[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



  INTERNET STREAMING OF RADIO BROADCASTS: BALANCING THE INTERESTS OF 
      SOUND RECORDING COPYRIGHT OWNERS WITH THOSE OF BROADCASTERS

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 15, 2004

                               __________

                             Serial No. 99

                               __________

         Printed for the use of the Committee on the Judiciary


    Available via the World Wide Web: http://www.house.gov/judiciary


                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
94-917                      WASHINGTON : DC
____________________________________________________________________________
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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama              MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

    Subcommittee on Courts, the Internet, and Intellectual Property

                      LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
ELTON GALLEGLY, California           JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia              RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
SPENCER BACHUS, Alabama              MAXINE WATERS, California
MARK GREEN, Wisconsin                MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  WILLIAM D. DELAHUNT, Massachusetts
MELISSA A. HART, Pennsylvania        ROBERT WEXLER, Florida
MIKE PENCE, Indiana                  TAMMY BALDWIN, Wisconsin
J. RANDY FORBES, Virginia            ANTHONY D. WEINER, New York
JOHN R. CARTER, Texas

                     Blaine Merritt, Chief Counsel

                         David Whitney, Counsel

                          Joe Keeley, Counsel

                     Alec French, Minority Counsel


                            C O N T E N T S

                              ----------                              

                             JULY 15, 2004

                           OPENING STATEMENT

                                                                   Page
The Honorable Lamar Smith, a Representative in Congress From the 
  State of Texas, and Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................     1
The Honorable Howard L. Berman, a Representative in Congress From 
  the State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................     2
The Honorable Rick Boucher, a Representative in Congress From the 
  State of Virginia..............................................     4
The Honorable Zoe Lofgren, a Representative in Congress From the 
  State of California............................................     5

                               WITNESSES

Mr. David Carson, General Counsel, Copyright Office of the United 
  States, The Library of Congress
  Oral Testimony.................................................     6
  Prepared Statement.............................................     8
Mr. Dan Halyburton, Senior Vice President/General Manager, Group 
  Operations, Susquehanna Radio Corporation, on behalf of the 
  National Association of Broadcasters
  Oral Testimony.................................................    22
  Prepared Statement.............................................    23
Mr. Steven Marks, General Counsel, Recording Industry Association 
  of America, Inc.
  Oral Testimony.................................................    37
  Prepared Statement.............................................    39
Mr. Jonathan Potter, Executive Director, Digital Media 
  Association (DiMA)
  Oral Testimony.................................................    43
  Prepared Statement.............................................    45

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Letter to Rep. Rick Boucher from David O. Carson, General 
  Counsel, Copyright Office of the United States, The Library of 
  Congress.......................................................    61

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement from the Honorable Howard L. Berman, a 
  Representative in Congress From the State of California, and 
  Ranking Member, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................    65
Prepared Statement from the Honorable John Conyers, Jr., a 
  Representative in Congress From the State of Michigan..........    66
Prepared Statement of the American Federation of Television and 
  Radio Artists (AFTRA), the American Federation of Musicians of 
  the United States and Canada (AFM), the Recording Artists 
  Coalition (RAC), and the Future of Music Coalition (FMC).......    66

 
  INTERNET STREAMING OF RADIO BROADCASTS: BALANCING THE INTERESTS OF 
      SOUND RECORDING COPYRIGHT OWNERS WITH THOSE OF BROADCASTERS

                              ----------                              


                        THURSDAY, JULY 15, 2004

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10 a.m., in 
Room 2141, Rayburn House Office Building, Hon. Lamar Smith 
(Chair of the Subcommittee) presiding.
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order.
    I will recognize myself for an opening statement and then 
other Members as well.
    The purpose of today's hearing is to begin an examination 
of issues that relate to the streaming of copyrighted sound 
recordings over the Internet. A related issue is the potential 
impact of new technologies and devices such as HD or digital 
radio upon the balance of interest embodied in our copyright 
laws.
    After reviewing the testimony of the witnesses, it is 
apparent that the concerns of the broadcasters, while 
substantial, are but one thread in a complex and interrelated 
quilt of issues. As is common with copyright issues, these 
concerns involve, one, the incentives to create and protect 
intellectual property; two, the economic interest of those who 
benefit from broadcasting and distributing these created works; 
and three, the public's interest in maximizing access to these 
works at a reasonable price.
    By enacting the Digital Performance Right in Sound 
Recordings Act in 1995, Congress took an important and historic 
step. It did so by establishing for the first time in the 
United States an exclusive, though limited right, for sound 
recording copyright owners to perform their works publicly by 
means of certain digital audio transmissions. The law was 
historic because it permitted sound recording owners, including 
performing artists, to receive compensation for the commercial 
use of their recorded performances and not solely rely on 
income from sales of their recordings.
    The law was limited because it exempted certain 
performances from its protection, including those made by 
traditional broadcasters. This exemption for FCC-licensed 
broadcasters was premised on an understanding that, one, the 
promotional air play of records by analog-radio broadcasters 
has long served as a catalyst for music sales; and two, a 
recognition that the consumer taping of analog-radio broadcasts 
did not create a significant threat to recording artists.
    As we will hear today, many broadcasters believe that DPRA, 
as well as amendments that were included in the DMCA which was 
enacted in 1998, have been inappropriately applied to their 
operations by the U.S. Copyright Office and the Federal courts. 
In their words, their view is that the application of certain 
provisions of sections 114 and 112 of the Copyright Act have in 
fact resulted in ``new and unreasonable burdens on radio 
broadcasters,'' burdens they assert have resulted in more than 
1,000 U.S. radio stations ceasing their Internet broadcasting 
operations.
    The general position of the broadcasters is they wish to 
relax certain protections that are intended to make it more 
difficult for those who intend to pirate sound recordings to 
identify the songs that are about to be played. They also 
object to paying royalties for the performance of sound 
recordings and record-keeping requirements.
    Not surprisingly, the RIAA which represents music labels, 
is opposed to a lessening of existing protections. In fact, 
they believe the development of new technologies such as 
digital radio receivers that can selectively identify, record 
and disaggregate specific songs poses a grave threat not only 
to the livelihood of music artists, but also to the advertiser-
supported business model of radio broadcasters.
    We are fortunate to have excellent witnesses with extensive 
experience related to the issues before this Subcommittee 
today, and we all look forward to their testimony.
    The Ranking Member, Mr. Berman, is recognized for his 
opening statement.
    Mr. Berman. Thank you, Mr. Chairman.
    I appreciate your holding this oversight hearing on 
balancing the interest of sound recording copyright owners and 
the broadcasters. While I am confident in the outcome of the 
Bonneville case, I am not convinced that pure webcasting and 
the simultaneous webcasting of an over-the-air radio broadcast 
are identical activities which should be subject to the same 
licensing conditions. It may be that the rule should be 
technology neutral, or it may serve a greater public need to 
carve out exceptions to the rule to account for the differences 
between the technologies.
    But before we get to the points of controversy, I think it 
is important to note that at least all of the witnesses here 
today acknowledge that the prevention of piracy of sound 
recordings is an important goal. With the advent of new 
technologies, we are once again faced with the problem of 
ensuring that performing artists, record companies and others 
whose livelihood depends upon effective copyright protection 
for sound recordings will be protected. The Copyright Office 
has suggested granting copyright owners of sound recordings a 
full performance right to harmonize the rights of owners of 
sound recordings with those of other copyright owners once and 
for all. There is great appeal to that proposal in that we need 
to focus not only on the immediate problem and seek the 
particular solution, we can stop having the tail wagging the 
dog of whatever technology is next.
    Just a short time ago, we proposed a sound recording 
complement to prevent copying of music which would replace 
sales of sound recordings. Now, there is already technology 
which allows users to copy all of the recordings transmitted on 
a webcast channel, disaggregate them, save them to substitute 
for purchases of legitimate downloads or CDs, and redistribute 
them with peer-to-peer software. In the near future, we will 
probably be back here to discuss in depth the effect of digital 
audio broadcasting or HD radio on the sound recording 
performance right as well.
    I doubt that the witnesses before us today will express 
unified support of a full performance right for sound 
recordings. In fact, I don't even doubt it; I know they won't. 
Instead, broadcasters and webcasters take issue with some of 
the provisions of the section 114 license.
    For its part, the record industry illuminates problems 
emanating from the ease of copying sound recordings from a 
broadcast or webcast. Clearly, if we are going to have a 
section 114 webcasting license, it should be a workable 
license. We should ensure that its terms do not unduly burden 
licensees nor unduly impair the legitimate interests of 
copyright holders.
    On the latter issue, I am concerned that several provisions 
of section 114 designed to deter piracy and preserve the 
recorded media market are not working. Specifically, I refer to 
the sound recording performance complement and the requirement 
that transmitting entities accommodate copy protection 
technologies used by sound recording copyright owners. It 
appears these provisions have fallen short in terms of 
protecting the interests of sound recording copyright owners.
    There will be testimony about the need or lack thereof for 
a separate license to cover multiple ephemeral copies. Section 
112(e) created a statutory license to allow any service 
operating under the section 114 statutory license to make one 
or more ephemeral recordings of a sound recording to facilitate 
the digital transmission of these works governed by section 
114.
    Even the Copyright Office has stated that section 112(e) 
can be best viewed as an aberration. However, the marketplace 
has borne out that there is a value to multiple ephemeral 
copies.
    There seems to be a discrepancy as to what the valuation of 
an ephemeral copy is. Instead of computing a separate value for 
the 112 license to copy, could we put before the CARP 
establishing the rate for the 114 license? Can we put before 
that CARP the requirement to include in its evaluation the 
value, if any, of the multiple ephemeral copies?
    I am aware it is described in the written testimony of NAB 
and DiMA that there is some distrust among the broadcasters and 
the webcasters of the CARP proceeding. After all, the claim is 
made that stations pay at least five to six times as much for 
sound recordings royalties than for musical works. However, I 
am not sure that speaks as much to the CARP as it does to the 
inequity of royalties paid to musical works copyright owners.
    That being said, I agree that to some extent the CARP needs 
to be reformed, and I therefore support H.R. 1417. Technology 
provides many new opportunities to reach new audiences. 
However, we have to be aware of trampling on certain rights in 
order to get there.
    Thank you, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Berman.
    Are there other Members who wish to make opening 
statements?
    Mr. Boucher is recognized.
    Mr. Boucher. Thank you, Mr. Chairman. I want to commend you 
for convening today's hearing. This is an important subject for 
our Subcommittee, and it does deserve our attention.
    In my view, webcasting of recorded music should receive the 
same treatment under the copyright law that the more 
traditional terrestrial broadcasts receive. Both webcasts and 
regular broadcasts deliver the same service, they merely 
deliver it by a different means; and the current copyright law 
imposes far higher payments on webcasters than on traditional 
broadcasters.
    For example, radio stations pay no performance royalty when 
they terrestrially broadcast recorded music. The theory of the 
exemption is that the copyright owners benefit enormously from 
the publicity that accompanies repeat broadcast airings of 
their music. Their reward comes through increased sales of CDs 
arising from that publicity.
    But radio stations must pay a performance royalty when the 
station's signal is streamed over the Internet. Webcasting is 
just another means for radio stations to reach an audience, and 
the same theory that supports an exemption from royalty 
payments for regular terrestrial broadcasts should also support 
an exemption for webcasting of the identical signal. And yet 
webcasting is burdened with a payment that averages about 11 
percent of gross receipts from radio station webcasting.
    This disparate treatment, to me, makes no sense. Here is 
another example of the unfair treatment of webcasting in 
comparison to the treatment of comparable services. Satellite-
delivered radio, such as XM or Sirius, and radio delivered over 
cable systems pay a performance royalty based on the standards 
that are set forth in section 801(b). At the core of these 
standards is a fairness and reasonableness test.
    But if the same radio signal is delivered over the 
Internet, the fairness and reasonableness test no longer 
applies. Instead, the webcaster royalty is set based upon what 
a willing buyer would pay to a willing seller. That test 
assumes the presence of a functioning competitive market for 
the music.
    But the market is broken; there is no competition. The 
recording industry has a statutory antitrust exemption which 
enables the labels to sell collectively and to establish a 
uniform price for music. Essentially, there is only one seller 
in the market who can extract a take-it-or-leave-it bargain. 
The result is that the willing buyer-willing seller standard 
imposes far higher royalties on webcasters than are imposed on 
cable or satellite under the fairness standard when exactly the 
same service is delivered. The only difference is the platform 
that is used.
    These disparities, Mr. Chairman, are wrong. We should not 
discriminate against the Internet as a distribution medium, but 
that is exactly the effect of current law. And this law, to me, 
cries out for reform.
    I very much appreciate your examining this subject, Mr. 
Chairman, bringing to light these inequities, and I hope 
following this hearing it will be the pleasure of this 
Subcommittee to adopt the kinds of reforms that establish 
parity in copyright treatment across all of the delivery 
platforms.
    Thank you very much, Mr. Chairman. I yield back.
    Mr. Smith. Thank you.
    Ms. Lofgren.
    Ms. Lofgren. Mr. Chairman, I will be brief. I am 
appreciative we are having this hearing. I do think it is an 
important issue, and as has been mentioned by Mr. Boucher, it 
provides us with an opportunity to level the playing field 
across technologies.
    The situation we have today provides disincentives for Web 
streaming, and I don't think there is any public interest in 
disincenting the particular form of technology. We certainly 
want to make sure that content creators are properly 
compensated. I think there is unanimity on that score. But if 
that is the case in radio that is land-based, it should be 
equally the same on satellite or on webcasting.
    We need to have a system that does not discriminate based 
on technology. I am hoping also that we can consider the 
Bonneville case, because I do think we need to deal with that 
on a head-on basis.
    Finally, I am interested in the whole issue of interactive 
services. I think we have failed to give appropriate guidance 
to the Copyright Office on this issue, and although there will 
always be a gray zone, I think the gray zone is a little bit 
broader than it needs to be.
    I think some of the new technologies and the Internet 
companies have made it possible for listeners to request a 
genre, to request a song, but they cannot decide when it is 
going to be heard. I don't think that is a whole lot different 
than when I was a girl and calling into the radio station and 
requesting my favorite song, and some day the DJ might play it. 
I am hopeful we can take a look at that and narrow the gray 
area somewhat on the noninteractive question.
    With that, I look forward to hearing the witnesses. I 
appreciate your courtesy, Mr. Chairman, and also Mr. Berman.
    Mr. Smith. Thank you, Ms. Lofgren.
    Our first witness is David Carson, General Counsel of the 
Copyright Office of the United States Library of Congress. Mr. 
Carson is the principal legal officer of the office with 
responsibility for the office's regulatory activities, 
litigation and administration of the copyright law. He also 
serves as a liaison on legal and policy matters to Congress and 
other Government agencies. Mr. Carson is a graduate of Harvard 
Law School, and received his Bachelor of Arts and Master of 
Arts degrees in history from Stanford University.
    Our second witness is Dan Halyburton, who is the Senior 
Vice President and General Manager of Susquehanna Radio 
Corporation. In that position, Mr. Halyburton oversees 
programming, interactive marketing, and research and 
engineering efforts for the group's 33 U.S. stations. A 
resident of Dallas, Mr. Halyburton is a past board member of 
the Texas Association of Broadcasters. He testifies on behalf 
of the National Association of Broadcasters.
    Our third witness is Steven Marks, General Counsel for the 
Recording Industry Association of America. He routinely 
represents the RIAA on legislative issues, particularly those 
that relate to the Copyright Act. In addition, he oversees 
litigation, licensing and technology initiatives for the 
industry.
    Mr. Marks is a graduate of Duke Law School where he served 
as Articles Editor of the Duke Law Journal. In addition, he 
received his B.A. from Duke University.
    Finally, Jonathan Potter, Executive Director of Digital 
Media Association, DiMA, a position he has held since DiMA was 
organized in 1998. DiMA's goal is to represent the leading 
companies that provide online audio and video content to 
consumers.
    Mr. Potter is a graduate of New York University School of 
Law and the University of Rochester. Most importantly, he is a 
newlywed, having just gotten married over the 4th of July. In 
fact, this Committee did a very rare thing, we actually 
postponed by a week this hearing to accommodate Mr. Potter's 
schedule and wedding.
    Mr. Berman. We did some other things during that week that 
made up for it, though.
    Mr. Smith. Yes. Mr. Berman was wondering whether that was a 
fair decision and trade or not.
    It is a tradition of the full Committee and, hence, needs 
to be done by the Subcommittee to swear in all witnesses.
    [Witnesses sworn.]
    Mr. Smith. Just a quick reminder that all written testimony 
will be made a part of the record. Please limit your comments 
to 5 minutes.
    Mr. Carson.

