMENT OF HILARY ROSEN, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, RECORDING INDUSTRY ASSOCIATION OF AMERICA
Ms. Rosen. Thank you. Good morning, Mr. Chairman, members
of the staff. I will just--you said you are pressed for time--
cut my statement in half, you will be pleased to know. So I
assume that will go in the record.
I would also like to put in the record a statement of Gary
Himelfarb, from RAS Records, representing the Association of
Independent Labels, who wanted to be here today.
Chairman Leahy. They will both go in the record in full.
Ms. Rosen. Let me just say what I hope is obvious, which is
that we want webcasters to succeed. The application of this
technology is exciting. It has energized music lovers and fans,
some of whom have turned themselves into webcasting
entrepreneurs, and it has also provided a new business
opportunity for some of the world's largest and most innovative
media companies. If webcasters don't succeed, artists and
record companies stand to lose an important new revenue stream.
For years, artists and record companies have been denied
the performance rights enjoyed by other copyright owners in the
United States, and indeed by artists and record companies
around the world. That situation has been well documented for
its inequity and was significantly addressed in 1995 by this
Congress.
New revenue streams are more important than ever in a world
where new technologies are dramatically changing the way people
get and listen to music. We worked closely with this committee
and others in 1998 when Congress enacted legislation
guaranteeing in an unprecedented manner that a new business
called webcasting would have access to blanket licenses for
sound recordings on a compulsory basis.
We invested millions of dollars creating a collection and
distribution system that would significantly ease webcasters'
burden of using hundreds of thousands of different recordings
in their programming, and artists and record companies engaged
in this activity despite the risk that payment would not come
for several years as rates were worked in the marketplace or
perhaps in a CARP proceeding.
We fervently believe now, as we did then, that webcasters
can succeed, while compensating creators of the sound
recordings upon which their businesses are built at a fair
rate. It is obvious that without sound recordings, there would
be no webcasting business, a point eloquently made by the
chairman.
It is equally obvious to artists and record companies that
webcasters were required to pay their other costs of doing
business from day one--the cost of their rent, their hardware,
their computer software, their supplies, their equipment, et
cetera.
So I recognize the issue of how much to pay for music is a
complicated one, but obviously that compensation has to be
determined by a fair process and based on the market value of
the sound recordings. That was the bargain in having a
compulsory license.
We think that the recently completed CARP proceeding was
fair. Just to comment on what you said, Mr. Chairman, we didn't
like the results, but we are not attacking the process. I think
that is the difference, that we are willing to live with the
result as it was. It was long, it was cumbersome, and it was
expensive. But now, 3\1/2\ years later, artists and record
labels are finally looking forward to actually being
compensated for their works.
I think it is important to keep a few things in mind as
this hearing proceeds today. The first is that the statute
actually directed the parties to negotiate rates in the
marketplace, and a CARP proceeding was the last resort. Because
webcasters had a compulsory license and therefore didn't really
need to negotiate a rate in order to get access to the music,
they could avoid paying royalties for several years by not
negotiating, which was fair under the statute. Many webcasters
took advantage of this and have not paid royalties for several
years as they began their businesses. In other words, they have
already had the start-up boost to their business.
Second, nobody was out-gunned in this process. Several
large media companies--AOL, Viacom, Clear Channel--had many
highly-paid and skilled lawyers and consultants in the CARP
proceeding fighting for as low a rate as possible. Many small
webcasters did participate and presented evidence and
testified. No doubt, they also benefitted from the very able
counsel and experts retained by the larger companies. Even if
some webcasters did not participate, their views were well
represented in the proceeding.
Third, the arbitrators had a host of confidential financial
information about these businesses, information that this
hearing could never possibly unveil--things like costs and
expenses and projected revenues and projected business plans,
IPO offerings, operating expenses. In other words, the CARP had
so much more detail about their ability to pay that it is
tough, and inappropriate, I think, to read a newspaper or
listen to rhetoric and imagine that the CARP somehow was just
stupid and they didn't get it.
The Librarian of Congress is reviewing an unredacted
version, which I certainly haven't seen, of the arbitrators'
decision. That did have confidential financial data. I am sure
that review is going to be thoughtful and considered, and it
should be based on the extensive record.
Congress set up this process. Let it work through without
interference. We absolutely want to be productive with the
webcasters as this decision gets implemented. We, of course,
want to work productively with this committee as you look at
the process for future proceedings, and I will be happy to
answer any questions that you might have.
Thank you.
[The prepared statement of Ms. Rosen appears as a
submission for the record.]
Chairman Leahy. Thank you. I will go into a number of steps
that the CARP took. I will continue to read the newspapers,
however. You never know. Every so often, like the blind pig,
you actually find something worthwhile there.
Ms. Rosen. I confess I read them, too.
Chairman Leahy. I was going to say I know the distinguished
witness reads them, and probably a heck of a lot more than the
chairman does.
Mr. Potter.
STATEMENT OF JONATHAN POTTER, EXECUTIVE DIRECTOR, DIGITAL MEDIA
ASSOCIATION
Mr. Potter. Chairman Leahy, thank you for inviting me to
testify today on behalf of more than 20 DiMA companies that are
webcasters and that support webcasters.
In a factual vacuum, the CARP-proposed sound recording
royalty rate of just over a tenth of a penny per song performed
to a single listener may seem small. But in context, it bears
no rational relationship to the economics of the broadcast,
webcast, or music industries. The proposed royalty equals 78
percent of Onion River Radio's gross revenue, while royalties
to songwriters and publishers are less than 4 percent.
Many other webcasters will have sound recording royalties
more than double their entire budgets, or five times or more of
their total revenue. For Yahoo, MTV, and other large
webcasters, the royalty rate ensures that Internet radio, which
has been embraced by consumers who relish diverse music
offerings, will be uneconomical and likely abandoned as a
viable line of business.
Let me be clear, Mr. Chairman. The Internet radio industry
is not seeking a subsidy or to perform music without paying
creators. Rather, we are seeing fair pricing and fair market
pricing.
When the Digital Performance Right in Sound Recordings Act
was enacted, this committee, to promote licensing efficiency,
provided the recording industry a limited antitrust exemption
to negotiate and license collectively. But to ensure that the
collective did not over-leverage its monopoly position, the Act
provided a safeguard, a Copyright Arbitration Royalty Panel,
empowered to determine reasonable license rates and terms.
When Congress expanded the performance right to webcasting
in the DMCA, at RIAA's urging Congress changed the standard by
which the CARP determines a royalty, but it did not confer with
the Justice Department about how the new standard dovetailed
with the previously drawn antitrust exemption. The new standard
eliminated all references to reasonableness or fairness and
required royalty rates to reflect what ``willing buyers would
pay willing sellers in the marketplace.''
RIAA immediately exploited this new standard. As the CARP
concluded, RIAA offered licenses on a ``take it or leave it''
basis, almost exclusively to small, unsophisticated webcasters
that paid negligible royalties. Why? As the Panel recognized,
``this sacrificial conduct made economic sense only if
calculated to set a high benchmark to be later imposed upon the
much larger constellation of services.'' In other words, the
RIAA targeted an insignificant segment of the market whose
peculiar circumstances prevented their awaiting a CARP outcome
to establish what the CARP said were ``artificially high'' and
``above-market'' prices in order to foist these prices on the
industry as a whole.
The CARP's ruling resulted from a confluence of
circumstances: first, the change to a ``willing buyer/willing
seller'' standard that the arbitrators misconstrued not to
require a competitive market outcome; second, RIAA's scheme to
use its antitrust exemption to ensure, as the sole seller of
the new performance license, that the CARP would review an
extremely limited set of ``marketplace licenses.'' Third, the
restrictive CARP procedures, in particular the lack of notice,
meaningful discovery and subpoena power, enabled RIAA to
present a one-sided view of the so-called marketplace to the
Panel.
Whereas RIAA offered the Panel a royalty model based only
on its 26 tainted licenses, webcasters offered a rate structure
based on the well-established industry standard 50-year history
of radio composition performance royalties. Remarkably, because
the Panel misconstrued the new ``willing buyer/willing seller''
standard, they dismissed in one sentence decades of benchmarks
for songwriter royalties.
Unable to rely entirely on the 25 agreements that they had
just characterized as tainted by anticompetitive conduct, the
arbitrators instead turned to the only agreement that appeared
even superficially to be the result of balanced negotiations,
the RIAA's deal with Yahoo.
Unfortunately, even the Yahoo agreement was an
inappropriate benchmark for industry-wide rates. As reflected
in Yahoo's written testimony to this committee, its radio
service and its licensing goals were entirely different than
virtually all other webcasters. Ninety percent of Yahoo's
service was retransmissions of terrestrial radio stations; only
ten percent was original Internet programming.
Thus, Yahoo ensured that its license rate for radio
transmissions was as low as possible, and Yahoo was least
concerned about what concerned the rest of the industry the
most, the so-called Internet-only rate. So Yahoo did not resist
when the RIAA sought to artificially inflate the Internet-only
rate. The CARP though, conceding that Yahoo's rate was
``artificially high''--their words--still used it to derive
webcasting rates for the industry as a whole.
Equally significantly, Yahoo realized that absent a deal
with RIAA, its arbitration costs would exceed the entire amount
of the royalty. Accordingly, Yahoo made the rational choice to
settle at above-market rates and save the extremely high costs
of the arbitration.