TESTIMONY OF DAVID CARSON, GENERAL COUNSEL, COPYRIGHT OFFICE OF 
           THE UNITED STATES, THE LIBRARY OF CONGRESS

    Mr. Carson. Mr. Chairman, Mr. Berman, Members of the 
Subcommittee, thank you for inviting me to testify on behalf of 
the Copyright Office on Internet streaming of radio broadcasts 
and section 114 of the Copyright Act.
    As you know, the Digital Performance Right in Sound 
Recordings Act of 1995 granted copyright owners of sound 
recordings, for the first time, an exclusive right to make 
public performances of their works by means of digital audio 
transmissions subject to a compulsory license for certain uses. 
The Digital Millennium Copyright Act updated section 114 and 
expanded the scope of the compulsory license.
    We at the Copyright Office believe that the creation of a 
limited performance right in sound recordings was a step in the 
right direction. It has fostered the growth of new digital 
technologies which support the legitimate use of music 
transmitted in digital networks such as the Internet and 
satellite radio services. But technological advances since the 
DMCA was enacted pose new threats to performers and copyright 
owners, and this hearing provides an opportune occasion to 
reconsider the scope of the sound recording performance right 
and whether it offers sufficient economic incentives for the 
investment in and creation of sound recordings in light of the 
threats posed by the emergence of new technologies that 
threaten to transform activities such as digital broadcasting 
into interactive enterprises that may further weaken the 
traditional market for distribution of sound recordings.
    It has been the long and consistent recommendation of the 
Copyright Office that sound recordings be given the same 
panoply of rights as other categories of copyrighted works. 
However, recognizing the political difficulties of extending an 
exclusive public performance right to sound recordings, the 
office has also gone on record in favor of a compulsory license 
governing public performances of sound recordings that, among 
other things, would require broadcasters who transmit 
performances of sound recordings over the air to pay a 
statutory royalty to copyright owners.
    The DPRA and DMCA were steps in that direction, providing 
for exclusive rights for copyright owners in connection with 
interactive digital transmissions of public performances, and a 
statutory license for noninteractive digital subscription 
services, eligible nonsubscription services--or webcasters--and 
satellite digital audio radio services; but over-the-air 
broadcasts of sound recordings remain exempt from the digital 
performance right.
    While that state of affairs may have been acceptable in the 
past, new technological developments lead us to believe that 
the time has come for Congress once again to address the scope 
of the performance right.
    The advent of digital broadcasting threatens the continued 
livelihood of the music industry as tools are being developed 
that promise to make it a simple matter to make perfect digital 
copies of all of the recordings you want off the air. If 
Congress is not yet ready to grant a full performance right for 
sound recordings, a right that is recognized in most parts of 
the world, it should at least consider extending the existing 
right to digital broadcast transmissions.
    In the remainder of my time, I would like to give you an 
update on some of the Copyright Office's activities in the 
administration of section 114 and its statutory licenses.
    Prior to the convening of the first copyright arbitration 
royalty panel to determine rates and terms for the webcasting 
license, we conducted a rule-making to address whether 
broadcasters who retransmit their over-the-air signals on the 
Internet have the same legal status as any other webcasters and 
are subject to the statutory license for eligible 
nonsubscription services, or whether they enjoy the same 
exemption on the Internet that they enjoy when broadcasting 
over the air.
    We concluded that section 114 treats them just like any 
other webcasters when they are webcasting, and a Federal 
district court and the United States Court of Appeals for the 
Third Circuit have agreed. That issue now appears to be 
resolved, although broadcasters would dearly love to have you 
change the law.
    When the CARP made its determination on rates and terms for 
webcasting for the years 1998 to 2002, we reviewed that 
determination. The Register of Copyrights recommended to the 
Librarian of Congress that he cut the rates for Internet-only 
webcasters because the CARP's determination on that issue was 
arbitrary, and the Librarian accepted that recommendation. 
Those rates expired at the end of the year 2002, and the rates 
that are currently in place were negotiated by broadcasters, 
webcasters and copyright owners. Those negotiated rates are 
remarkably similar to the earlier rates.
    We are also establishing notice and recordkeeping 
regulations governing digital music services operating under 
the statutory license. These regulations play a crucial role in 
ensuring that the royalties paid under these licenses 
ultimately are paid to the copyright owners and performers 
whose sound recordings are played on these services. Without 
accurate identification of the recordings that are being 
played, there is no way to ensure that the royalties reach the 
artists and record companies who are entitled to them.
    Just this week, we announced proposed regulations governing 
notice and recordkeeping for the period during which webcasters 
have not been reporting their performances. Those regulations 
will designate the reports already made by preexisting 
subscription services for the same period as proxies for 
records of performances by webcasters. This solution will 
resolve the problem of how to account for performances by 
webcasters who have no records of what they have performed in 
the past.
    As always, Mr. Chairman, the Copyright Office stands ready 
to assist you as you consider the important issues we are 
addressing this morning.
    Mr. Smith. Thank you, Mr. Carson.
    [The prepared statement of Mr. Carson follows:]

                 Prepared Statement of David O. Carson

    Mr. Chairman, Mr. Berman, and distinguished members of the 
Subcommittee, I appreciate the opportunity to appear before you on 
behalf of the Copyright Office to testify on internet streaming of 
radio broadcasts. In my testimony today, I will address the workings of 
the section 114 compulsory license and the role the Copyright Office 
has played in administering this license. As you know, in 1995, 
Congress passed the Digital Performance Right in Sound Recordings Act 
of 1995 (``DPRA'') \1\ which, for the first time, granted to copyright 
owners of sound recordings an exclusive right to make public 
performances of their works by means of certain digital audio 
transmissions, subject to a compulsory license for certain uses of 
these works codified in section 114 of title 17 of the United States 
Code. In the Digital Millennium Copyright Act (``DMCA'') \2\ of 1998, 
Congress updated section 114 and expanded the scope of the compulsory 
license.
---------------------------------------------------------------------------
    \1\ Pub. L. No. 104-39, 109 Stat. 336 (1995).
    \2\ Pub. L. No. 105-304, 112 Stat. 2286 (1998).
---------------------------------------------------------------------------
    We at the Copyright Office believe the creation of a limited 
performance right in sound recordings was a step in the right 
direction. It has fostered the growth of new digital technologies which 
support the legitimate use of music transmitted in digital networks 
such as the Internet and satellite radio services. However, there are 
those who still oppose a public performance right in sound recordings 
and would oppose any further expansion of that right beyond the limited 
performance right granted to the copyright owners by virtue of the 
passage of the DPRA and the DMCA. Whether to expand the scope of the 
performance right or limit it further remains the prerogative of 
Congress. But we are convinced that after considering the current state 
of affairs and the workings of the section 114 statutory license, 
Congress should be reassured that the creation of a digital performance 
right, although limited in its scope, was the proper step to take at 
that time in order to strike a workable balance between the rights of 
the copyright owners and the demands of users who wished to use these 
works in new and creative ways.
    In fact, technological advances since the DMCA was enacted in 1998 
pose new threats to performers and sound recording copyright owners, 
and this hearing provides an opportune occasion to reconsider the scope 
of the performance right for sound recordings and whether it offers 
sufficient economic incentives for the investment in and creation of 
sound recordings in light of the threats posed by the emergence of 
additional new technologies that threaten to transform activities such 
as digital broadcasting into interactive enterprises that may further 
weaken the traditional market for distribution of sound recordings

                               BACKGROUND

    Sound recordings did not receive protection under the 1909 
Copyright Act or under earlier versions of the copyright law. Instead, 
a copyright owner had to seek relief at common law in state courts for 
unlawful use of their works. That changed in 1971 when Congress enacted 
a law, effective February 15, 1972, that granted exclusive rights of 
reproduction and distribution to copyright owners of sound 
recordings.\3\ Congress took this action in order to curb the mounting 
losses suffered by the record industry from the burgeoning trade in 
pirated records and tapes. However, Congress did not grant the full 
bundle of rights given to other copyright owners because traditional 
users of these works fiercely opposed a performance right for sound 
recordings. Moreover, the more limited set of rights seemed sufficient 
to deal with the immediate problem of record piracy.
---------------------------------------------------------------------------
    \3\ Sound Recording Act of 1971, Pub. L. 92-140, 85 Stat. 391 
(1971).
---------------------------------------------------------------------------
    Even so, those who opposed federal copyright protection for sound 
recordings mounted a constitutional challenge to the amendment adding a 
limited copyright for sound recordings. Twice, the courts considered 
the question and in both cases the courts upheld the law as 
constitutional,\4\ confirming the position long held by the Copyright 
Office that a sound recording was capable of being considered the 
``writing of an author'' within the constitutional sense \5\ and 
reinforcing the conclusion that sound recordings are creative works 
worthy of full copyright protection.\6\
---------------------------------------------------------------------------
    \4\ See Shaab v. Kleindienst, 345 F. Supp. 589 (D.D.C. 1972) (sound 
recordings qualify as writings of an author that may be copyrighted); 
Goldstein v. California, 412 U.S. 546 (1973) (the term ``writing'' can 
be broadly interpreted by Congress to include sound recordings).
    \5\ See Supplementary Register's Report on the General Revision of 
the U.S. Copyright Law, House Comm. Print (1965) at 51 (``1965 
Supplementary Register's Report'') (``We believe that, leaving aside 
cases where sounds have been fixed by some purely mechanical process 
involving no originality whatever, the aggregate of sounds embodied in 
a sound recording is clearly capable of being considered the `writing 
of an author' in the constitutional sense. . . . Thus, as indicated in 
the 1961 Report, we favor extending statutory copyright protection to 
sound recordings.'').
    \6\ See Statement of Barbara Ringer, Register of Copyrights, before 
the Subcommittee on Patents, Trademarks and Copyrights of the Committee 
on the Judiciary, United States Senate, pursuant to S. Res. 72 on S. 
111, July 24, 1975, at 11(``July 1975 Statement of the Register of 
Copyrights'').
---------------------------------------------------------------------------
    Although these events settled the basic question of 
copyrightability and questions with respect to the reproduction and 
distribution rights for sound recordings in the early 1970's, the 
debate on whether and to what extent sound recordings should enjoy full 
federal copyright protection that began in the 1960's has continued. In 
most cases, stakeholders have retained their original positions during 
the intervening period, although there is now a general consensus that 
performers and record producers' creative contributions are entitled to 
some degree of copyright protection.
    Historically, television and radio broadcasters, jukebox operators, 
and wired music services--the traditional users of the sound recordings 
who publicly perform sound recordings--have opposed any changes to the 
Copyright Act that would require payment of a royalty for the 
performance of a sound recording. These users were already paying 
authors and publishers of musical works for the right to perform the 
musical works embodied in sound recordings and saw no reason to make a 
second payment to performers and record companies for the same 
performance. Traditional users, however, did not stand alone in their 
opposition to the movement for a full performance right. In the early 
1960's, music publishers aligned themselves with these users and 
opposed the public performance right for sound recordings because they 
feared that the creation of a sound recording public performance right 
would result in a decrease in their stream of revenue. Basically, they 
envisioned that the royalty pool generated from the public performance 
of recorded music would remain fundamentally the same and that they 
would have to share these royalties with the record companies and the 
performers of sound recordings.
    On the other side of the debate stood the representatives of the 
record companies--e.g., the Recording Industry Association of America 
(RIAA)--and representatives of the performers--e.g., the American 
Federation of Musicians (``AFM''). The record company representatives 
took the position that there was no principled reason for treating 
sound recordings differently from other categories of works. AFM took a 
broader view. It focused more sharply on the economic deprivation 
experienced by performers who received no compensation from the public 
performance of their own recordings, while others, including jukebox 
operators, radio and television broadcasters and wired music services - 
as well as composers and music publishers--benefitted commercially from 
these actions. However, AFM did offer a solution to the problem in 
1967, during the early stage of the debate regarding the revision of 
the 1909 Act. It proposed an amendment to establish a ``special 
performing right that would endure for 10 years and would be subject to 
compulsory licensing,'' \7\ a novel idea that would not come to 
fruition in any form until thirty years later.
---------------------------------------------------------------------------
    \7\ See Second Supplementary Report of the Register of Copyrights 
on the General Revision of the U.S. Copyright Law: 1975 Revision Bill, 
October-December 1975, pp. 214-216 [Draft] (``Register's Second 
Supplementary Report'').
---------------------------------------------------------------------------
    Copyright owners and performers were not alone in their quest for 
the elusive performance right. On a number of occasions during 
consideration of the omnibus bill to revise the 1909 Copyright Act and 
since, the Copyright Office has voiced its unwavering support for the 
creation of a full performance right for sound recordings, while also 
acquiescing to proposals to subject the right to a compulsory 
license.\8\ In fact, the push for a performance right nearly paid off. 
Proponents were successful in getting Senator Harrison Williams to 
introduce a formal amendment to the 1967 Senate bill which, among other 
things, aimed to create a compulsory license for the public performance 
of sound recordings. The amendment was accepted when the revision bill 
was reported by the Senate Subcommittee on Patents, Trademarks and 
Copyrights to the full Judiciary Committee on December 10, 1969, and 
remained in the 1971 and 1973 bills, which were reported favorably by 
the full Senate Judiciary Committee on July 3, 1974. The amendment, 
however, did not survive opponents' efforts to remove the provision 
from the bill, and it was removed from the 1975 revision bills in both 
the Senate and the House.
---------------------------------------------------------------------------
    \8\ See 1965 Supplementary Register's Report; July 1975 Statement 
of the Register of Copyrights; and Register of Copyrights, Report on 
Performance Right in Sound Recordings, H.R. Doc. No. 15 (1978) (``1978 
Report on Performance Right in Sound Recordings'').
---------------------------------------------------------------------------
    In fact, the issue was so explosive that in 1975, Register of 
Copyrights Barbara Ringer refrained from pushing for the creation of 
even a limited public performance right for sound recordings in the 
omnibus bill, and testified accordingly:

        At the same time it must be said that, on the basis of 
        experience, if this legislation were tied to the fact of the 
        bill for general revision of the copyright law, there is a 
        danger that it could turn into a ``killer'' provision that 
        would again stall or defeat omnibus legislation. This danger 
        exists even more clearly than when I testified to this same 
        effect last July, and would be very severe if the potential 
        compulsory licensees--notably the broadcasting and jukebox 
        industries--exerted their considerable economic and political 
        power to oppose the revision bill as a whole. Should this 
        happen, there could be no question about priorities. The 
        performance royalty for sound recordings would have to yield to 
        the overwhelming need for omnibus reform of the 1909 law.\9\
---------------------------------------------------------------------------
    \9\ Testimony of Barbara Ringer, Register of Copyrights (December 
4, 1975), before the House of Representatives, Subcommittee on Courts, 
Civil Liberties, and the Administration of Justice of the Committee on 
the Judiciary on H.R. 2223, Serial No. 36, part 3, at 1908 (1975).

Thus, when Congress passed the 1976 Copyright Act, it did not include a 
performance right for sound recordings. It did, however, ask the 
Copyright Office to submit a report on January 8, 1978, making 
recommendations as to whether Congress should amend the law to provide 
performers and copyright owners any performance rights in sound 
recordings. But change could not occur in a hostile environment.
    In that report, the Copyright Office reaffirmed its earlier 
position and stated without qualification that a right of public 
performance for sound recordings is fully warranted, offering the 
following explanation for its unwavering position:

        Such rights are entirely consonant with the basic principles of 
        copyright law generally, and with those of the 1976 Copyright 
        Act specifically. Recognition of these rights would eliminate a 
        major gap in this recently enacted general revision legislation 
        by bringing sound recordings into parity with other categories 
        of copyrightable subject matter. A performance right would not 
        only have a salutary effect on the symmetry of the law, but 
        also would assure performing artists of at least some share of 
        the return realized from the commercial exploitation of their 
        recorded performances.\10\
---------------------------------------------------------------------------
    \10\ 1978 Report on Performance Right in Sound Recording, at 177.

    The predicate underlying this position--that the creation and 
delivery of music requires a joint effort by songwriters and music 
publishers as well as performers, record producers and record 
companies--was not widely recognized in the early 1960's, and even in 
the early 1970's certain opponents of the performance right continued 
to argue that sound recordings lacked sufficient creativity to justify 
copyright protection.\11\ Nevertheless, the realization that the 
creation and delivery of music had changed dramatically over time and 
was the result of the contributions not only of composers and music 
publishers but also of performers and record producers gradually took 
hold, becoming a generally accepted principle by 1978, and one which 
remains unquestioned today.
---------------------------------------------------------------------------
    \11\ See Register's Second Supplementary Report at 221.
---------------------------------------------------------------------------
    Yet, in spite of this general understanding and the efforts of 
those who supported a full performance right for sound recordings, no 
legislation was passed in response to the Office's 1978 recommendation, 
and the controversy died down. The debate remained relatively dormant 
until the late 1980's. Congress acknowledged that the development of 
digital audio tape (``DAT'') machines posed a real threat to the record 
industry and passed the Audio Home Recording Act of 1992 
(``AHRA'').\12\ Congress passed AHRA to allay the fears of copyright 
owners that consumers would use the new technology to make unauthorized 
high - quality digital reproductions en masse, thus displacing sales in 
the marketplace.\13\ It did so by requiring the incorporation of a 
Serial Copy Management System into each digital audio recording device 
in order to prevent serial copying, and by requiring payment of a 
royalty fee for the importation and distribution, or manufacture and 
distribution, of digital audio recording media and devices. AHRA also 
immunizes a consumer who has made a noncommercial reproduction of a 
musical recording as provided in Chapter 10 of Title 17 from suit for 
infringing the reproduction right of the copyright owners, although it 
does not transform infringing consumer uses into non-infringing ones. 
And it does not cover reproductions of songs stored on a computer in 
which one or more computer programs are fixed.
---------------------------------------------------------------------------
    \12\ Pub. L. No. 102-563, 106 Stat. 4237 (1992).
    \13\ H. Rep. No. 102-873, at 18-19 (1992).
---------------------------------------------------------------------------
    But use of DAT recorders was merely the tip of the iceberg. Digital 
technology continued to advance at a rapid pace, forcing Congress to 
reexamine the effect of new digital technologies on the record 
industry. The outcome of this reevaluation was an acknowledgment from 
Congress in 1995 that the advent of on-demand digital subscription 
services and interactive services posed a serious threat to performing 
artists and record companies. Record companies believed, and rightfully 
so, that consumers would adapt to the new technologies and use these 
services to fulfill their desire to obtain music, and do so without 
having to purchase a retail phonorecord.
    Consequently, after carefully weighing the rights of the copyright 
owners against its desire to foster new technologies and business 
models, Congress took action in 1995 and passed the Digital Performance 
Right in Sound Recordings Act (``DPRA''), which granted copyright 
owners of sound recordings an exclusive right to perform their works 
publicly by means of certain digital audio transmissions, subject to 
certain limitations. In taking this action, Congress sought to preserve 
and ``protect the livelihoods of the recording artists, songwriters, 
record companies, music publishers and others who depend upon revenues 
from traditional record sales, . . . without hampering the arrival of 
new technologies, and without imposing new and unreasonable burdens on 
radio and television broadcasters, which often promote, and appear to 
pose no threat to, the distribution of sound recordings.'' \14\
---------------------------------------------------------------------------
    \14\ S. Rep. No. 104-128, at 14-15 (1995).
---------------------------------------------------------------------------
    For this reason, the DPRA restricted the application of the new 
digital performance right to interactive services and subscription 
services, and specifically exempted traditional over-the-air broadcasts 
and related transmissions, including certain retransmissions of radio 
signals and incidental transmissions and retransmissions made to 
facilitate an exempt transmission. It created these exemptions in 
recognition of the fact that the possibility of these transmissions 
displacing sales was never very high. It also included a statutory 
license for subscription services so that these services could avoid 
the difficulties involved in direct licensing and devote more of their 
resources to developing new business models for the benefit of the 
public.
    However, services operating under the statutory license are subject 
to specific terms that are designed to limit unauthorized copying of 
the works by the recipient of the performance. These terms include 
requirements that the service avoid the use of a signal that would 
cause the receiver to change from one program to another; refrain from 
publishing or preannouncing particular songs that will be played during 
the course of a program; and schedule songs to avoid playing too many 
different songs by the same artist or from the same phonorecord in a 
short period of time or, to state it in legal terms, to avoid violating 
the ``sound recording performance complement.''
    While these terms did offer a measure of protection to copyright 
owners and performers during the early days of the technological era, 
they only covered those problems associated with services in existence 
at the time. It soon became apparent that the DPRA was too narrow. It 
failed to anticipate the rapid development of the Internet and its 
ability to offer perfect digital transmissions to a global audience 
instantaneously. Thus, three years later, Congress had to revisit the 
issue of digital audio transmissions and consider how the digital 
performance right applied to new non-interactive, nonsubscription 
services that were springing up overnight and offering real time 
transmissions of a wide variety of musical choices over the Internet to 
anyone who had a computer.
    These services, commonly referred to as webcasters, offered for the 
first time a rich and diversified selection of music for free over a 
communications network that was readily accessible to anyone with an 
internet connection. The problem, however, was the unique programming 
options that these services offered. For example, some webcasters 
offered ``artist-only'' channels that played works of one artist 
continuously 24 hours a day, while other webcasters offered programming 
techniques that permit listeners to influence the selection of sound 
recordings that are part of programs created by the webcasters.'' \15\ 
In light of these programming capabilities and the exponential growth 
of these new services, Congress recognized that even nonsubscription 
services can pose a threat to the economic health of the record 
industry. For this reason, it again amended section 114 with the 
passage of the DMCA to clarify that the digital performance right 
applied to these non-subscription webcasters and that these services 
came within the scope of the statutory license. Moreover, Congress 
imposed additional terms, beyond those already adopted under the DPRA, 
on these new nonsubscription services in order to address the 
programming and technological problems raised by Internet 
transmissions.
---------------------------------------------------------------------------
    \15\ Committee of the Judiciary House of Representatives, Section-
by-Section Analysis of H.R. 2281 as passed by the United States House 
of Representatives on August 4, 1998, at 52 (Comm. Print 1998).
---------------------------------------------------------------------------
    Specifically, the expanded section 114 license requires licensees: 
to cooperate with copyright owners to prevent recipients from using 
software or devices that scan transmissions for particular sound 
recordings or artists; \16\ to allow for the transmission of copyright 
protection measures that are widely used to identify or protect 
copyrighted works; \17\ and to disable copying by a recipient in the 
case where the transmitting entity possesses the technology to do so, 
as well as taking care not to induce or encourage copying by the 
recipient.\18\
---------------------------------------------------------------------------
    \16\ 17 U.S.C. 114(d)(2)(C)(v).
    \17\ 17 U.S.C. 114(d)(2)(C)(viii).
    \18\ 17 U.S.C. 114(d)(2)(C)(ii).
---------------------------------------------------------------------------
    Congress also made a few other modifications to the Copyright Act 
in 1998. One major change was the creation of a second statutory 
license in section 112(e). This license allows any service operating 
under the section 114 statutory license to make one or more ephemeral 
recordings \19\ of a sound recording to facilitate the digital 
transmissions of these works governed by section 114. The DMCA also 
differentiated between those services that were operating prior to the 
passage of the 1998 amendments and those that came on line after the 
DMCA's date of enactment, October 28, 1998. The three preexisting 
subscription services (Music Choice; DMX Music, Inc.; and Muzak, L.P.) 
and the two preexisting satellite digital audio radio services (Sirius 
Satellite Radio, Inc. and XM Satellite Radio, Inc.) comprise the former 
group and all other services fall into the latter category. Prior to 
the DMCA, the rates for the preexisting services were set in accordance 
with four statutory objectives that also apply to some of the other 
statutory licenses but do not necessarily yield a marketplace rate.\20\ 
These services retained this standard when section 114 was amended in 
1998 even though Congress adopted a willing buyer/willing seller 
standard for setting rates for all other services operating under 
section 114.
---------------------------------------------------------------------------
    \19\ These reproductions are referred to as ephemeral copies 
because they generally must be destroyed within six months of the first 
transmission to the public.
    \20\ Section 801(b)(1) provides that ``rates applicable under 
sections 114(f)(1)(B), 115, and 116 shall be calculated to achieve the 
following objectives:

      (A) To maximize the availability of creative works to the 
---------------------------------------------------------------------------
      public;

      (B) To afford the copyright owner a fair return for his 
      creative work and the copyright user a fair income under 
      existing economic conditions;

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

      (D) To minimize any disruptive impact on the structure of 
      the industries involved and on generally prevailing 
      industry practices.''

17 U.S.C. Sec. 801(b)(1).
    Congress's responses to threats from new digital technologies in 
1995 and in 1998 were limited, just as in 1971. Each time, Congress has 
chosen to focus only on the immediate problems presented to it and to 
calibrate the rights of sound recording copyright owners to address 
these particular problems, rather than adopt a full performance right, 
even though many urged Congress to grant sound recording copyright 
owners a full performance right. In testimony before the Senate 
Judiciary Committee in 1995, the Register of Copyrights restated the 
Office's steadfast support for a full performance right for sound 
recordings, citing the need to harmonize the rights for copyright 
owners of sound recordings with those of the music publishers once and 
for all.\21\ Moreover, an earlier study conducted by the Copyright 
Office in 1991 had underscored the need for such a right as a means to 
protect record companies and performers who suddenly were faced with 
the high probability that digital technology would provide readily 
available distribution channels for the reproduction and performance of 
their works without a counterbalancing means to compensate the creators 
of the sound recordings.\22\
---------------------------------------------------------------------------
    \21\ Statement of Marybeth Peters, Register of Copyrights, before 
the Senate Committee on the Judiciary (March 9, 1995).
    \22\ Report of the Register of Copyright, Copyright Implications of 
Digital Audio Transmission Services (October, 1991).
---------------------------------------------------------------------------
    In light of this danger, there was no principled reason to continue 
to allow one group--music publishers--to receive compensation for the 
performance of their works while denying another similarly situated 
group of copyright owners--record companies--the same right to collect 
royalties for the very same performance, especially in the case where 
the users' businesses relied heavily on the use of the creators' works 
to turn a profit. This is an observation that has been made repeatedly 
in support of a full performance right and one articulated by the 
Working Group on Intellectual Property Rights in its 1995 report on 
Intellectual Property and the National Information Infrastructure.\23\ 
This report characterized the lack of a performance right in sound 
recordings as ``an historical anomaly that does not have a strong 
policy justification--and certainly not a legal one. Sound recordings 
are the only copyrighted works that are capable of being performed that 
are not granted that right.'' \24\
---------------------------------------------------------------------------
    \23\ Information Infrastructure Task Force, Intellectual Property 
and the National Information Infrastructure: The Report of the Working 
Group on Intellectual Property Rights (Sept. 1995).
    \24\ Id. at 222.
---------------------------------------------------------------------------
    Nevertheless, most users of these works continue to oppose a full 
performance right for sound recordings and argue that the economies in 
the current marketplace favor the user and the emerging technologies 
over the creator, even those who stand on the opposite side of the 
argument when it is their works that are being targeted for use by 
another group. Indeed, in the last few weeks, broadcasters have 
participated in meetings at WIPO considering proposals for a treaty 
that would obligate countries to provide exclusive rights to 
broadcasting organizations against the fixation, rebroadcasting and 
retransmission of their broadcast signals, among other rights. The 
broadcasters claim this new protection is necessary due to changes in 
technology, such as the Internet, which threaten their existing 
business models. They seek these rights notwithstanding their efforts 
here in the United States to oppose and limit the same rights for the 
creators of the sound recordings that the broadcasters transmit. 
Paradoxically, if such a treaty is concluded, broadcasters may be able 
to exercise exclusive rights over their performance of sound recordings 
even though the copyright owners of the same sound recordings have no 
rights in that context.
    Congress has the power to remedy this situation and strike the 
proper balance in favor of a full performance right. Thus, the question 
should no longer be whether Congress should provide a full performance 
right for sound recordings, but rather whether it should be subject to 
statutory licensing and, if so, what the value of that right should be 
in order to insure that copyright owners and performers have sufficient 
monetary incentives to continue to create works for the enjoyment of 
the public, and what restrictions, if any, should be placed on that 
right to insure the viability of new businesses to disseminate the 
works in a high-quality, readily accessible format. Stated another way, 
the challenge of copyright in this context, as it is in general, is to 
strike the ``difficult balance between the interests of authors and 
inventors in the control and exploitation of their writings and 
discoveries on the one hand, and society's competing interest in the 
free flow of ideas, information, and commerce on the other hand.'' \25\
---------------------------------------------------------------------------
    \25\ Sony Corp. of America v. Universal City Studios, Inc., 464 
U.S. 417, 429 (1984).
---------------------------------------------------------------------------
     THE SECTION 114 STATUTORY LICENSE- HOW IT AFFECTS BROADCASTERS

    Although the digital performance right enacted in 1995 and expanded 
in 1998 is a step in the right direction, it is not an unfettered 
right. It is subject to certain exemptions--e.g., nonsubscription 
broadcast transmissions are exempt--and to a statutory license for 
certain noninteractive transmissions. Pursuant to this license, many 
digital transmissions of performances of sound recordings may be made 
without the permission of the copyright owner if the licensee adheres 
to the terms of the license, pays the statutory royalties, and complies 
with the Copyright Office regulations governing notice and 
recordkeeping. Users, however, have complained that the license terms 
and regulatory requirements have in some cases created barriers that 
prohibit them from taking advantage of the license.