Mr. Chairman, in 1998 DiMA was agreeable to having its
webcasting member companies pay record companies and recording
artists a performance royalty, so long as the statute was
mutually supportive of the nascent Internet radio industry, as
Congress intended. It cannot possibly be fair or reflect a fair
market to have the sound recording copyright owners be paid 7
to 20 times, or more, than what songwriters are paid. Nor is it
fair that a statute intended to promote Internet radio, as well
as recording artists, results in a royalty that will devastate
a nascent industry that Congress thought it was helping to
promote, thereby resulting in no royalties or minimal royalties
to artists.
Thank you.
[The prepared statement of Mr. Potter appears as a
submission in the record.]
Chairman Leahy. Thank you.
I will also place in the record an article from the Wall
Street Journal this morning on music royalties written by Julia
Angwim. Ms. Rosen, Mr. Potter, Mr. Schliemann and others are
mentioned in it. I have found the Wall Street Journal news
pages tend to be quite accurate and I toss that in there for
what it is worth and others can read it.
I would also point out, and I would hope all witnesses know
this--Mr. Rosen and others who have testified here before
understand that once the hearing is over if you find items that
you wish had been included, feel free to send them to us. If
they are not too lengthy, they will be included.
By the same token, if you find in your own testimony as you
look at it that there were another few sentences you meant to
have said--as often happens, as you get on the elevator, you
think of a question and what you should have added. This is not
a ``gotcha'' kind of hearing; this is to help the committee. So
just send those on to us and they will be included in the
record.
After all, I take the advantage of taking care of any
Vermont colloquialisms or syntax that nobody would understand
outside our State and we clean those up in the record. So at
least we can offer the same courtesy to you.
Mr. Rose.
STATEMENT OF WILLIAM J. ROSE, VICE PRESIDENT AND GENERAL
MANAGER, ARBITRON WEBCAST SERVICES
Mr. Rose. Mr. Chairman, thank you. I am Vice President and
General Manager of Arbitron Webcast Services and I thank you
for the opportunity to speak with you today.
Arbitron has been in the business of audience measurement
and has 50 years of leadership and experience in the business.
Since 1998, Arbitron, together with Edison Media Research,
conducted eight studies on how consumers use the Internet and
streaming.
You have several qualified panelists here today with a wide
variety of backgrounds, so I will concentrate my comments on
Arbitron's areas of expertise, specifically the audience to
traditional over-the-air media, how consumers use the Internet
and streaming, and our general knowledge of advertising sales,
planning, and buying processes.
Consumer use of streaming media has grown substantially in
a short period of time. According to our first study in July
1998, 6 percent of Americans had ever listened to radio
stations on the Internet. Arbitron's latest study from January
2002 shows that 25 percent have ever listened now to online
radio stations.
Consumer use of Internet audio and video is now at an all-
time high, with an estimated 80 million Americans having ever
tried it. Our research indicates that broadband will stimulate
even greater usage, because people with super-fast, always-on
Internet connections use far more streaming media than those
with dial-up connections.
Despite this remarkable growth, streaming media is still in
its infancy compared to traditional broadcast media. As of
January 2002, 9 percent of the population aged 12 and over used
streaming audio or video in the past week. In fall 2001, 95
percent of people over the age of 12 had listened to radio
during an average 7-day period of time. That is 9 versus 95
percent.
Streaming media provides a valuable service by enabling
consumers to have a variety of choices that are not available
on the traditional media. Traditional media limit the types of
music the play over the air, while streaming media can expose
consumers to a wide variety of music. For example, classical
music is not found on commercial radio in most markets today,
but it is widely available on the Internet through streaming
media.
The most active streaming media users are those who listen
or watch each week. Among this group, nearly two-thirds agree
that they use the Internet to listen to audio content they
cannot get otherwise through traditional over-the-air media.
Arbitron analyzed the proposed digital rights fees from the
Copyright Arbitration Royalty Panel in an effort to understand
the impact of the proposed fees and to put those fees into
perspective. For example, if one of the top rated music
stations in New York City rebroadcasted its programming online
and it had the same audience on the Internet that it does over
the air, that station would pay approximately $15 million a
year in sound recording fees.
Thus, the proposed fees would be more than 25 percent of
what that station currently realizes from selling traditional
over-the-air advertising. If that same online station had
original programming instead of a rebroadcast, its fees would
be approximately $30 million, or over half of the revenue from
its over-the-air advertising sales.
While broadcasters pay licensing fees to composers of
music, currently they do not pay sound recording fees to
artists and labels. However, if the proposed fees were applied
to an over-the-air radio audience, the royalty would create an
impact that would significantly hinder the financial viability
of an already mature and healthy medium. Broadcasters would not
be able to sustain a cost that amounts to 25 to 50 percent of
their current over-the-air revenue.
The webcasting industry is in its infancy, with little
revenue and profit at this stage of the market's development.
If music radio had to face similar fees in its infancy, it is
highly unlikely it would have grown into the business it is
today.
Arbitron and Edison recently conducted a poll from May 2 to
May 6 of this year to understand consumer awareness and
attitudes regarding audio streaming and digital rights issues.
We spoke with 162 people who listen to Internet audio on a
monthly basis. These are the regular audio streamees. Nearly
two-thirds would be upset if the Web radio stations they
normally listen to permanently stopped offering the ability to
listen over the Internet.
Two-thirds support action by Congress to address the
proposed online licensing fees in ways that help Internet audio
webcasters afford to continue streaming music. Nearly 4 in 10
feel strongly enough about the threat to Internet radio to
indicate they would be willing to write their Congress
representatives in support of Internet audio webcasters
regarding licensing and performance fees.
While webcasting's audience is growing rapidly, it is still
small compared to traditional media. Arbitron believes that all
parties should work together to enable the webcasting media to
grow a critical mass of audience big enough to support
significant ad revenue. A broad distribution of programming,
greater competition, and diversity of voices on the Internet
will help to achieve this objective.
Thank you.
[The prepared statement of Mr. Rose appears as a submission
for the record.]
Chairman Leahy. Thank you very much, Mr. Rose.
Two announcements. This hearing is being webcast live over
the Internet from the Judiciary Committee Web site using Real
Video.
Before we go to Mr. Schliemann, I am going to yield to the
distinguished senior Senator from Utah, my friend, Senator
Hatch. He and I have worked together on a number of these
digital issues actually for as long as they have been on the
radar screen.
Orrin, I think we have put a few of those digital issues on
the radar screen, good or bad.
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
OF UTAH
Senator Hatch. Well, thank you, Mr. Chairman. I apologize
for being a little late. I am in the middle of this trade
promotion authority battle on the floor as well, so I had to go
to a series of meetings on that before arriving here.
I am grateful to you for holding this hearing today. I
think it is important to continue our ongoing conversation
about digital entertainment in general, and about Internet
distribution of music specifically. I believe our discussion
today needs to be viewed in a larger context of ongoing
developments in the online music sector that we have been
monitoring for the last couple of years.
For about 2 years now, Mr. Chairman, we have been
encouraging the exploitation of technology like the Internet to
deliver the wide range of music that listeners want in a user-
friendly way. We have encouraged online experimentation of
broad licensing of popular content to foster the growth of this
medium. We have hoped for the harnessing of technology and the
creativity of intermediaries to create synergies that allow
artists and their audiences a new and closer experience.
For the better part of 6 or 7 years, since creating a
digital performance right in sound recordings in the copyright
law with the Digital Performance Right Act of 1996, I have
repeatedly expressed the hope that we were on the verge of a
well-stocked, ubiquitous, and user-friendly celestial jukebox
that not only would allow music fans easy access to music they
love, but provide artists greater freedom to interact with
their fans and increased income from the exploitation of their
works.
Let me suggest with some substantial understatement that we
are not there yet. Indeed, over the past 2 years of litigation
and some licensing activity, piracy over peer-to-peer networks
has gotten worse and the online music market has gotten more
consolidated. I believe this is the wrong direction.
Consequently, Mr. Chairman, I have sent you a letter
outlining my concerns and suggesting legislative items for us
to develop that can help the online music market grow for music
fans and help to ensure that more of the benefits of online
opportunities accrue to the artists.
I would ask that my letter to you be included as part of
the record of this hearing.
Chairman Leahy. The letter is excellent. I have read it and
it will be part of the record. I think maybe toward the latter
part of this week or over the weekend, you and I could sit down
and discuss it more.
Senator Hatch. That would be great.
Chairman Leahy. You raise some very good points.
Senator Hatch. Among the topics I think we should discuss
are the following. First, artists ought to be able to exploit
or benefit from the works that are not being exploited by the
labels that currently hold the copyright, such as out-of-print
works.
Second, artists ought to be paid their online revenues
directly, and those revenues should not be unfairly discounted
because of traditional but inapplicable offsets.
Third, artists should be able to keep their own online
identifiers, their domain names, so they can more directly
control their relationship with their fans online.
Fourth, we need to explore how to make copyright ownership
information available through the Copyright Office more
accessible and usable through the Internet.
Fifth, we must help ensure that market power and content is
not unfairly aggravated, to the detriment of other legitimate
distributors of online music who seek fair licensing
opportunities.
Finally, Mr. Chairman, I am glad that we have an artist
viewpoint represented at this hearing. Mr. Navarro represents
many, many artists who are also the smallest of small business
people who hope to enjoy some of the benefits digital
distribution happens to offer.
To round out the input of artists in this process, Mr.
Chairman, in addition to Mr. Navarro's testimony here today, I
received a letter from Mr. Don Henley on behalf of the
Recording Artists Coalition, submitting written testimony from
this hearing, and also outlining briefly some broader issues
that we should consider as we continue our look at this
industry.
I would ask that this letter and statement be included in
the record of this hearing.
Chairman Leahy. Of course, and this committee has relied on
testimony and comments from Mr. Henley a number of times. He is
someone that a number of us know personally and have relied on.
I would be happy to put his letter and statement in.
Senator Hatch. I have a lot of respect for him. He stands
up for the artists like hardly anybody I know, and he is a
reasonable person as well. Although not all of his ideas
perhaps are readily workable, he is continually bombarding the
committee with good ideas that we ought to consider.
Without these artists, both famous and not so famous, there
would be no music to distribute online and no businesses to
distribute it. Our lives are richer because of their work and,
whatever we do, we need to ensure that they continue to have
the incentive necessary to create great music and to share
their music with us, irrespective of the medium that brings it
to us. I also don't want to hurt the major music distribution
companies, but we have to somehow find a way of helping
everybody on this matter, and most of all the American
consuming public.
With that, Mr. Chairman, I look forward to our continued
conversation on these issues.
Chairman Leahy. Thank you. I had written also to Mr. Henley
and told him I appreciated his views because we had talked
about this hearing.
Mr. Schliemann is here from Onion River Radio. Now, I know
that you are going to be eager to know this, Senator Hatch.
Onion River is also known by its Native American name, the
Winooski, and the Winooski River runs straight through
Montpelier. I was born on the banks of the Winooski River, in
Montpelier.
Senator Hatch. I am starting to worry about it already, I
will tell you.
[Laughter.]
Chairman Leahy. I grew up there in a home that was
literally on the banks of the river. We used to sometimes have
to run when the floods would start. I lived there until I got
married, 40 years ago this summer.
I knew you wanted to know that and you will put this now on
your list of things to look at when you come to Vermont with
me, right?
Senator Hatch. That was quite interesting to me. Winooski.
Chairman Leahy. Winooski.
Senator Hatch. Winooski.
Chairman Leahy. Senator Hatch and I are planning trips to
Vermont and Utah.
Senator Hatch. I am just afraid, though, once he goes to
Utah he may not want to go back to Vermont. That is the only
problem.
Chairman Leahy. He always gets me.
Senator Hatch. Vermont is beautiful.
Chairman Leahy. Mr. Schliemann.
STATEMENT OF FRANK SCHLIEMANN, FOUNDER,
ONION RIVER RADIO
Mr. Schliemann. Chairman Leahy and members of the committee
and staff, I want to thank you for the opportunity to discuss
the proposed sound recording royalty rate released by the
Copyright Arbitration Royalty Panel and the devastating effect
it will have on the webcasting industry.
Onion River Radio is an Internet-only radio station located
in Montpelier, Vermont. Because the rate is a flat rate based
on the number of times a listener hears a song performed, Onion
River Radio and other Internet radio stations must pay for
every additional listener.
Unless the Librarian of Congress or Congress itself
includes a percentage-of-revenue alternative similar to what we
pay songwriters and music publishers for the right to perform
their copyrighted music, the recommended rate will force
Internet radio to close its doors. I do not believe that this
is what Congress intended when granting webcasters a statutory
performance license under the DMCA.
On Onion River Radio, listeners can hear lesser-known
artists mixed in with more established artists. Local artists
are also featured in regular rotation. We are a media sponsor
of local community events. Our advertisers are local
advertisers. In short, the Internet makes it possible to listen
to Onion River Radio anywhere in Vermont and to broadcast
Vermont to the world.
Here is the catch-22: In order to increase my revenues, I
need to build a much larger audience, but I can't afford to
build my audience under the CARP per-performance rate. To
explain, we need a large number of listeners to attract local
advertisers. We also need a large number of listeners to ensure
that those advertisers see results. In a small market, it is
crucial that advertisers see a return on their investment, or
else they will not continue to spend money on our station.
The advertising rate for a 60-second commercial on Onion
River Radio is only $10. Our advertising rates have to stay low
in order to compete with local FM stations. We cannot generate
the same amount of revenue as a station in New York City, but
because the rate is a flat rate based on ratings, we will have
to pay the same per-song fee.
I have 10 years' experience in FM radio broadcasting. I saw
the opportunity to build an Internet-only radio station, while
keeping costs to a minimum. At $250 a month, bandwidth is our
single largest expense. From January to March 2002, our
composition performance fees to songwriters and music
publishers will total $170.50. In contrast, if the CARP
decision is approved by the Librarian of Congress, Onion River
Radio will pay a sound recording performance fee for the same
period that is almost 12 times what we pay to ASCAP, BMI, and
SESAC combined.
Over the last 6 months, the total time spent listening to
Onion River Radio has doubled. Under the CARP recommendations,
so would the sound recording royalty. But as I explained, we
cannot grow our revenue to keep up with the royalty
obligations. We will be bankrupted by royalties.
We have done everything right. My background in music
programming, computer networking, and engineering has enabled
me to create a small business with very little overhead. Our
ratings are growing fast and advertisers are starting to take
notice. The future of my business should not be determined by
an exorbitant flat per-performance rate.
We are not asking for a free ride from record companies and
recording artists, but I cannot built a webcasting business if
Onion River Radio must pay a royalty on a per-performance basis
that is currently 78 percent of my gross revenue.
What webcasters need from the Librarian of Congress or from
the Congress itself is a royalty rate at the established ASCAP,
BMI, and SESAC standard rates, 3\1/2\ percent of our revenue,
and a reasonable minimum fee. A percentage-of-revenue royalty
formula is fair to all webcasters, regardless of market size.
Mr. Chairman, this issue is critical to the survival of
Onion River Radio and hundreds of other Internet radio
stations. This decision affects the future of the Internet
webcast medium itself. Internet webcasting technology enables a
small business like mine to create a compelling local broadcast
medium that promotes local artists and interests to Vermont and
communities around the world. If we cannot afford the
royalties, Internet radio will not exist.
When Congress enacted a statutory webcasting license, I
believe Congress was saying that the future of Internet radio
should not be controlled by the recording industry. If this
committee's intent was to encourage the growth of new
technology, then the unaffordable rates proposed by the CARP
will have the opposite effect.
I urge the committee and members of Congress to save my
industry. Please help prevent these calamitous rates from being
implemented.
Thank you.
[The prepared statement of Mr. Schliemann appears as a
submission for the record.]
Chairman Leahy. Thank you very much.
Artists are also represented on the panel. RIAA had also
suggested that Billy Straus, of Websound, Inc., that happens to
be in Brattleboro, Vermont--now, that is on the Connecticut
River, Senator Hatch. The Connecticut is the natural boundary
between the eastern State of New Hampshire and the western
State of Vermont.
Mr. Straus has been nominated for Emmys for his musical
direction work on TV. He was a nominated for a Grammy, I think,
this year for producing the Broadway cast album of ``The Full
Monty.''
Am I correct that you mixed that in Putney, Vermont?
Mr. Straus. Yes, sir.
Chairman Leahy. This is to prepare you for that trip.
Putney is a very small town where the Putney School came from
and is. It also was the home of the longest-serving Senator
from Vermont, George Aiken, who became Senator the year I was
born and served until I arrived, for whatever that is worth.
Mr. Straus.
STATEMENT OF BILLY STRAUS, PRESIDENT, WEBSOUND, INC.
Mr. Straus. Chairman Leahy, Senator Hatch, thank you very
much for inviting me to appear before you today as a citizen of
Vermont, Senator Leahy's great home State.
I am the President of Websound, a small webcaster based in
Brattleboro. We provide online webcasts to consumers via the
Web sites of our commercial clients, which include brands such
as Volkswagen, Eddie Bauer, and Pottery Barn. I started
Websound in my barn in the spring of 2000.
On the screens, you are seeing and hearing a real-time
webcast originating from Websound servers. I thought it might
be helpful to quickly demonstrate for you what we do and how we
do it. This particular program, ``Radio VW,'' is produced in
Brattleboro for our client Volkswagen. The listener can select
from four different channels of music and continue to listen
after leaving the Volkswagen site. Other than Volkswagen's
branding, there are no commercials, just eclectic, interesting
music programmed in a way reminiscent of the best of free-form
FM radio.
My passion has always been for music of all styles and
genres, and though my role at Websound is that of entrepreneur,
I am first and foremost a musician and a composer. In the
context of this hearing, it is my hope that perhaps this unique
perspective may be somehow useful to the committee.
I would like to make three main points today in my
testimony pursuant to the issues at hand. The first is simple
enough: Artists must be fairly compensated for the use of their
work in webcasts. It is simply not just to build an industry
around the proceeds of artistic endeavor without adequate
compensation to the creators. To do otherwise provides a short-
term shot in the arm for the industry at the expense of a long-
term liability.
Secondly, we need to create a tiered system of royalty
provisions in order to encourage innovation and creativity
among fledgling as well as established webcasters. This will
ensure that we avoid a perilous situation where the record
labels are the only ones who can afford to stream music on the
Internet.
Thirdly, detailed reporting is not only possible, but is a
key component in putting an effective tiered royalty system
into effect. This can be accomplished without undue burden on
either the webcaster or copyright owner and without running
afoul of privacy issues.
Websound has produced and streamed Web radio for clients on
a fee-for-service basis under a license executed with the RIAA
in September of 2000. Websound negotiated this license based on
a carefully considered set of business parameters which make
sense in the context of our fee-for-service model. The terms of
our license, therefore, cannot necessarily be held up as a
model for all other webcasters.