a.  Scope of the exemption for nonsubscription broadcast transmissions.
    Broadcasters have been particularly vocal about their treatment 
under the license, arguing in the first instance that they should not 
be subject to the digital performance right for their digital, 
Internet-based activities, such as webcasting. At the outset of the 
first rate setting proceeding for the webcasting license, broadcasters 
argued that retransmissions of AM/FM broadcast programming enjoyed an 
exemption from the newly created digital performance right and that 
simulcasts of radio broadcast programming therefore were not subject to 
the statutory license. The recording industry and associations 
representing the interests of performers \26\ did not agree. They 
opposed this interpretation and sought a ruling from the Copyright 
Office declaring that retransmissions of a broadcast signal over a 
digital communications network, such as the Internet, were not exempt 
from the digital performance right under section 114(d)(1)(A) of the 
Copyright Act, as amended by the DMCA. Because the resolution of this 
question would determine whether broadcasters chose to participate in 
the rate setting process and because it was necessary to resolve 
whether the rates being set would apply to broadcasters' 
retransmissions over the Internet, the Copyright Office postponed the 
rate setting hearing until it could decide the legal questions posed by 
the broadcasters and the record industry.
---------------------------------------------------------------------------
    \26\ RIAA represented the interests of the record industry in the 
rate setting proceeding and the rulemaking proceeding to address the 
legal questions regarding the scope of the section 114 statutory 
license as it relates to simulcasts of broadcast radio programming over 
a digital communications network, like the Internet. The Association of 
Independent Music, the AFM, and the American Federation of Television 
and Radio Artists filed comments jointly with the RIAA in the 
rulemaking proceeding.
---------------------------------------------------------------------------
    Broadcasters, however, questioned the Office's authority to conduct 
a rulemaking to ascertain whether simulcasts of AM/FM broadcast 
programming over the Internet came within the scope of the section 114 
statutory license. For this reason, the National Association of 
Broadcasters (``NAB'') filed an action in the U.S. District Court for 
the Southern District of New York, seeking a declaratory ruling on the 
issue.\27\ This action was eventually withdrawn. In the meantime, the 
Copyright Office conducted a notice and comment rulemaking proceeding 
and made a determination that the exemption for broadcast transmissions 
did not include transmissions made over a digital communications 
network such as the Internet.\28\
---------------------------------------------------------------------------
    \27\ See NAB v. RIAA, 00-CV-2330 (S.D.N.Y.).
    \28\ 65 Fed. Reg. 77292 (Dec. 11, 2000) (amending the regulatory 
definition of a ``service'' in order to clarify that transmissions of 
sound recordings by means of digital audio transmissions over a 
communication network, such as the Internet, are not exempt from 
copyright liability under section 114(d)(1)(A) of the Copyright Act).
---------------------------------------------------------------------------
    The key question in this proceeding centered on the meaning of the 
phrase, ``nonsubscription broadcast transmission,'' which is not 
defined expressly in the law. More specifically, the analysis focused 
on the statutory definition of the term ``broadcast'' transmission. The 
statutory definition characterizes a ``broadcast'' transmission as ``a 
transmission made by a terrestrial broadcast station licensed as such 
by the Federal Communications Commission.'' \29\ The Office then 
focused on the phrase ``licensed as such by the FCC,'' finding that it 
limited the exemption to those transmissions made under a license 
issued by the FCC, and that these transmissions are limited to the 
local service area of the radio transmitter. In reaching this 
conclusion, the Office noted that Congress used the descriptive term 
``over-the-air'' frequently in the legislative history to identify 
those broadcasts that it sought to protect under the exemption and 
never referenced any other type of transmission made by an FCC-licensed 
broadcaster when discussing the scope of the exemption.
---------------------------------------------------------------------------
    \29\ 17 U.S.C. Sec. 114(j)(3).
---------------------------------------------------------------------------
    In addition, the Office determined that had Congress wished to 
exempt all transmissions made by an FCC-licensed broadcaster--the 
position urged by the broadcasters--then there would not have been a 
need to carve out additional exemptions to cover certain 
retransmissions of an AM/FM radio broadcast program. In reaching this 
conclusion, the Office focused on an exemption in the law which 
provides that the performance of a sound recording by means of a 
digital audio transmission is not an infringement in the case of a 
retransmission of a radio station's broadcast transmission, provided 
that ``the radio station's broadcast transmission is not willfully or 
repeatedly retransmitted more than a radius of 150 miles from the site 
of the radio broadcaster.'' \30\
---------------------------------------------------------------------------
    \30\ 17 U.S.C. 114(d)(1)(B)(i).
---------------------------------------------------------------------------
    Broadcasters had argued that this 150-mile exemption applied only 
to third parties who retransmitted the original broadcast programming 
and not to the original broadcaster, but the Office rejected this 
interpretation. The law draws no distinction between the original 
broadcaster and third party retransmitters, nor does it or the 
legislative history offer any reason why Congress would allow original 
broadcasters to retransmit their programming globally while at the same 
time restricting the retransmissions of others to a defined geographic 
area.
    In fact, an exception in the law to the 150-mile limitation for 
retransmissions of a radio signal in the case where the radio signal is 
``retransmitted on a nonsubscription basis by a terrestrial broadcast 
station, terrestrial translator, or terrestrial repeater licensed by 
the Federal Communications Commission'' \31\ supports this position. In 
all cases, the purpose of these provisions is to restrict each 
retransmission of a digital audio transmission of a radio signal to a 
limited geographic area, even in those instances where the 
retransmissions are done by terrestrial physical facilities regulated 
by the FCC.
---------------------------------------------------------------------------
    \31\ 17 U.S.C. 114(d)(1)(B)(i)(I).
---------------------------------------------------------------------------
    The Office found further support for its determination that 
broadcasters could not retransmit AM/FM radio programming over the 
Internet when it examined section 112, the provision that governs the 
making of ephemeral copies of sound recordings necessary to facilitate 
a public performance under the section 114 statutory license. While 
traditional broadcasters can make a single server copy of their radio 
programs to facilitate their over-the-air broadcasts under an exemption 
in section 112(a), webcasters are unable to rely upon this provision 
for making all the necessary ephemeral recordings that are needed to 
facilitate a transmission over the Internet. Webcasting requires more 
than a single copy of a work to effectively transmit over the Internet. 
For this reason, Congress created a second statutory license in section 
112(e) which, subject to the rates and terms of the statutory license, 
allows a webcaster operating under the section 114 statutory licensing 
regime (or certain services that provide transmissions to a business 
establishment for use during the normal course of business) to make one 
or more ephemeral recordings to facilitate their transmissions. Thus, 
broadcasters who wish to retransmit their radio station programs over 
the Internet would have to operate under the section 114 license in 
order to be eligible under the section 112(e) statutory license to make 
all the ephemeral recordings needed to effectuate the retransmission of 
the AM/FM radio program over the Internet.
    Not surprisingly, the broadcasters did not accept the Office's 
determination. They immediately filed a lawsuit under the 
Administrative Procedure Act challenging the Register's determination, 
but the Register's decision was upheld by both the district and the 
appellate courts.\32\
---------------------------------------------------------------------------
    \32\ Bonneville Int'l. Corp. v. Peters, 347 F.3d 485 (3rd Cir. 
2003), aff'g 153 F. Supp.2d 763 (E.D. Pa. 2001).
---------------------------------------------------------------------------
    In making its decision, the United States Court of Appeals for the 
Third Circuit rejected the broadcaster's fundamental argument that 
Congress had intended to provide a broad exemption to cover any 
transmission made by a licensed broadcaster. Specifically, it held that 
the reference to ``broadcast station'' in the definition of a 
``broadcast'' transmission referred to the physical facility licensed 
by the FCC and not to the broadcaster. It noted that under the FCC 
rules a station must be a physical facility and that the FCC license 
referenced in the statutory definition must be tied directly to the 
operation of a particular facility rather than a corporate entity. 
Consequently, the court held ``[a] `broadcast transmission' under 
Sec. 114(d)(1)(A) would therefore be a radio transmission by a radio 
station facility operated subject to an FCC license and would not 
include a webcast. AM/FM webcasting does not meet the definition of a 
`nonsubscription broadcast transmission' and does not therefore, 
qualify under Sec. 114(d)(1)(A) for an exemption from the digital audio 
transmission performance copyright of Sec. 106(6).'' \33\
---------------------------------------------------------------------------
    \33\ Id. at 495.
---------------------------------------------------------------------------
    The court found additional support for its conclusions in the fact 
that Congress included additional exemptions from the digital audio 
transmission performance right for retransmissions of certain 
nonsubscription broadcast transmissions, noting that the common-sense 
reading of the exemptions in Sec. 114(d)(1)(B) requires an 
interpretation that does not differentiate between webcasting of AM/FM 
radio programming by one group, i.e, broadcasters, and webcasts of the 
exact same programming by third parties. Likewise, the court read the 
legislative history of the DPRA and the DMCA as supporting an exemption 
for traditional radio broadcasts, and concluded that the exemption for 
a ``nonsubscription broadcast transmission,'' which was added with the 
passage of the DPRA in 1995, did not contemplate protecting AM/FM 
webcasts by any group.
    This interpretation of the scope of the exemption for 
``nonsubscription broadcast transmissions'' offered by the Office and 
by the courts is totally consistent with Congress' perception at the 
time the DPRA was enacted that traditional over-the-air radio did not 
pose a threat to the record industry.

b. Interactive services.
    The section 114 statutory license is not available to an 
interactive service. Such a service is defined, in general, as ``one 
that enables a member of the public to receive a transmission of a 
program specially created for the recipient, or on request, a 
transmission of a particular sound recording, whether or not as part of 
a program, which is selected by or on behalf of the recipient.'' \34\ 
Interactive services must negotiate separate licenses in the 
marketplace with the copyright owners of the sound recordings for the 
right to perform publicly specific sound recordings by means of a 
digital audio transmission. Congress took this position and imposed 
full copyright liability on interactive services because Congress 
realized these services had the greatest potential for displacing 
record sales. Consequently, in 2000 the Digital Media Association 
(DiMA) petitioned the Copyright Office to initiate a rulemaking 
proceeding for the purpose of adopting an amendment to the rule 
defining the term ``Service'' to make it clear that a service is not 
interactive simply because it offers the consumer some degree of 
influence over the programming offered by the webcaster.
---------------------------------------------------------------------------
    \34\ The statutory definition provides additional explanatory 
language to distinguish between interactive and non-interactive 
services, stating that ``[t]he ability of individuals to request that 
particular sound recordings be performed for reception by the public at 
large, or in the case of a subscription service, by all subscribers of 
the service, does not make the service interactive, if the programming 
on each channel of the service does not substantially consist of sound 
recordings that are performed within 1 hour of the request or at a time 
designated by either the transmitting entity or the individual making 
such request. If an entity offers both interactive and noninteractive 
services (either concurrently or at different times), the 
noninteractive component shall not be treated as part of an interactive 
service.'' 17 U.S.C. Sec. 114(j)(7).
---------------------------------------------------------------------------
    After considering DiMA's arguments for initiating the rulemaking 
and RIAA's opposing arguments, the Office determined that a rulemaking 
was not the appropriate way to resolve the question of interactivity 
because there was no way to articulate with any precision specific 
guidelines that would distinguish between an interactive service and an 
non-interactive service beyond what was already in the statute, 
especially when business models were undergoing constant change.\35\ 
Moreover, the Office noted that ``such a determination had to be made 
on a case-by-case basis after the development of a full evidentiary 
record in accordance with the standards and precepts already 
established in the law.'' \36\ Consequently, the Office denied the 
petition.
---------------------------------------------------------------------------
    \35\ 65 Fed. Reg. 77330 (Dec. 11, 2000).
    \36\ Id. at 77332.
---------------------------------------------------------------------------
c. Notice and recordkeeping requirements.
    Sections 114(f)(4)(A) and 112(e)(4) require the Librarian of 
Congress to establish regulations specifying notice and recordkeeping 
requirements for use of sound recordings in a digital transmission. 
Accordingly, the Office issued interim regulations on March 11, 2004, 
specifying notice and recordkeeping requirements for use of sound 
recordings under the sections 112 and 114 statutory licenses.\37\ These 
rules require users of the section 112 and 114 statutory licenses to 
report on the sound recordings they perform so that SoundExchange, the 
collective that collects the statutory royalties and disburses them to 
copyright owners and performers, knows how to divide up the royalties 
for performances of sound recordings. Because the amount of royalties 
paid to each copyright owner and performer depends upon the number of 
performances of each sound recording, such reporting is crucial to the 
operation of the statutory license. Requirements have long been in 
place for preexisting subscription services, and we believe they are 
working well.\38\
---------------------------------------------------------------------------
    \37\ 69 Fed. Reg. 11515 (March 11, 2004).
    \38\ See 63 Fed. Reg. 34296 (June 24 1998).
---------------------------------------------------------------------------
    However, the rulemaking proceeding governing notice & recordkeeping 
requirements for eligible nonsubscription services such as webcasters 
is ongoing, and it has proved to be difficult and controversial. 
Representatives of record companies and performers have sought 
comprehensive information about each and every performance of each and 
every sound recording transmitted by a service, arguing that such 
information is essential in order to ensure that the correct amount of 
royalties is paid to each copyright owner and performer, and that 
information that will permit monitoring compliance with the 
requirements of the sound recording performance complement is also 
needed. Webcasters and broadcasters opposed such detailed reporting 
requirements, asserting that they would be excessive and too onerous 
for an industry that historically has accounted for its performances of 
musical works in a totally different manner. Throughout the rulemaking, 
they maintained that the Office should require reporting of only that 
information that would identify the sound recording for purposes of 
making a distribution of royalties. Specifically, they submitted that 
only five data elements would be needed for this purpose : name of the 
service, sound recording title, name of the artist, call sign of the 
station and date of transmission. They also suggested that the rules 
should allow services to obtain this information through a sampling 
process (e.g., providing information for only two weeks out of every 
year) rather than accounting for each performance.
    In adopting interim regulations setting the requirements for the 
information that eligible nonsubscription services must report to 
SoundExchange, we rejected the type of sampling proposed by 
broadcasters because it would be likely to under report--or omit 
reporting at all--performances of the lesser known artists and 
performers receiving playtime from those webcasting services that offer 
multiple channels of niche programming, covering an array of genres, 
e.g., hip-hop, gospel, classical, country, folk, new age, and pop. 
Morever, we found it difficult to credit claims from webcasters that 
although their transmissions--and frequently the programming of the 
content of their transmissions--are controlled and accomplished by the 
use of computers, they would be unable to report all actual 
performances of sound recordings. Ideally, this computer-driven medium 
should be well-suited to the reporting of actual performance data that 
would ensure that each copyright owner and performer is compensated for 
the value of the transmissions of performances of his or her 
recordings.
    On the other hand, we recognized that for many webcasters, 
maintaining and reporting any information at all about their 
transmission of performances would be a novel experience, and that it 
would be desirable to have a period of transition during which they 
would become accustomed to such reporting. Thus, while it is likely 
that we shall require year-round reporting of all performances in the 
not-too-distant future, the new interim rules require licensees to 
maintain records for two weeks out of every quarter, identifying which 
sound recordings were performed during this period and how often they 
were performed. In deriving these rules, the Office balanced the need 
to obtain accurate information about performances of specific sound 
recordings for purposes of compensating as many copyright owners 
entitled to receive these fees as possible against the burden imposed 
on the services to provide the needed information and the need for a 
period of time during which licensees will become accustomed to 
reporting actual performance data. The ultimate goal remains a final 
regulation requiring year-round reporting.
    Meanwhile, the interim rules require the licensees to report only a 
relatively minimal amount of specific information needed to identify 
and differentiate sound recordings from one another. In addition to its 
own name and the category of transmission (e.g., eligible 
nonsubscription transmission other than a broadcast simulcast, or 
eligible nonsubscription transmission of a broadcast simulcast, or 
eligible transmission by a business establishment service making 
ephemeral recordings), a licensee is currently required to report as 
few as four key items for each sound recording performed: sound 
recording title; featured recording artist, group or orchestra; sound 
recording identification; \39\ and total number of performances.\40\ 
They do not require the licensee to report other information sought by 
the record industry, such as the catalog number, the track label (P) 
line, the duration of the sound recording, the universal product code, 
or the release year. Nor are the licensees required to report specific 
information that would aid the copyright owners in assessing compliance 
with the programming restrictions, e.g., the start date and time of the 
transmission of the sound recording. Moreover, the rules do not require 
a full census report at this time, although they do require licensees 
to maintain precise records for two weeks out of every quarter.
---------------------------------------------------------------------------
    \39\ The sound recording identification may consist of either the 
International Standard Recording Code (ISRC) for the particular 
recording or, in lieu of the ISRC, the album title and the marketing 
label of the company that markets the album which contains the sound 
recording.
    \40\ Total performances may be reported either by reporting the 
actual number of times a sound recording was performed by the licensee 
multiplied by the number of recipients; or by reporting the total 
number of times the sound recording was performed as well as the 
licensee's aggregate tuning hours--i.e., the total number of listener 
hours by all who have accessed the service during a given period of 
time.
---------------------------------------------------------------------------
    The rulemaking is ongoing. The Office is still considering rules 
that would establish specific electronic formats for transmitting this 
information. The format issue has proven difficult. One might have 
imagined that although there would be differences of opinion over what 
kind of information must be reported, the interested parties would be 
able to work out the technical issues involving the electronic formats 
in which the reports of use would be made. SoundExchange has been 
working on its own system for maintaining the data that will be 
reported to it on sound recording performances, and many broadcasters 
and webcasters have their own electronic systems that already report 
information on their performances. We had anticipated that 
SoundExchange could sit down with broadcasters and webcasters to work 
out the details of how these systems can communicate with each other, 
but thus far very little progress has been made despite our 
encouragement and urging.\41\ We at the Copyright Office have no 
familiarity with or expertise about the electronic systems maintained 
by SoundExchange, broadcasters and webcasters, but the interested 
parties appear to have decided to leave it to us to prescribe the 
technical rules on the formatting of reports of use of sound 
recordings, specifying precise fields and delimiters for reporting the 
required information. We remain hopeful that the parties may come to an 
agreement--and we strongly urge them to do so--but meanwhile, we are 
considering a recent submission from RIAA that proposes revised 
specifications for filing electronic reports of the performance data 
and has been forwarded to DiMA for consideration. We hope to publish a 
notice of proposed rulemaking on formatting requirements this summer, 
and we are optimistic that we can conclude that phase of the rulemaking 
proceeding by the end of this year.
---------------------------------------------------------------------------
    \41\ ``The Office encourages copyright owners, broadcasters and 
webcasters to work together to agree on formatting requirements that 
will serve all of their needs, and to submit joint proposals or 
comments if possible.'' 67 Fed. Reg. at 59576 (Sept. 23, 2002).
---------------------------------------------------------------------------
    We are also near to concluding the portion of the proceeding 
concerning reports of use for the historic period. On Tuesday, we 
published a Notice of Proposed Rulemaking concerning reporting 
requirements for use of sound recordings during the period prior to 
April 1, 2004. The notice proposes use of data already provided by the 
preexisting subscription services to SoundExchange for the relevant 
period as a proxy for the reporting of actual performances made by all 
other services during the same time period. This approach had been 
suggested in our Notice of Inquiry,\42\ and has been endorsed by the 
copyright owners and performers as well as the affected licensees. Both 
groups have acknowledged that little useful data exists at this point 
in time and that there is no apparent way to reconstruct the 
information needed to file reports of actual use. Consequently, 
copyright owners, performers and licenses advocate the use of a proxy 
to account for the historic performances.
---------------------------------------------------------------------------
    \42\ 68 Fed. Reg. 58054 (Oct. 8, 2003).
---------------------------------------------------------------------------
    Use of a proxy, however, is an imperfect solution, since it is 
likely to undercount some performances and over-count others. 
Nevertheless, it has many advantages. First, the data from the 
preexisting services for the historic period offers accurate reporting 
for programming that is by and large comparable to what was offered by 
the nonsubscription services during the same time period. Second, the 
preexisting subscription services had transmitted a diverse number of 
sound recordings so that a large number of copyright owners and 
performers can be compensated. And finally, the data has already been 
used by SoundExchange for distribution of royalties received from the 
preexisting subscription services and can easily be used for 
distribution of the royalties received from the nonsubscription 
services for the corresponding time period.
    For these reasons, we believe the use of the reports of the 
preexisting subscription services as a proxy represents the simplest, 
most practical and cost-effective solution, and that the affected 
parties will continue to embrace this solution. Interested parties have 
thirty days to file comments either in support of this solution or 
offering alternative proposals.