It is crucial that we do not force all of the wonderfully
diverse streams and sources of music programming out of the
system by creating an untenable set of royalty provisions
across the board. To do so is surely to sound the death knell
for one undeniable promise offered by the Internet--global
access to an infinitely broad range of musical expression.
To this end, it is not fair to subject a small, non-
commercial webcaster such as San Francisco's soma-fam.com to
the same royalty requirements as a large commercial webcaster
like Yahoo, or for that matter a smaller commercial webcaster
such as Websound.
To respect the rights of copyright-holders while not
overburdening the small webcaster, we should institute a multi-
tiered approach. The thresholds could be tied in part to a
maximum number of simultaneous listeners or to a monthly volume
of performances, for example. Accurate reporting can and will
help facilitate these distinctions, ensuring that each
webcaster is properly classified.
To the extent accurate reporting is needed in order to
properly compensate copyright owners, webcasters can and should
report on their use of sound recordings. Websound has been
doing this successfully for about 18 months, and our total
office staff other than myself consists of only two people.
We have recently announced a new technology called RadLog,
designed to streamline the tracking of sound recordings used in
our webcasts. We plan to make this technology available
industry-wide to help address the significant concerns mounting
over webcast reporting for statutory licensees.
There is no question, however, that an initial cost will be
incurred in setting up a reporting system that serves the
industry well and does not overburden either the webcasters or
the copyright owners. It is crucial that the record labels take
the lead in constructing a central database that can be made
available to the industry for the purpose of streamlining
reporting, encouraging compliance with the license, and
providing the specific data needed to properly process and
distribute the royalties collected.
The record labels as the copyright owners are the logical
source of this raw data. I wish to emphasize the importance of
creating this centralized database of song information as we
look to create a fully functional reporting scenario.
As an industry, we must recognize that certain entities
will undoubtedly cease doing business as a result of the costs
and challenges, just as others come into the marketplace with
new innovations. We must provide an environment where
innovation and creativity are encouraged, but we cannot
possibly hope to save every existing webcasting business. We
must also value the artists whose music is central to the
industry, but not at the expense of creating a scenario where
the only companies able to afford streaming music online are
the record labels who own the copyrights.
It is my belief that a viable, flourishing webcasting
industry made up of a range of participants from the smallest
non-commercial entities to the largest commercial outlets is
feasible under a tiered license that provides opportunity based
on realistic concessions from both the webcasting community and
the copyright owners.
I would be happy to answer any questions the committee may
have.
[The prepared statement of Mr. Straus appears as a
submission for the record.]
Chairman Leahy. Thank you very much.
Mr. Navarro, we are very pleased to have you here. I know
you have released six albums, and you and Eric Lowen have
written ``Constant As the Night'' and ``We Belong,'' and a lot
of others.
We are delighted to have you here, and please go ahead,
sir.
STATEMENT OF DAN NAVARRO, AMERICAN FEDERATION OF TELEVISION AND
RADIO ARTISTS
Mr. Navarro. Well, thank you, and I want to thank you
particular, Senator Leahy, for including us, for your interest
in this issue, and for the opportunity to explain the
importance of the digital performance license income to
recording artists.
I am a recording artist and a member of the American
Federation of Television and Radio Artists, AFTRA, and the
American Federation of Musicians of the United States and
Canada, AFM, the two labor unions that represent recording
artists. Both unions' members include many stars earning
significant record royalties, but more numerous are the non-
superstar, middle-class royalty artists and professional
session singers and instrumentalists who seldom gain fame.
As you said, for more than a decade my partner, Eric Lowen,
and I have written, recorded, and toured, with six albums on
major labels, independent labels, and our own label. We have
had several adult rock radio hits. You have mentioned a few.
To supplement my income, I have also sung background vocals
on numerous albums, including releases by Julio Iglesias and
Clint Black, performed as an instrumentalists on albums by
Whiskeytown and others, and I am also a songwriter, writing
that worldwide hit for Pat Benatar, ``We Belong,'' and songs
for Dionne Warwicke, the Temptations, and many others. I would
like a Gladys Knight cut, but that is Senator Hatch's gig, I
think.
[Laughter.]
Mr. Navarro. The recording process is involved and
rigorous, and I will try to explain the process to help you
understand our work. First, we decide the kind of record we
want to make, the sound we are after. Then we compose or select
material that reflects that artistic vision, constantly editing
until we are satisfied we are saying what we mean to say.
Next, we create arrangements, make demos, select musicians,
secure funding, select studios and engineers, set a working
schedule and rehearse. By the time we begin recording, we have
been working at it for months. Recording and mixing the album
is a logistical and technological obstacle course requiring
patience and stamina, not to mention artistry and technical
skill.
Later, we supervise mastering, take photos, create the
cover, do clerical work like union reports. It is an overall
process of long hours day after day for months on end, all with
the goal of conveying an artistic expression that resonates
with the public. And we are done, if we are lucky, we get to go
back to square one and do it all again.
One would expect that artists are paid handsomely for the
level of talent and effort required, but that is not always the
case. In fact, I discovered early on that there is little money
to be made from recording albums. Costs incurred are advances
recouped from my artist royalties. Manufacturing, promotion,
marketing, videos, tour support and such are defrayed from my
small share of the pie.
So no matter what royalty arrangement I made with the
label, or even when I produced my own albums, I never made a
livable income from my records alone. So I wrote songs for
other artists, sang as a background singer and instrumentalist
for other artists, toured, and marketed merchandise. How ironic
that after years of developing my skills and honing my
creativity, I generate greater profits selling t-shirts.
Unlike the rest of the world, for decades recording artists
have not been paid performance royalties when their work is
played on U.S. radio. Congress redressed a small part of this
unfair position when it passed the Digital Performance Right in
Sound Recordings Act. For the first time, at least some public
performances of recorded music require payment to the artist
for the right to perform it.
Congress created a compulsory license for these uses and
mandated that performers receive 50 percent of that compulsory
license income, 45 percent to featured artists, 5 percent to
backing singers and instrumentalists. I cannot overestimate how
important this new income stream will be to both royalty
artists and session singers and session players.
There has been a great deal of publicity lately about the
plight of webcasters who say that as new and small businesses
they cannot afford to pay the digital performance royalty rate
set by the CARP last February. We concur that fostering the
growth of these new outlets for our music is of the utmost
importance to performers. But the truth is we are also small
businesses and without income streams we can rely upon to make
a living, we will be unable to continue to create the
recordings that the public wants to hear.
Now, although webcasters have been liable for compulsory
license payments since 1998, they have paid nothing, awaiting
the outcome of the CARP proceedings, which comprised over 40
days of hearings, some 80 witnesses, thousands of pages of
evidence, including confidential information about their
businesses, and legal arguments on all facets of the license
question.
The AFM, AFTRA, and the webcasters all participated, ably
represented by counsel. Neither side was completely satisfied
with the recommendations that the arbitrators made to the
Librarian of Congress and both sides have appealed the
decision. But Congress must allow the CARP process to conclude
and the final determination to stand or it will undermine the
integrity of the very system it established.
Our work provides the backbone of these new industries
which pay for everything else they use. The electrical
companies aren't being asked to provide free power. Why should
webcasters get the benefit of our music for free? Webcasters
could get free content by making their own recordings, but they
don't because what their listeners want is our music.
In conclusion, I wish to stress that this is not simply one
business versus another. At the heart of this are individuals
whose talents create sound recordings. Digital performance
royalties will provide us with critically important income to
performers both famous and not so famous. Without us, there
would be no music on any station on the dial or the Internet.
So please don't make us wait any longer for fair compensation
for the use of our recordings on the Net.
Thank you.
[The prepared statement of Mr. Navarro appears as a
submission for the record.]
Chairman Leahy. Thank you, Mr. Navarro.
We hear this debate over whether the Arbitration Panel's
rates were too high or too low and everybody has their feelings
on what it should be. I hope that we don't run into a case like
the old legend of King Midas. He got one wish and the wish was
that anything he touched would turn to gold, but that meant
that his food, his family, and everything else he touched
turned to gold and he ended up with nothing.
If the webcasters are right, for example, that the CARP
would force them out of business, in the end does that help
artists, labels, and consumers? They all have nothing. Ms.
Rosen has said, and I definitely agree with her, that if
webcasters don't succeed, artists and record companies tend to
lose an important new revenue stream. So I think everybody
agrees on the value of webcasters. What we are debating now is
what is the value to everybody else and how do you get paid.
Mr. Navarro, let me start with you. I appreciate that
artists are often not sufficiently compensated. The artist
groups are appealing the CARP decision because they feel that
the CARP set the rate too low. A lot of my friends who are
artists certainly do not reach the Top 10 or the Top 40, but
they are tremendous artists and they want to be able to make a
living from their artistry, and I want them to.
So is it better to have higher rates, even if that forces
many webcasters out of business, or to have lower rates that
result in a larger number of webcasters playing your music?
I ask this of both of you. It is not a trick question. I am
reminded, for example, of the movie industry. They got very
concerned when videotapes first came out and recordings, and
they were quite concerned because they said people are going to
record some of these movies off the air or whatever. They had
plans of selling these movies to consumers on tape for $100,
$125 a tape.
I remember saying at the time, well, why don't you sell
them for $10 a tape? Outrageous; we never could make a living
that way. Well, now one of the companies is going to put their
DVDs in the Safeway and the Giant, and what not, at $8 or $9 or
$10 a DVD because they know they are going to make millions
doing that.
So, basically, you understand the question, do you not?