d. Conditions for use of the statutory license.
    It is our understanding that, now that the question of whether 
their Internet transmissions are exempt from the performance right has 
been resolved against them, broadcasters are questioning whether 
certain terms in the statutory license should apply to simulcasts of 
AM/FM programming when retransmitted over the Internet. Specifically, 
broadcasters have focused on those provisions that prohibit a service 
from announcing its play schedule in advance and the requirement that a 
service not play more than a limited number of selections from a 
particular record album or by a particular recording artist within a 3-
hour period (the ``sound recording performance complement''). These 
restrictions, among others, were adopted in 1995 to inhibit copying of 
music by consumers who could make near-perfect digital copies of a 
sound recording. The reasons behind the restrictions are simple to 
understand. They were adopted to make it difficult for an individual to 
identify in advance, and thereby copy, specific works, thus avoiding 
the expense of purchasing a copy of the work.
    The need for such restrictions, however, may be less obvious when 
one considers a typical radio program offering Top-40 selections. Many 
radio stations routinely play the same selections over and over so that 
one need wait only a short time before the most recent release of a hit 
song is played over the airwaves. Consequently, preannounced schedules 
of these programs may do little to prevent a listener from copying the 
newest hits. Thus, it is unclear whether the restriction has much value 
with respect to these types of radio programs. On the other hand, it is 
hard to understand how the term creates a hardship for broadcasters who 
simulcast over the Internet today or to understand the need for such 
preannounced schedules, since most listeners would not consult a 
program guide before listening to AM/FM radio anyway. The typical 
practice is to flip on the radio and surf the channels to see what is 
playing at the moment or to tune in to a favorite talk show at the 
regularly scheduled time. Thus, until more information comes to light, 
it is hard to understand what harm the broadcasters suffer today under 
the preannouncement restriction, or why there is a need to eliminate 
this term with respect to broadcast programming.
    Similarly, it is hard to understand the broadcasters' complaint 
with respect to the sound recording performance complement restriction 
since the definition was crafted so that it would permit programming 
that was typically used by broadcast radio stations. Specifically, the 
legislative history notes that ``[t]he definition [of the complement] 
is intended to encompass certain typical programming practices such as 
those used on broadcast radio.'' \43\ Whatever confusion does exist 
with respect to the application of this provision may well stem from a 
misunderstanding of what the complement does and does not allow. For 
example, it would not prohibit a service from playing the same three 
songs from a single phonorecord as many times as it wanted during a 3-
hour period, provided that no more than two of these songs were played 
consecutively. The sound recording performance complement would 
similarly allow a service to play up to four different songs by the 
same featured recording artist or four different songs from any 
particular boxed set of phonorecords over and over again during a 3-
hour period provided that no more than three of these songs were 
transmitted consecutively. Since these provisions seem to accommodate 
normal scheduling practices, it is hard to see how the sound recording 
performance complement imposes a burden on a typical AM/FM broadcast 
station.
---------------------------------------------------------------------------
    \43\ S. Rep. No. 104-128, at 34 (1995).
---------------------------------------------------------------------------
    Certainly, should these restrictions be shown to pose a substantial 
burden on programming practices that outweigh whatever protection they 
provide, then Congress should take another look at their application to 
broadcast programming being retransmitted over the Internet. In fact, 
that day may well be near at hand, because new technologies and 
software that allow a consumer to capture and edit programming 
transmitted via the Internet already threaten their effectiveness.

 DIGITAL AUDIO BROADCASTING--DOES IT POSE A THREAT TO COPYRIGHT OWNERS?

    Digital audio broadcasting, also known as HD radio, is no longer a 
vision of the future. Technology to facilitate digital audio broadcasts 
has already been approved by the Federal Communications Commission 
(``FCC''). In 2002, the FCC adopted the in-band on-channel system 
developed by iBiquity Digital Corporation as the standard technology 
for enabling digital broadcasts by AM and FM radio stations that wished 
to begin digital transmissions over the airwaves immediately.\44\
---------------------------------------------------------------------------
    \44\ Digital Audio Broadcasting Systems and Their Impact on the 
Terrestrial Radio Broadcast Service, 17 FCC Rcd 19990 (2002).
---------------------------------------------------------------------------
    Although radio stations did not immediately embrace the new 
technology, they are doing so now. In January of this year, KZIA in 
Cedar Rapids, Iowa, began the movement when it announced its intent to 
become the first station to offer HD radio.\45\ Less than five months 
later, iBiquity issued another press release, announcing that radio 
station KEMR-FM in San Jose, California, had become the 100th radio 
station to launch HD radio broadcasts.\46\ It also has compiled a list 
of more than 300 licensed radio stations that have begun offering HD 
radio or will begin to do so soon.\47\
---------------------------------------------------------------------------
    \45\ IOWA--First in the Nation for HD Radio, The Hollywood 
Reporter.com (January 2, 2004) located at http://www.ibiquity.com/
press/pr/010204.htm.
    \46\ HD Radio Going Live Coast-to-Coast . . . and Beyond (April 19, 
2004) at http://ibiquity.com/press/pr/041904Coast2Coast.htm.
    \47\ iBiquity has established a website, www.HD-Radio.com, where 
visitors can find information about stations across the United States 
that are either offering HD radio now or intend to do so in the near 
future.
---------------------------------------------------------------------------
    The electronics industry has also been hard at work. Companies are 
manufacturing and marketing digital radio receivers for those who wish 
to be among the first to receive clear, digital radio signals over the 
airwaves. But technologists have not stopped there. Companies are also 
busy designing and manufacturing new products to capture and record 
these signals and anticipate the release of a number of new products 
which will allow a consumer to record digital audio radio signals so 
that a listener can listen to his or her favorite radio talk show, news 
show or music program at a later time. In some instances, these 
products will operate in the same manner as a VCR or a TiVo device, 
allowing the listener to fast-forward over the segments that one 
prefers not to hear.\48\ In fact, some early digital radio recorders, 
e.g., Blaze Audio's Radio Recording Suite,\49\ already include 
functions that allow the listener to program the device to record a 
program at specified times, convert an analog signal into a digital 
format, and upload the recorded program onto a personal computer in a 
transferable file.
---------------------------------------------------------------------------
    \48\ See Elisa Batista, A TiVo Player for the Radio, Wired News 
(May 12, 2003), at http://www.wired.com/news/technology/
0,1282,58769,00.html.
    \49\ http://www.blazeaudio.com/products/radiorecorder--
softpack.html.
---------------------------------------------------------------------------
    In spite of these features, the early release of these devices did 
not disturb the copyright community because radio programming was not 
being offered in a digital format at the source. Consequently, programs 
that were transmitted in an analog format and later converted to a 
digital format were only as good as the original analog signal. In many 
cases, recordings of these signals were plagued by static, fades, and 
hisses.
    The advent of digital audio broadcasting (``DAB'') and advances in 
the recording devices, however, will greatly improve audio quality, 
removing the flaws associated with analog broadcasts. Moreover, these 
devices and software packages will allow the listener to change the 
traditional passive listening experience into an interactive process. 
They will give the recipient the means to edit and store specific 
segments and songs from a prerecorded program, upload these selections 
onto the recipient's personal computer, and allow for further 
distribution of these segments to others via electronic transfers over 
the Internet or by other means.
    On-Demand Audio expects to offer a digital radio recorder this fall 
that will provide these functions.\50\ It promises not only to capture 
and record the digital radio signal, but also to include technology 
which will allow the listener to skip from song-to-song and skip over 
advertisements. Moreover, according to its promotional material, its 
SongSurfer Technology will be able to identify specific segments of a 
radio program or a song, and bookmark each segment for identification 
and use at a later time. The product will also include a Jukebox Mode 
which will allow the user ``to save songs, interesting ads, and talk 
radio segments to a built-in Jukebox. . . . Saved songs can then be 
sorted into playlists either when they are saved or later.'' \51\
---------------------------------------------------------------------------
    \50\ See also Neuros HD 20GB MP3 Digital Audio Computer located at: 
http://www.neurosaudio.com/ store/ product.asp?catalog%5Fname= Digital 
Innovations Catalog & category%55Fname= 
Neuros+Players&product%5Fid=401020.
    \51\ On-Demand Radio Overview at http://www.gotuitcom/audio/
agradio.html. See also http://www.gotuit.com/audio/aConsumer.html.
---------------------------------------------------------------------------
    Similar technology is available to capture online music over the 
Internet. Replay Music promotes its ability to save every song played 
by an on-line music service, automatically tag each song with the 
artist name and song title, and separate the song into individual 
tracks for easy access and play-back. The company claims that its 
``Replay Music sports the most sophisticated track splitting algorithms 
on the planet. Besides just recording and tagging, each MP3 file 
contains the entire song--no more, no less.'' \52\
---------------------------------------------------------------------------
    \52\ Replay Music at http://www.replay-music.com/.
---------------------------------------------------------------------------
    These technological advances threaten to disrupt the careful 
balance Congress struck between the record industry, on the one hand, 
and the purveyors of new digital technologies, on the other, in the 
DPRA and the DMCA. Moreover, widespread use of these products would 
alter the longstanding relationship between record companies and radio 
broadcasters in which record companies have provided radio stations 
with the latest releases at no cost in exchange for promotional 
airplay, a relationship based on record companies' expectation that 
consumers would purchase new CDs based upon what they heard over the 
airwaves. But today listeners are not limited to what they hear on the 
radio to inform their choices, nor do they necessarily purchase CDs 
containing the songs they like. Instead, new technologies, e.g., peer-
to-peer services, offer free access to music and a means to obtain free 
copies of the works they enjoy. In this new environment, record 
companies cannot necessarily have any expectation of financial reward 
because consumers find ways to obtain copies of their works for free. 
Nevertheless, radio broadcasters who use music as a hook to get 
listeners and, by extension, advertising dollars, as well as the makers 
of the software packages that facilitate the free exchange of music 
over the Internet profit directly from their use of sound recordings.
    Clearly, the threat posed by today's new technologies is most 
ominous for the performers, the record companies and authorized on-line 
record stores, like iTunes and MusicMatch, whose profits depend, at 
least to some extent, directly upon sales of CDs or digital downloads; 
but the potential harm is not restricted to these businesses. 
Broadcasters and subscription services will suffer, too, from the use 
of technologies that can capture, record, and preserve individual sound 
recordings, and the more valuable segments of a radio station's 
program. Subscription services will find it hard to sell reproductions 
of a sound recording to listeners through use of a ``buy button,'' when 
these listeners can capture the songs they want and upload them 
directly to their personal computers with the use of a On-Demand Audio 
device or Replay Music software. Why would anyone pay for a 
reproduction of a sound recording when they can create their own 
private music collection without expending a dime for the reproduction? 
Broadcasters could also suffer from extensive use of these new 
technologies, albeit in a more indirect fashion. In the event that the 
TiVo type devices become popular, listeners will simply avoid the ads, 
making it ineffective for businesses to advertise on radio. Were this 
to occur, businesses will seek better ways to reach consumers, and 
advertising dollars will no longer flow to the broadcasters.
    The answer, however, is not to inhibit the roll out of HD radio; 
nor is anyone suggesting a slowdown on this front. HD radio promises to 
deliver a high-quality audio product that should draw consumers back to 
the airwaves. The more promising approach would be to grant copyright 
owners of the sound recording a full performance right so that they can 
seek marketplace solutions to the problem, perhaps by negotiating 
licenses for performance rights that would include measures to protect 
against the types of activities that would make record sales obsolete. 
At the moment, sound recording copyright owners have no means to 
prevent a broadcaster from broadcasting their works over the airwaves 
or to compel protection of their work. Alternatively, Congress may want 
to consider technological methods to prohibit unlawful copying, an 
approach the Federal Communications Commission has already begun to 
explore. On April 20, 2004, it published a Notice of Inquiry to 
consider the question of digital audio content control in response to 
concerns presented to the it by the Recording Industry Association of 
America.
    While we take no position on the FCC's recent action, it is 
apparent that digital audio broadcasting raises many of the same 
concerns and fears voiced by the record industry when digital 
technologies first made their appearance in the nineties, and these 
concerns are even more valid today. How the issues should be addressed, 
however, remains an open question. But what is clear is that the 
process must include a careful analysis of copyright policies. 
Moreover, any solutions adopted must provide strong incentives to the 
creators to continue their artistic endeavors and equally strong 
incentives to encourage the continued development of new technological 
advances. In the absence of corrective action, the rollout of digital 
radio and the technological devices that promise to enable consumers to 
gain free access at will to any and all the music they want will pose 
an unacceptable risk to the survival of what has been a thriving music 
industry and to the ability of performers and composers to make a 
living by creating the works the broadcasters, webcasters and consumer 
electronic companies are so eager to exploit because such exploitation 
puts money in their pockets.
    Mr. Chairman, as always, we at the Copyright Office stand ready to 
assist you as the Committee considers how to address the new challenges 
that are the subject of this hearing.