Mr. Navarro. I do indeed.
Chairman Leahy. Do you raise it and allow webcasters to go
out of business, or lower it and encourage more webcasters?
Which is better for you?
Mr. Navarro. I am not sure there is any one answer. I think
it goes hand-in-hand with whether, when you make a purchase,
you buy something that costs a lot of money or you get
something that is real cheap. Somewhere in the middle is an
axis on the double Bell curve at which point value is achieved,
and to achieve the greatest value, I think, is in everyone's
best interest.
I am a songwriter and a performer. I am not sure that I am
necessarily qualified to establish a business model for the
webcasters, but if their business model is such that it can't
keep them in business, then that is something that they have to
sort out, the same way that I have to sort out whether or not I
can make my rent.
Chairman Leahy. I understand. But, Mr. Navarro, you are a
good songwriter and you are a good artist, and we have to
figure out what is the way that you have the widest
dissemination.
Again, I don't want to push the movie thing too far, but
there are a lot of movies today that are not blockbusters and
are out of the theaters quickly, but they are good movies and
lot of people want to see them. So they see them in the after-
performance, whether it is DVDs or videotapes. I would think
that an artist would want to make sure that there are as many
accesses as possible in the long run to make more money. And I
am not suggesting what the answer is; I am just curious.
Mr. Straus, did you want to have a try on that?
Mr. Straus. Yes, a few thoughts on that. I think that one
of the places we get tripped up has to do with what the
promotional value that an artist receives is from any given
medium of distribution. Traditional radio is perceived as
having an integral role in driving record sales, and I don't
think there is anybody here that would disagree that, for
better or worse, traditional radio is vital in that process.
Whether or not the Web currently provides or will
eventually provide that same kind of benefit to artists is
definitely a question. Currently, in my mind, it definitely
doesn't. We don't see a lot of record sales from our service,
and I don't know if other webcasters who are webcasting can
attest to seeing something different.
So I think that is one of the issues tied up in this, is
what is the benefit other than the direct royalty benefit to an
artist from having their music played on various webcasts. So
that is a question. What is that exposure worth?
I think in terms of the rate itself, speaking for Websound,
we are paying a higher rate than the CARP-recommended rate.
Chairman Leahy. Which you negotiated?
Mr. Straus. Which we negotiated, and for our particular
model it is fine. We knew what we were getting into. We had
experience in the space. We had a sense of what clients were
willing to pay for music and it worked fine from day one. I
mean, we are not making a lot of money, but we are holding our
own, and in the context of our existing business, which is
creating music compilations for clients, it works fine.
That rate might not work fine for a lot of other people,
and I think I spoke to that. I think that the key thing is
that--and this may be a somewhat circuitous answer--we need to
limit the costs, I think, for webcasters so that Frank's
company, for instance, isn't going to get buried if they are
able to set up a broadcast that has a million listeners per-
whatever a week.
He is a small webcaster and he is sitting perhaps in his
house streaming this music out. You don't necessarily want to
squash him at all. I mean, we want to encourage small
webcasters. By the same token, they need to pay something, so
my sense is that we need to come up with a rate that works and
a scenario that caps what those royalties will be so that if a
small webcaster is able to grow a big listenership, they are
not getting killed.
Chairman Leahy. I am going to put in the record a letter we
received signed by 138 independent artists and labels who
actually want the CARP rate lowered. They say that,
We fear that the ultimate result of the performance royalty
fee as proposed will be consolidation of the Internet radio
industry to those few large corporate webcasters who can afford
the high rate. Smaller Internet radio webcasters will be forced
out of business. Independent artists and recording labels will
lose a major source of exposure and promotion.
Of course, Mr. Straus, as you said in your case, you have
negotiated a specific rate.
Mr. Straus. Correct.
Chairman Leahy. You didn't become a millionaire from that
by any means, I know.
Mr. Schliemann, Mr. Straus has referred to you, not to put
words in his mouth, as probably more typical of what a lot of
these Web sites are. Under the CARP's proposed regulations, how
much will Onion River Radio owe in royalties, both
retroactively for the time you have been in business since 1998
and prospectively?
Mr. Schliemann. We came on the air or started to broadcast
in February 2001, so it would be retroactive to February 2001.
I don't have the number in front of me, but I can tell you that
for the first 3 months of 2000, so January through March, the
sound recording performance royalty fee would be $1,180.93,
compared to the $107 that we are paying to songwriters and
music publishers for the same performance of the same works.
I am sorry. He is handing me the actual figure that I gave
from earlier--$1,880.93 for the first 3 months. I apologize.
The really scary thing to me is that it doesn't end there.
Our ratings have doubled in the last 6 months. Arbitron reports
an explosive growth in Internet radio. Based on what they say
and what a company, MeasureCast, says--MeasureCast reports
actually that Internet radio listening is up 563 percent since
January 1, 2001, roughly the time we came on the air.
So at my best guess, I would say that we are going to be at
100,000 streaming hours per month by the end of the year. A
station that streams that much would spend $25,200 for the
performance fee. Now, in Montpelier, in a small market, if we
have a banner year in sales----
Chairman Leahy. The total population of Montpelier is 8,500
people, the smallest State capital in the country.
Mr. Schliemann. That is right, and our market is actually
the entire State of Vermont. And if you want to compare it to
New York City, I think the population of New York City is 15
times the entire population of Vermont, so we have fewer
prospects. Of course, our rate needs to remain low in order to
compete with local FM. So we have a couple of issues there
because we are also in a small market.
So the best-case scenario for us is that we may be able to
bill between $25 and $50,000 in sales revenue if we have a
banner year. If you stream 100,000 hours per month, then it is
$25,000 for that fee alone. Again, right now for us, the single
largest expense is the cost of bandwidth. Of course, we already
pay for music, but bandwidth is our single largest expense. To
put it into perspective, the proposed royalty is almost three
times our single largest expense at the moment, at our current
number of streaming hours. So as we continue to grow, it gets
worse and worse.
Chairman Leahy. Thank you. I appreciate the courtesy of
Senator Hatch. I want to ask one more question. You had raised
Arbitron and its take on this, and with Mr. Rose here, who is
the Arbitron expert on this panel, Mr. Rose, you have had
studies of the webcasting industry.
How many webcasters will be forced to cease operations and
how many will be able to stay in business if the CARP rates
became final? Is it possible to make that judgment?
Mr. Rose. Mr. Chairman, I would love to be able to predict.
I have learned many years ago to be able to predict in the age
of the Internet is a pretty challenging task. Furthermore, we
are not economists. We are a company that measures what
consumers do with the Internet and streaming and how they
listen to the media.
But perhaps I can offer some perspective on that with some
other research that we have done, pointing to the infancy of
webcasting as an advertising medium. The point is advertising
really hasn't begun on the medium yet, and you layer on top a
very high cost in addition to it and it really makes it
difficult for the media to get traction.
In June of this past year, we talked to our customers,
which we are want to do, in a more formal way and some of the
findings that we have point to the infancy of the medium. We
asked advertising agencies, in particular, and webcasters, too,
do advertisers in agencies include streaming media in their
media mix on a consistent basis? Eighty-six percent of the
agency people and eighty-six percent of the Webcasters said no.
By the way, that was 6 months ago, before the issues that
we are dealing with now, which by the way are very public and
makes it hard for advertising agencies to go to their
customers, the advertisers, and recommend the medium with this
uncertainty.
We then asked what size of weekly audience would be needed
for advertisers and agencies to include the medium on a
consistent basis in your media mix. Sixty-two percent of the
agencies--those are the companies that count; they are the ones
who spend the money--said that the size of the weekly audience
needs to be more than twenty percent. Today, that number is 9
percent, so we are not even halfway there.
Then we took it one step further and said when do you think
it is going to get to that point? If it is not there now, when
would it be there? The overwhelming response again from the
agencies, the people with the money to spend, said 2004, 2005,
or 2006. So, clearly, the industry has not really begun from an
advertising medium point of view, and if you go back and look
at FM radio or you look at the cable medium and its growth, it
is very much in its infancy stage.
Ms. Rosen. Mr. Chairman, can I respond to that?
Chairman Leahy. Sure.
Ms. Rosen. First of all, I think the fact that Mr. Rose
said he wasn't an economist was helpful because actually the
CARP had multiple economists testifying to the ability of
webcasters to pay to the forecast projections of these
businesses and to the rates that were being considered. So I
think there is a lot of credit that should be given--economists
hired by all sides, by the way, so I think some credit should
be given to the evidentiary proceeding on that score.
I think the other issue is one that Dan raised, which is
this issue of affordability, I think, is troublesome for the
artists and record companies to really deal with because it is
really an issue of who is first in line.
I have a chart that I think some of the webcasters
distributed about how big a percentage the CARP fee is of their
income, and I think that Frank just alluded to a high
percentage there. But their operating expenses already, without
a music fee, are hundreds and hundreds of percent of their
operating income. So all of these businesses are already losing
significant amounts of money.
So I think that to somehow say, well, we are going to go
out of business because we are going to have to pay copyright
fees is frankly a little unfair, because we are last in line
because we have waited for 3\1/2\ years. I think you really
have to recognize that the CARP looked at all of those numbers
and came to those kinds of determinations.
Mr. Potter. Can I get a shot at this one, Mr. Chairman?
Chairman Leahy. If you don't have any objection, Orrin,
please go ahead.
Senator Hatch. No. This is very interesting.
Mr. Potter. I will be very fast. Ms. Rosen's point about
the economists is well taken, particularly because it was the
RIAA's economist who said that it would be appropriate for the
RIAA to charge monopoly rates in this circumstance, and
particularly because it was the RIAA economist who said that
essentially 25 or 26 of the ``marketplace agreements'' were
irrelevant as benchmarks because none of those companies, or
very, very few of those companies had any chance of success. If
a company doesn't have a chance of long-term, viable success,
it should not be viewed as a benchmark for an entire industry,
and that is the trouble that we have today.
Mr. Straus just acknowledged that his license is not
applicable to the entire industry. He runs a fee-for-service
business. He doesn't run an advertiser-supported media
business. The RIAA's economist said these unique companies, all
of whom the CARP called unsophisticated, uneducated, and who
would be characterized in the ASCAP-amended consent decree as
those in the early stages of an industry--and the new ASCAP
consent decree does not permit the first 5 years of an
industry's agreements to be considered by a rate court for an
overall industry-wide rate. It is for all of these
circumstances.
So the RIAA economist agrees with Billy Straus and agrees
with the Department of Justice that all of these agreements
were useless. Unfortunately, it is exactly what the CARP relied
upon in setting a benchmark for the entire industry.
Ms. Rosen. That is the value of evidentiary proceedings.
You don't have to have the tit-for-tat. You know, there is
actually a record to look at.
Chairman Leahy. Well, we will go into that in a bit.
Senator Hatch.
Senator Hatch. This is extremely interesting to me.
Mr. Navarro, you raised some important issues in your
testimony concerning the challenges facing a recording artist
who is working to promote his or her music on his or her own.
One issue you raised that I have heard from others is that some
of your work is inaccessible to you and to your fans because
the label that currently holds the copyright has chosen not to
make the work available.
Is it your sense that works that the labels decide are not
worth keeping in print would be of value to artists who
recorded them and their fans if we could find a way of making
those works available through legislation or otherwise? If so,
would it make sense to share the new revenues from those works
among the artist and the label?
Mr. Navarro. I see no problem with sharing those revenues.
The big issue with regard to that for me is that a record
company that releases 100 or so records a year, year after
year, that is a pretty large number of recordings. For me, over
my entire career so far, 12 years, I have released 6, which is
probably less than a week's output for a major label.
Each individual recording in my career represents a
substantial portion of my creative body of work and what I am
able to put out there for my audience and to sell. I have no
problem sharing it. I just want to be able to get it, or else a
big piece of my career disappears.
Senator Hatch. Ms. Rosen, would your members support
legislation to make unused catalogue available for the benefit
of artists and fans, and if not, why would they not want to
find a costless way of generating some revenues from these
unused assets in a way that would also benefit artists and
fans?
Ms. Rosen. I have actually been looking at this issue for
the last several weeks, Senator Hatch, and I think that you
don't really need legislation because I think my conversations
with at least some of the major record companies are that they
actually on a regular basis have communications with artists
whose music has been out of print. The only reason it is out of
print is because some guy at a record company hasn't seen a
potential market value for it.
Senator Hatch. Right.
Ms. Rosen. But if artists go to their record company and
say that they perceive a market value for it, my understanding
is that the record companies have come up with very creative
and favorable scenarios for artists to either find another
distributor or to distribute their own. I think that you should
look into that.
Senator Hatch. I think we should look into it, and to the
extent you can help on that, I would appreciate it.
Ms. Rosen. I would be happy to.
Senator Hatch. I think that that may be a way. Moods
change, the public changes. Songs that may have been done 20
years ago may suddenly become popular--you never know--that
didn't make it then. I have seen that happen in the songs that
I write.
Mr. Navarro. May I respond?
Senator Hatch. Yes.
Mr. Navarro. I just wanted to respond to that. One of my
six albums right now dropped out of print about 3 months ago by
Mercury Records. The remaining 2 or 300 copies in existence we
tried to purchase, and they were actually ordered to be ground
up instead.
We have been in negotiations. It is difficult for guys like
us to get a phone call back, even to our manager, and what they
wanted in return for allowing us--they offered us two options.
One of them was to either press them on our behalf and charge
us actually $3 a CD more than they had been selling for when
they were still in print. The other option was to pay a royalty
to them.
Now, we have no objection to that, but the royalty they
requested was with a guaranteed return of a number of units
over a 3-year period that equaled better than half of what they
sold over a 7-year period especially when the record was new.
We found that to be punitive. We are still in negotiations
trying to figure out exactly how to get through this so that we
can get the rights to this back, but essentially in terms of
how they want to approach it right now, it is something that we
can't fathom.
Senator Hatch. Well, how do you respond to that?
Ms. Rosen. I don't know the particulars of Dan's situation,
but I would be happy to do what I can to help.
Senator Hatch. Actually, for somebody who started writing 6
or 7 years ago, I have had some interesting success, but with
one of our CDs I had a very similar experience with a small
record company or book company. We entered into an agreement
that they would sell so many of them, and we thought it was a
pretty darn good Christmas record. We also got an agreement
that if they didn't sell so many, it came back to us, and the
agreement explicitly said that it should come back free.
They said they were going to discontinue producing and
selling them, but they would sell us their remaining inventory
for $4 a CD. We couldn't do that, so they went out and sold
them at $4 a CD and then said if we want the master back, we
will have to pay $10,000.
Now, that is with me, a U.S. Senator. I can imagine the
difficulty you must have, not that you are not my equal in
every sense of the word, and better than I am as a musician.
But I can imagine how tough it would be for somebody who
doesn't have a lot of bargaining power.
Chairman Leahy. Originally, we were going to play a few of
your CDs on the video for the hearing, but we thought that
might be a little bit over the top.
Senator Hatch. Well, the only reason I mention that is
because I know it is a misunderstanding and I will probably get
it straightened out. But the fact of the matter is I understand
what you are saying, and my experience with major record
companies is that most of them would probably work it out with
you in a satisfactory way.
If Mercury is not doing that, I would suggest to Mercury
they ought to do that. If they are not going to make a
recording go and not going to put any money into it and not
going to do anything for the artist, they at least ought to let
the artist try to do it.
Mr. Navarro. Well, I agree, and there is no question that
what they stand to get from it now by sitting on it is absolute
zero.
Senator Hatch. Well, that is right.
Mr. Navarro. So making the rates prohibitive doesn't do
them any good.
Ms. Rosen. That is right.
Senator Hatch. You and I both, Ms. Rosen, and Mr. Navarro,
have seen records that were made decades ago that suddenly
become popular. There just may be a mood change. They may just
fit the right scheme or the right situation, and some great
music has been lost because we haven't done that. So I think of
worry about this a little bit.
Mr. Navarro, you also mentioned how glad you are that you
can use the Internet to interact with your fans and how
important it is to control your own domain name. Can you
explain why it is so critical that an artist be able to control
that Internet identifier, especially when he or she leaves a
label to work on his or her own? You have said you have worked
with labels and you have sold your CDs on your own.
Mr. Navarro. Our first deals were sort of pre-Internet-era.
It certainly hadn't hit critical mass, and when we signed with
Mercury, in particular, they didn't go out there and open up a
Web site for us or register a domain name, or really didn't
even seem to have it on their radar. We did it ourselves, and
thank goodness we were able to do that.
The name of our group is Lowen and Navarro; it is our own
names. If someone else owned my name and I couldn't get that
back, I would have to change my name to something facetious
just to be able to survive in the business and it wouldn't
work. We have invested a lot of time and effort and money in
the value of that name and to be able to control it so that I
can continue my career with that label or without label. The
Internet has been absolutely a cornerstone of how we are able
to reach our fans, how we are able to continue to sell records,
and without it we would be non-existent.
Senator Hatch. Ms. Rosen, as you know, I am a fan of all
you do and I want your companies to succeed. But how do you
explain the CARP finding that the RIAA had ``developed a
strategy to negotiate deals for the purpose of establishing a
high benchmark for later use as a precedent'' in the CARP
proceeding, and that it concluded deals only in ``substantial
conformity with that sweet spot?'' How would you react to this
finding?
Ms. Rosen. Well, I actually didn't find it much of an
accusation. I mean, you know, the statute directed us to
negotiate in the marketplace and, like other compulsory
licenses the Congress enacted, provided us a setting to do
that. I think it is natural for copyright owners to seek as
high a rate as possible in those negotiations, and natural for
the users to seek as low a rate as possible.
I think the key finding, though, of the report was that
actually the CARP didn't respect the overwhelming majority of
those deals that we had done. They threw out 25 of 26 of those
deals, and then chose one closer to the lowest rate. So I think
it is pretty clear that we were doing, in my view, what people
should have expected us to do and what the statute called for,
and the CARP made an independent judgment about the marketplace
viability of those deals.
Senator Hatch. Let me ask both of you this question and get
your perspectives. Mr. Navarro raised the issue of
consolidation among radio and concert venues. I have heard of
some artists or labels being required to purchase advertising
or play affiliated concert venues in order to get air play on
their radio stations.
Can you each tell me how you view these types of issues
from your perspectives? Let's start with you, Ms. Rosen.
Ms. Rosen. I think you are referring to the issue of Clear
Channel Radio essentially owns the largest concert and venue
promotion company in the country. I have heard sort of the same
kinds of anecdotal complaints, I suppose, that you have that if
artists choose another promoter, they are worried about being
penalized by the Clear Channel radio stations in those cities
where they would like to have a relationship with radio to
promote their shows, but I don't have any factual information
about it.
Senator Hatch. Mr. Navarro, do you care to comment?