    Mr. Smith. Mr. Halyburton.

  TESTIMONY OF DAN HALYBURTON, SENIOR VICE PRESIDENT/GENERAL 
 MANAGER, GROUP OPERATIONS, SUSQUEHANNA RADIO CORPORATION, ON 
       BEHALF OF THE NATIONAL ASSOCIATION OF BROADCASTERS

    Mr. Halyburton. Thank you, Mr. Chairman, Ranking Member 
Berman, and Members of the Subcommittee.
    When Congress enacted section 405 of the DMCA, it clearly 
sought to foster Internet streaming while preserving the long-
standing, mutually beneficial relationship between radio and 
the recording industry. Unfortunately, the potentials of this 
technology have not been realized.
    In April 2000, there were more than 1,700 U.S. Radio 
stations streaming their programming via the Internet. Industry 
estimates predicted that each month 100 stations would add 
streaming services. Today, those bright expectations have not 
materialized. By the end of 2002, well over 1,000 stations had 
discontinued streaming due in large part to copyright issues.
    My company, Susquehanna Radio, helped pioneer radio 
Internet delivery, and 23 of our stations are still trying to 
make a go of it. However, the DMCA has made it impossible to 
create a viable business model for simulcast streaming. In 
fact, it is a recipe for losing money, which is exactly what we 
are doing.
    Here are the problems we face. First and foremost, we are 
subject to a rate structure under which the more audience we 
attract, the more we pay. The result is that once we draw 
enough audience to attract advertisers, the RIAA fee becomes so 
expensive we lose money.
    Not only must we pay for the right to perform sound 
recordings, but we also have to pay for so-called ephemeral 
copies that are technically necessary to stream but have no 
independent economic value.
    Third, the statutory conditions interfere with our 
programming. DJs cannot preannounce records, and we are limited 
to the number of cuts we can play of one artist or from a 
single album. And there is a concern that the complex and 
expensive recordkeeping requirements may be adopted. No wonder 
most stations looked at this scheme and said, No thanks.
    So let me suggest five steps Congress should take to fix 
the law so that Internet radio streaming can mature into a 
workable business model and serve our listeners.
    First, Congress should exempt from sound recording fees 
streams to a station's local over-the-air audience. It simply 
makes no sense to treat this audience differently when they 
listen to our signal on the Internet; the same local public 
service benefits are provided. Moreover, the recording industry 
cannot deny the enormous promotional benefit that it gets from 
radio air play, by far the most important driver of record 
sales. This same benefit exists when a station streams its 
programming over the Internet to its local audience.
    Second, the sound recording performance fee and the 
standard by which it is set must be reformed. The willing 
buyer-willing seller standard and the DMCA is a recipe for 
abuse. Before the CARP proceeding, RIAA set out to negotiate 26 
agreements at fees far above the competitive market rate for 
the purpose of establishing an artificially high benchmark in 
order to influence the CARP. The CARP threw out 25 of those 
agreements, but still relied entirely on a single agreement 
between the RIAA and Yahoo to arrive at the current rate, and 
that rate is exorbitant.
    Susquehanna will pay RIAA six times what we pay ASCAP, BMI 
and SESAC combined for those same exact performances. Just one 
of our stations, KPLX in Dallas, will pay almost $50,000 in 
fees in a year to reach a small fraction of its over-the-air 
audience. Congress should establish a fee comparable to what is 
paid to BMI, ASCAP, and SESAC.
    Third, Congress must reform the statutory license 
conditions and make them consistent with broadcast practices. 
Radio stations should not be forced to choose between either 
radically altering their over-the-air programming practice or 
risk uncertain and costly copyright infringement litigation.
    Fourth, Congress should eliminate additional copyright 
liabilities for ephemeral recordings that simply exist to 
facilitate a licensed or an exempt performance.
    And fifth, Congress should ensure that the reporting and 
recordkeeping requirements in the act do not preclude 
broadcasters from streaming.
    Mr. Chairman, coupling the powers of the Internet with the 
long-standing strengths of free, over-the-air radio promises 
exciting opportunities for our listeners, your constituents. 
Let me thank the Subcommittee for its leadership and hard work 
in moving forward legislation to reform the CARP system. 
Unfortunately even if the CARP process is fixed, the law will 
continue to stifle the growth of radio streaming.
    We look forward to working with the Subcommittee to repair 
the law and create a workable copyright regime that allows 
fledgling service to flourish rather than suffocate.
    Mr. Smith. Thank you, Mr. Halyburton.
    [The prepared statement of Mr. Halyburton follows:]

                  Prepared Statement of Dan Halyburton

    Chairman Smith and Members of the Subcommittee. My name is Dan 
Halyburton. I am the Senior Vice President and General Manager for 
Group Operations for Susquehanna Radio Corp., which owns 32 broadcast 
radio stations.
    I appreciate the opportunity to appear before you today on behalf 
of the National Association of Broadcasters to discuss a matter of 
importance to the radio industry and to the many members of the public 
who want to hear their favorite radio station over the Internet on 
their home or office computers but who have been frustrated by what has 
become, through various judicial and administrative actions, a 
burdensome and unworkable law.
    In 1998, Congress enacted section 405 of the Digital Millennium 
Copyright Act with the goal of fostering the growth of Internet 
streaming while preserving the longstanding, mutually beneficial 
relationship between the radio and recording industries. The Internet 
offered an opportunity for all types of radio stations throughout the 
country, small and large, urban and rural, to reach their audiences in 
a new, more convenient and more creative way, coupled with information, 
graphics, and other material that can be placed on a web site.
    Unfortunately, that goal has been thwarted. A medium that was once 
thought to have a bright future to enhance the ability of radio 
stations to serve the public is vastly underused. As you may have 
noticed, relatively few radio stations now stream their programming on 
the Internet. In 2000, more than 1,700 radio stations were streaming 
their programming and nearly 100 additional stations were expected to 
commence streaming each month. By the end of 2002, however, well over 
1,000 stations had stopped streaming and those stations that now come 
online overwhelmingly are all talk stations.
    There are a number of reasons for this, but the biggest part of the 
problem lies with the rules governing sound recordings. Specifically:

          The fee set by the copyright royalty arbitration 
        panel and the Librarian of Congress in 2002 was much too high, 
        and far exceeds a reasonable or even a hypothetical competitive 
        fair market rate. As an example, if the Internet listenership 
        of one of our most popular stations ever matched its over-the-
        air listenership, the sound recording fees would be 15 millions 
        dollars a year. Even at today's listenership levels, our 
        stations pay 5 to 6 times as much for sound recording royalties 
        than we pay to the musical works copyright owners for the right 
        to make the same Internet performances of all of the musical 
        works embodied in the sound recordings.

          The applicable statutory performance license is 
        subject to a host of conditions that are inconsistent with the 
        way radio stations program their stations. Radio stations are 
        faced with the untenable choice of making fundamental changes 
        to their programming, not streaming, or incurring the risk of 
        having to defend uncertain and hugely expensive and complex 
        copyright infringement litigation.

          The law governing the making of copies that are used 
        solely to facilitate permitted transmissions unreasonably 
        requires the payment of still additional fees and is subject to 
        conditions crafted in the earlier days of radio that fail to 
        accommodate modern technological practices and realities.

          The Copyright Office has raised the specter of 
        onerous and unnecessary record keeping and reporting 
        requirements in the near future. Many radio stations, 
        particularly smaller stations, simply will not be able to 
        comply using their existing systems and business practices. The 
        threat of these requirements keeps many from even considering 
        streaming.

    Mr. Chairman, I know you are concerned about the failure of this 
new opportunity for radio to serve the public to develop. You have 
already moved to address the problems associated with the CARP 
(arbitration panel) procedure that the DMCA put in place to set fees, 
and we greatly appreciate your leadership and efforts. We strongly 
support HR1417 and hope that the Senate will pass it promptly and that 
it will become law.
    Unfortunately, the CARP procedure is a relatively small part of the 
difficulties current law and regulations pose for streaming radio 
stations. There are major substantive problems with rights afforded to 
the copyright owners of sound recordings in sections 114 and 112 of the 
Copyright Act. These must be addressed if Internet streaming of radio 
stations is to fulfill its promise.
    I would first like to provide some history of the sound recording 
performance right, to review how we got here. Then I will describe the 
current state of radio stations simultaneously streaming their over the 
air signals on the Internet (simulcast streaming). Finally, and most 
importantly, I will offer specific suggestions to fix the problems that 
are preventing simulcast streaming from happening.