Mr. Navarro. As much I know about the situation is that the
vertical integration by Clear Channel in particular, but also
by other entities, has resulted in independent labels being
shut out and has resulted in smaller or independent artists
being shut out of the equation.
If you can't afford the time buys, if you can't work with
that particular promoter, you are not going to play in the
marketplace, either on the radio or live. And without that, the
ability to reach an audience is severely hampered. A smaller
artist and a smaller label doesn't necessarily have the
wherewithal to play that game in that way, and as such is it is
very anti-competitive and pretty damaging to the careers of
modest artists who go out and pound the streets and tour the
country and want to get played.
Senator Hatch. Well, we know how some artists work as
studio singers and all of a sudden they hit it. I remember when
Faith Hill was doing studio singing and, of course, has really
hit it big. Natalie Grant fell in love with her husband on one
of our songs, and that song has become a fairly substantial
song.
Chairman Leahy. You are the Renaissance Man.
Senator Hatch. Yes, the Renaissance Man here.
I wish we could find a way where all these really great
talents could really come to the forefront. Some of the
greatest singers and some of the greatest musicians I have ever
seen never have a chance and I wish I could find some way of
helping them. I know we have got to have a viable recording
industry to do that, and we have got to have viable people who
are playing these things.
So anybody who can help us do a better job here, I would
like to do it. And everybody is important; it isn't just one
side or the other. I would like to see us do a better job with
as few mandates as we can possibly have.
Some have raised concern about the major labels' online
joint ventures, suggesting they aggregate market power in ways
that distort competition and therefore harm smaller competitors
or artists in the online market. The primary concern, at least
it seems to me, seems to be where large content competitors act
jointly in aggregating their content for distribution and then
do not make the content available on a fair and non-
discriminatory set of terms to their distribution competitors.
I would like to ask each panelist if any of you share these
concerns, and if so, do you think that a legislative remedy is
warranted to limit competitive harms where there is joint
conduct by content competitors?
Ms. Rosen. Well, this is a very big question, so forgive me
for trying to answer it and put it in context for the very
thing that we are discussing today.
With regard to the specifics of the online ventures and the
competitive nature of their deals, I think you can be comforted
that the Justice Department is looking closely at this and
won't let a speck of paper go by without scrutiny. But I think
it points out the bigger issue, which is that in some respects
for music, unlike other copyrighted works, we all still have a
little bit of an old-fashioned notion about how consumers get
music and how the various businesses interrelate.
The issue of promotion came up. Now, despite the fact that
the CARP found that there was no evidence of promotion in
webcasting or no evidence of substitution of sales, and they
looked at things like click-throughs and other issues, people
still think that exposure is what artists and record companies
want. But that is, if we think about it, based on the old-
fashioned notion that once there is exposure, somebody is going
to go into a record store and buy a CD or go to Amazon.com and
buy a physical good.
I think what you two, in your prescient wisdom, and other
members of Congress did in 1995 was say, you know what? The
world is changing, where people are not going to depend on the
sale of physical goods, and so we have to do for music what we
already had done years ago for things like movies. Senator
Leahy referenced this.
The risk and return on investment in movies is paid from
theatrical release. It is paid from selling it to broadcast, it
is paid from selling it online, it is paid from selling it in
video cassettes, and in satellite and a host of other areas
that enables them to spread out the risk.
So, for instance, if you see a DVD in the store and it is
$10 and the CD is still $15, well, the DVD is their tertiary
market. It is the third time they are selling it. So what we
are getting here in the webcasting issue is how do we move the
music business into the 21 century? How do you create incentive
to these companies to license all of these users online?
You have to be able to recognize that there are going to be
growing pains in that because people are going to be paying for
things they never paid for before because we always depended on
returns on sales in the record store. The only way prices come
down for everybody and we all grow is if you recognize that
multiple distribution streams and multiple revenue streams are
really going to be the future that is best for everybody.
So I think what we are experiencing here is the growing
pains of the webcast side of it, but it is illustrative of the
problems that record companies have in their licensing in the
new models because nobody wants to pay what people think it
might be worth. So you have to consistently anticipate the
impact of a new stream on your existing business. But if you
worried less about that and more about growing multiple
streams, you really have something there, and I think we have
something here, but there is no question there are going to be
growing pains.
Senator Hatch. Mr. Potter.
Mr. Potter. It is a very large question, Senator Hatch, and
it is one that DiMA members are deeply embroiled in. Many of
those DiMA companies that don't exist today would argue it is
largely as a result of their inability to get licenses, which
seems to be the same case at company after company after
company.
There clearly is a history in the record industry of most
favored nations clauses in licensing contracts, which some
would allege is a constructive price-increasing and price-
equalizing across the horizontal spectrum of the industry
impact.
There are issues associated with digital licensing when one
is distributing downloads and one is therefore not subject to
the traditional wholesale/retail pricing limitations. For
instance, on resale price maintenance, downstream price
controls for products, there are traditional antitrust laws
that are absent when one is licensing.
When the chairman or the vice chairman of the company that
owns PressPlay acknowledges that that joint venture will
control downstream pricing all the way through the distributors
to the consumer, that suggests that not only is digital
different and it feels different, but, in fact, it has very
different legal implications for consumers and for customer
choice, and for frankly the ability of retailers to compete on
choice, and that is troubling.
In this context, sir, to bring it back to webcasting, the
RIAA had a webcast negotiation licensing committee that met
regularly. It created white lists of ``approved companies''
that were distributed to all the record labels, and somehow
those white lists occasionally made it into individual record
company negotiations with individual webcasters. Frankly, that
is troubling.
What we are most concerned about, however, is that the CARP
seemed constrained by what it thought the willing buyer/willing
seller standard required of it, which was to only look at
actual sellers and actual buyers. In this marketplace, there
was only one seller, the RIAA, and if you are a willing buyer
and the only place you can buy the sweater you want is Nieman-
Marcus, you have a choice. You can buy it at the Nieman-Marcus
price or you can go without it. The CARP construed everybody
who went without it to be not a willing buyer.
There are 2,800 terrestrial radio stations that are
simulcasting their over-the-air broadcasts on the Web. Not a
single one of them licensed the content from the RIAA in a
negotiation. That does not mean they weren't willing buyers,
but they were not acknowledged by the CARP as having any
consideration in the rate because they weren't actual buyers.
There are thousands of webcasters that did not negotiate
with the RIAA because it was clear for months and months that
the RIAA had the sweet spot price. It was ``take it or leave
it, have a nice day.'' Frankly, after the 80-something
witnesses and the 43 days of hearings, the arbitrators
concluded that was the marketplace, that was the actual
marketplace.
Unfortunately, the arbitrators also felt that they were
constrained to set a rate based on the actual marketplace which
they acknowledged over and over again was manipulated. So the
problem is how does Congress clarify the standard to ensure
that it is a competitive marketplace.
As the rate court for ASCAP for 40 years has said, the
standard is competitive; it is fair market value, a reasonably
competitive marketplace. Otherwise, what is the purpose of the
CARP? If the RIAA, the sole seller, can go out and license
these small companies at high-priced rates because they don't
want to pay lawyers and they don't want to go to the CARP, and
then can walk in and say here it is, 26 agreements, willing
buyers, willing sellers, that is the sole parameter of the
evidence you should consider in setting the rate--they can hear
a lot of other witnesses, as they did, but that doesn't mean in
the ultimate outcome that they have to go to with any
hypothetical marketplace which was proposed or to any analogous
marketplace, such as 50 years of ASCAP rates or broadcast radio
rates.
Instead, they were forced to return to the actual
marketplace; they felt forced by the law. Frankly, they ended
up with a Yahoo agreement which is completely opposite.
Senator Hatch. Mr. Rose.
Mr. Rose. Senator Hatch and Mr. Chairman, you asked some
questions having to do with broad distribution of content or
somewhat limited distribution of content. I think both of you
talked about that in slightly different ways, but the essence
of it is there, and ultimately what is better for the consumer,
what is better for the artists, et cetera.
If I was listening carefully, I think I heard Mr. Navarro
say something to the effect regarding his CDs that they are
sitting on it and if they sit on it, nothing is sold. Well, one
of the biggest value propositions of the Internet, according to
consumers, is their ability to get things they can't get
through traditional media.
So it seems to me that in essence what we are hearing from
the consumers is their vote is a broad distribution of
different choices to get different content from different
sources, not limiting it to a select few and thereby
potentially driving the market.
For that matter, we have also been talking a little bit
about the promotional value of streaming media. As we are want
to do, we have some research from the consumers to hopefully
address this issue. In January, we had asked consumers between
the following choices--the Internet, radio, television, and
newspapers--which medium do you turn to first to learn about
new music, the very music that we want to sell?
Among everybody 12 and older, whether they are online or
not, whether they are streaming or not, the answers came out
like this: 63 percent said radio. There it is, evidence that
radio promotes the value of the medium, or promotes music. TV,
14 percent; I guess we can call that the MTV revolution.
Internet, 9, and certainly no one can argue that newspapers
really are that relevant at 2 percent.
Now, we are going to look at it among those who listened to
Internet audio in the past week. These are regular audio
streamees. The numbers are different. Radio goes from 63
percent to 47 percent. The Internet goes from 9 percent to 31
percent. TV is essentially the same at 13, and newspapers
essentially the same at 3 percent.
So the essence of the point here is that consumers are
going to go online to learn about new music far more among the
streaming population than among the general population. So I
think there is certainly some evidence here that streaming
media does, in fact, have a promotional value for music on the
Internet.
Senator Hatch. Does anybody else care to comment?
Mr. Schliemann. Yes. I guess I will approach it from the
radio station side of it, Senator Hatch. Since Congress enacted
the Telecommunications Act of 1996, the result is a few large
companies owning the majority of radio stations. I would like
to think that a radio station such as Onion River Radio
provides an alternative to the cookie-cutter radio that you
hear on broadcast FM.
One of the trends in broadcast radio is to limit the number
of songs that can be scheduled for air play. Another trend is
to decrease the amount of time before a song can be repeated,
and the reason that they do that is it is called a tighter
rotation. It will increase a listener's chance of hearing his
or her favorite song when they drive to work, and then, of
course, when they drive home they are probably going to hear
those same songs again. That is what I call cookie-cutter
radio. You know what is coming up in the play list.
Unfortunately, that makes it difficult for local artists,
it makes it difficult for lesser-known artists to receive radio
air play. But that lack of diversity, of course, creates the
opportunity for our station. We play a few local Vermont bands;
if I want to name a few here, Strange Folk and Soma Seth
Yacavone Band. I mean, those bands don't receive a lot of FM
radio air play, and when we play them on our station alongside
more established artists out of Vermont such as Phish or the
Grateful Dead, or if we play them along with John Mellencamp,
we cross over a few different formats that you wouldn't hear on
an FM station.
We receive e-mails from listeners asking how can they
purchase that CD. You know, they want to know more about that
band Strange Folk that they haven't heard of before. So then,
of course, we can provide that information for them. I think
the success of Internet radio is proof that the consumers want
that variety and they want that originality that we can offer.
Chairman Leahy. Let me ask this. I think most people feel
that normal radio play promotes sales of CDs. Six months ago or
eight months ago or whenever it was when I heard a cut from
``Red Dirt Girl,'' by Emmylou Harris, I actually picked up the
CD the next day. If I hear a cut from Sheryl Crow's new album
or if I play something from Steve Earle or John Prine or U2--
Buddy and Judy Miller came out with a great album and I heard a
cut from that and got the album. But it might also be
Rostropovich or Yo-Yo Ma. They are all different ones that I
like, somewhat eclectic taste. I have to listen to things from
Dick's Picks to get more Grateful Dead today.
The RIAA argued before the CARP that webcasting actually
hurts CD sales. I am wondering if you all agree on this because
I might hear Steve Earle more often on webcasting. I might hear
Buddy and Judy Miller's songs because they have written so many
for other people, but I might here them there, or Nancy
Griffith, or people like this. I am not trying to promote any
particular artist, but I am just thinking of some of the ones
that I might hear first.
Now, the CARP declined to make any finding on the impact of
webstreaming on sales of records, but I have heard from a lot
of webcasters that artists and independent labels appreciate
the exposure they get because it helps record sales. I put into
the record the letter from 138 of them. They are concerned that
the CARP rate is going to force smaller webcasters out of
business and consolidate it, as some of you have said, to large
corporate webcasters.
I am just wondering what is the answer here. Do these
promote sales? If U2 comes out, as they did with their last
album, with a mega-tour, it is not going to make any difference
if any of you play it. Sold-out concerts. You know, Edge, if he
just waves out there, they are going to sell another 20,000
albums. That is no problem. But I am thinking of some of the
lesser-known ones, those who don't go on a mega-tour.
Mr. Potter. Mr. Chairman, 2 days ago I spoke to one of the
major Internet radio companies who polled their data and said
that in January of 2002, they sold tens of thousands of CDs
directly through the tuner on the Web site. Another actually
much smaller Internet radio company gave me survey data last
week from a survey they had done just this year, but it
reflected trends from a survey they had done 6 months ago of
approximately 16,000 people.
Each time was a 30-day survey of people who were tuning
into their radio programming, and the survey data showed a
significant double-digit, 20-, 30-percent of people were having
their purchases influenced by online radio. But more
importantly perhaps, frankly, 40, 50 percent of those people
whose purchases were influenced--actually, two-thirds of the
people whose purchases were influenced were still buying
offline.
So if you extrapolate from the 30,000, 40,000, 50,000 CDs
that the major online player is selling and two-thirds are
still buying offline, you can double and triple that amount,
and that is just for that one Internet radio company. There is
no doubt that small artists and small labels are getting
valuable exposure from Internet radio. There is no doubt that
Internet radio sells CDs and promotes CDs by providing exposure
to people frankly who otherwise wouldn't be listening to the
radio.
Chairman Leahy. Mr. Rose, do you get that same impression
at Arbitron?
Mr. Rose. In fact, we do. Again, from January 2002, we had
asked consumers, have you ever purchased a CD on the Internet,
not got it for free, did you pay money for it? Among all
Internet users, 1 in 5, or 22 percent, said yes, I have bought
a CD on the Internet.
Among those who listened or watched on the Internet in the
last week, the active streaming media users we talked about
before, that percentage is 46 percent. They are far more likely
to buy music on the Internet than those who aren't streaming.
Chairman Leahy. It is interesting because you walk into a
record store now and more and more something they didn't do
before--you have got the earphones to listen to this. And they
are not doing that out of the goodness of their heart. It
obviously works in selling.
Ms. Rosen. Mr. Chairman.
Chairman Leahy. Just a moment, Ms. Rosen.
A friend of mine, Peter Yarrow, called me yesterday and a
basic question he asked is shouldn't artists be compensated for
the work they have done? Does anybody disagree? It has always
been my basic bottom line that artists should be compensated
for the work they do.
Mr. Schliemann. We are fans of the music that we play. We
want to ensure that all the artists and all the creators are
compensated fairly, but we can't pay a royalty rate that is so
far out of whack, in plain English, with every other expense
that we have. It is 12 times higher than what we pay the
songwriters and music publishers.
If Senator Hatch would write a song and somebody else would
perform that song, why is their performance 12 times more
valuable than his creative genius?
[Laughter.]
Ms. Rosen. Don't worry, I am not going near that one.
Chairman Leahy. I listen to Orrin's music. I don't know if
he is listening to me saying this, but I listen to his music.
Go ahead.
Ms. Rosen. Well, this issue of this other music keeps
coming up, and perhaps Frank isn't aware that a substantial
part of the CARP proceeding is how much they pay for the
underlying musical work. The arbitrators came to the conclusion
they did with a significant amount of evidence to distinguish
between the rates.
I have to clarify the record, Mr. Chairman. We did not say
that webcasting hurts sales. What we said was that we didn't
see evidence that it helped sales.
Chairman Leahy. I have got CARP here and it says, ``RIAA
did not attempt to offer any empirical evidence to support its
concerns that webcasting causes a net substitution of record
sales.''
Ms. Rosen. Right, because we just don't know, and that is
what we told the arbitrators. We don't know whether these are
substitutional, we don't know whether it is promotional. In
fact, the CARP ended up agreeing with that question mark, which
is exactly the point I raised before.
But, you know, we met with a whole host of small,
independent labels yesterday, all of whom said you know what?
We want the money. Who knows whether people are going in the
stores? Maybe this will be the only way people are going to get
music, if it is so ubiquitous--thousands and thousands of
channels of the most niche programming possible.
It is attractive to have that be the way you get music. It
is not an accusation. These guys are not pirates. It is a fact
of changing technology and new opportunity for consumers, in
particular. So what we are saying is you can't assume that the
pricing structure is going to be that we get it at rates that
are so low that they are useless here because we are going to
drive sales here. We are moving into a new era.
Chairman Leahy. Well, some of your answers raise more
questions than we have time for, and unfortunately this is a
hearing that has to end now. I am going to submit questions to
all of you. I don't mean to do this to burden you. If you have
questions about the questions, please call me or the staff on
it.
In many ways, this may be the beginning of hearings on this
because if I was given the power right now to make the
solution, I am not sure what that solution would be. So maybe
it is just as well for all of you that I don't have the power
because I have a feeling whatever I were to decide in a case
like that, some of you would like, some of you wouldn't like.
Maybe you are all in a situation--and I am obviously not
telling you what to do, but you may want to consider whether it
is the time to seek yet again a global settlement of this
issue.
Mr. Straus, you made your own settlement within your own
business model. A lot of others will not be able to do that, if
it is possible to do it.
Artists should be paid, artists should be compensated.
Otherwise, you are not going to have anything else to carry
anywhere. But small companies like Mr. Schliemann's should
continue. If I turn on the Top 10, I may not hear Steve Earle
every time, but I like to listen to Mr. Earle. I may not hear
others that I might want. There is a lot of opera I like, a lot
of classical music I like, and I want to find niche areas to
listen to that.
So what I urge, if anything, is if you are continuing talks
on this--again, I can't tell you what to do; I can only make
recommendations, but if you are continuing in talks, consider
that the world is changing very, very rapidly and the way of
selling music and getting music out there is changing and will
continue to change in a digital age and in an Internet age.
Newspapers are finding this, book publishers are finding this,
everybody is finding this, and music is not going to be any
different. It really is not.
I think there are also some potential advantages here for
artists, for advertisers, for businesses, and certainly for the
listening public. If the listening public finds they benefit, I
have to be convinced that you can build business models where
all of you benefit, too.
We have several written statements that the committee has
received that we will insert into the record at this point.
Chairman Leahy. With that, we still stand in recess. You
will all have a chance to add to your comments. I want to thank
Senator Hatch for his work and effort on this and, of course,
our staff.
Thank you.
[Whereupon, at 11:27 a.m., the committee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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