  I.  HOW WE GOT HERE--THE HISTORY OF THE SOUND RECORDING PERFORMANCE 
                                 RIGHT

    Until 1995 there was no performance right in sound recordings. 
Instead, radio stations paid well over a hundred million dollars 
annually to music composers and publishers while the producers and 
performers of sound recordings made billions of dollars from the sales 
of records promoted by radio airplay.
    In 1995, Congress first created a carefully and narrowly 
circumscribed performance right in digital audio transmissions to 
address the specific concerns of record companies that certain 
interactive and multi-channel, genre-specific subscription performances 
would displace record sales. In 1998, in response to issues concerning 
the status of Internet-only webcasts, the right was expanded to include 
certain non-subscription transmissions. In our view these rights were 
never intended to apply to radio broadcasters.
    Congress has, for decades, recognized the symbiotic relationship 
between the recording and radio industries, first refusing to grant a 
public performance right in sound recordings, and then granting it 
narrowly only in response to a specific threat. Even then, Congress 
provided that nonsubscription broadcast transmissions would remain free 
from any sound recording performance obligation. Although broadcasters 
believe that Congress intended this exemption to include the Internet 
streaming of radio broadcasts, the Copyright Office and the Courts 
ruled otherwise.
    It is not at all clear why radio stations should be required to pay 
record companies for the right to stream their radio broadcasts over 
the Internet. After all, the recording industry has for decades tried, 
using every device imaginable and spending millions upon millions of 
dollars annually, to encourage broadcasters to play their records in 
these very same broadcasts. Why? Simply because radio play is, far and 
away, the most important vehicle for exposing to the public the 
products of the record industry. Consumers buy what they hear, and what 
DJs they trust play. Arbitron studies have proven as much--fully two 
thirds of those polled said they turn to radio first to learn about new 
music.\1\ A radio broadcast has the same extraordinary promotional 
value to the record companies whether it is heard over the air or over 
the Internet. In a truly free, competitive market, the net balance of 
payments would flow from record companies to radio stations, not vice-
versa, just as free copies of their recordings still flow every day 
from the record companies to radio stations.
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    \1\ See, e.g., Internet 9: The Media and Entertainment World of 
Online Consumers, Special Radio Industry Edition, available at http://
www.arbitron.com/downloads/I9NAB.pdf (viewed June 8, 2004).
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A. Pre-1995
    Throughout the history of the debate over sound recording 
copyrights, Congress has consistently recognized that record companies 
reap huge promotional benefits from the exposure given their recordings 
by radio stations and that placing burdensome restrictions on 
performances could alter that relationship to the detriment of both 
industries. For that reason, in the 1920s and for five decades 
following, Congress regularly considered proposals to grant copyright 
rights in sound recordings but repeatedly rejected such proposals.
    When Congress did first afford limited copyright protection to 
sound recordings in 1971, it prohibited only unauthorized reproduction 
and distribution of records but did not create a sound recording 
performance right. The purpose of such protection was to address the 
potential threat such reproductions posed to the industry's core 
business: the sale of records. During the comprehensive revision of the 
Copyright Act in 1976, Congress again considered, and rejected, 
granting a sound recording performance right. As certain senators on 
the Judiciary Committee recognized in their (prevailing) minority 
views:

        For years, record companies have gratuitously provided records 
        to stations in hope of securing exposure by repeated play over 
        the air. The financial success of recording companies and 
        artists who contract with these companies is directly related 
        to the volume of record sales, which, in turn, depends in great 
        measure upon the promotion efforts of broadcasters.\2\
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    \2\ S. Rep. No. 93-983, at 225-26 (1974) (minority views of Messrs. 
Eastland, Ervin, Burdick, Hruska, Thurmond, and Gurney).

    Congress continued to refuse to provide any sound recording 
performance right for another twenty years. During that time, the 
record industry thrived, due in large measure to the promotional value 
of radio performances of their records.

B. 1995
    It was not until the Digital Performance Rights in Sound Recordings 
Act of 1995 (the ``DPRA'')--enacted less than ten years ago--that even 
a limited performance right in sound recordings was granted. Even then, 
the right was limited to certain subscription and interactive digital 
transmissions that threatened to displace the sale of recordings.
    In granting this limited public performance right in sound 
recordings, Congress stated it: ``should do nothing to change or 
jeopardize the mutually beneficial economic relationship between the 
recording and traditional broadcasting industries.'' \3\ As explained 
in the Senate Report accompanying the DPRA, ``The underlying rationale 
for creation of this limited right is grounded in the way the market 
for prerecorded music has developed, and the potential impact on that 
market posed by subscription and interactive services--but not by 
broadcasting and related transmissions.'' \4\
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    \3\ S. Rep. No. 104-128, at 15 (``1995 Senate Report''); accord, 
id. at 13 (Congress sought to ensure that extensions of copyright 
protection in favor of the recording industry did not ``upset[] the 
long-standing business relationships among record producers and 
performers, music composers and publishers and broadcasters that have 
served all of these industries well for decades.'').
    \4\ Id. at 17.
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    Consistent with Congress's intent, the DPRA expressly exempted from 
sound recording performance right liability non-subscription, non-
interactive transmissions, including ``non-subscription broadcast 
transmission[s]''--transmissions made by FCC licensed radio 
broadcasters.\5\ Congress made clear that the purpose of this broadcast 
exemption was to preserve the historical, mutually beneficial 
relationship between record companies and radio stations:
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    \5\ 17 U.S.C. Sec. 114(d)(1)(A). All statutory citations are to the 
Copyright Act, Title 17 of the United States Code, unless otherwise 
noted.

        The Committee, in reviewing the record before it and the goals 
        of this legislation, recognizes that the sale of many sound 
        recordings and careers of many performers have benefited 
        considerably from airplay and other promotional activities 
        provided by both noncommercial and advertiser-supported, free 
        over-the-air broadcasting. The Committee also recognizes that 
        the radio industry has grown and prospered with the 
        availability and use of prerecorded music. This legislation 
        should do nothing to change or jeopardize the mutually 
        beneficial economic relationship between the recording and 
        traditional broadcasting industries.\6\
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    \6\ 1995 Senate Report, at 15.

    The Senate Report confirmed that ``[i]t is the Committee's intent 
to provide copyright holders of sound recordings with the ability to 
control the distribution of their product by digital transmissions, 
without hampering the arrival of new technologies, and without imposing 
new and unreasonable burdens on radio and television broadcasters, 
which often promote, and appear to pose no threat to, the distribution 
of sound recordings.'' \7\
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    \7\ Id.
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    In explaining its refusal to impose new burdens on FCC-licensed 
terrestrial radio broadcasters, Congress identified numerous features 
of radio programming that place such programming beyond the concerns 
that animated the creation of the limited public performance right in 
sound recordings. Specifically, radio programs (1) are available 
without subscription; (2) do not rely upon interactive delivery; (3) 
provide a mix of entertainment and non-entertainment programming and 
other public interest activities to local communities to fulfill FCC 
licensing conditions \8\; (4) promote, rather than replace, record 
sales; and (5) do not constitute ``multichannel offerings of various 
music formats.'' \9\ Each of these features--i.e., nonsubscription, 
non-interactive, mixed programming content and public interest content, 
promotion of record sales, and single-channel--also characterizes the 
web stream of a broadcast signal.
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    \8\ Radio broadcast stations are subject to numerous ``public 
interest'' requirements in order to obtain and maintain their FCC 
licenses--requirements that do not apply to Internet-only webcasters. 
See 47 U.S.C. Sec. Sec. 307, 309-10 (1998). These requirements apply to 
the content of licensed stations' broadcasts and to their operations 
and record-keeping procedures. See, e.g., 47 C.F.R. Sec. 73.3526(e)(12) 
(requiring a quarterly report listing the station's programs providing 
significant treatment of community issues); 47 U.S.C. Sec. 315(a) 
(requiring a station to offer equal opportunity to all candidates for a 
public office to present views, if station afforded an opportunity to 
one such candidate); 47 C.F.R. Sec. 73.1212 (requiring identification 
of program sponsors); id. Sec. 73.1216 (providing disclosure 
requirements for contests conducted by a station); id. Sec. 73.3526 
(requiring maintenance of a file available for public inspection); id. 
Sec. 1211 (regulating stations' broadcast of lottery information and 
advertisements).
    \9\ 1995 Senate Report, at 15.
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C. 1998
    Just three years after enactment of the DPRA, the record industry 
voiced dissatisfaction with the scope of the new performance right, 
contending that such right should encompass certain categories of 
nonsubscription music services. At the same time, the Digital Media 
Association (``DiMA''), a newly formed association of Internet-only 
``webcasters,'' approached Congress seeking clarification of the status 
of such webcasters with respect to sound recording performances on the 
Internet. DiMA and RIAA, neither of which represented the interests of 
FCC-licensed broadcasters, negotiated amendments to the DPRA, that were 
put into the House version of the Digital Millennium Copyright Act of 
1998 (``DMCA'') literally on the eve of passage, and that were enacted 
without any hearing or debate.\10\ For their part, broadcasters were 
assured by both parties and others that none of the DMCA would affect 
the exempt status they enjoyed under the DPRA.
---------------------------------------------------------------------------
    \10\ See, e.g., Jane C. Ginsburg, Copyright Legislation for the 
``Digital Millennium,'' 137 Colum.-VLA J.L. & Arts 137, 166-68 (1999) 
(noting that the Section 114 amendments regarding digital performance 
right in sound recordings were a ``last minute'' addition to the DMCA 
resulting from ``negotiations between copyright owners and digital 
transmission services''); Bob Kohn, A Primer on the Law of Webcasting 
and Digital Music Delivery, 20 Ent. L. Rep. 4 (Sept. 1998) (describing 
the version of the amendments to Section 114(d) passed by the House, as 
being ``negotiated'' and ``drafted'' by DiMA and RIAA, at the 
suggestion of the Register of Copyrights, ``days, and perhaps hours'' 
prior to passage).
---------------------------------------------------------------------------
    The RIAA/DiMA deal removed certain exemptions that had previously 
been available under the DPRA, including the exemption for ``a 
[digital] nonsubscription transmission other than a retransmission'' 
and expanded the types of transmissions that would be eligible for a 
statutory license to include at least some of the previously exempt 
nonsubscription, non-interactive transmissions.\11\
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    \11\ See, e.g., 17 U.S.C. Sec. 114(d)(2) (1998).
---------------------------------------------------------------------------
    The relevant DMCA amendments were inspired by and directed to ``a 
remarkable proliferation of music services offering digital 
transmissions of sound recordings to the public,'' primarily via the 
Internet.\12\ ``In particular,'' the House Manager reported, ``services 
commonly known as `webcasters' have begun offering the public multiple 
highly-themed genre channels of sound recordings on a nonsubscription 
basis.'' \13\ As used in the legislative history, the term 
``webcaster'' referred, not to radio stations streaming their AM/FM 
over-the-air broadcast programming, but to ``services'' originating on 
the Internet \14\ and offering ``a diverse range of programming,'' 
often ``customized'' to an individual user's preferences.\15\
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    \12\ Staff of House Comm. on the Judiciary, 105th Cong., Section-
by-Section Analysis of H.R. 2281 as passed by the United States House 
of Representatives on August 4, 1998, at 50 (Comm. Print 1998) 
(hereinafter, ``1998 House Manager's Report'').
    \13\ Id.
    \14\ See e.g., id. at 51 (discussing low barrier to entry for 
Internet-based webcast services, which ``can be started by an 
individual with one computer in his or her home'').
    \15\ See id. at 50 (``Many webcasters also offer certain types of 
programming, such as archived and continuous programming, that permit 
listeners to hear the same recordings repeatedly and anytime the 
listener chooses.''); id. (``Most significantly, the Internet enables a 
music service to interact with its listeners so that listeners have the 
ability to hear their favorite music whenever they wish, select certain 
sound recordings or programs, skip to the recordings of their choice, 
and to create personalized channels that are customized to their 
specific tastes.'').
---------------------------------------------------------------------------
    The DMCA, however, did nothing to disturb the DPRA's exemption for 
``nonsubscription broadcast transmissions'' or the definitions that 
accompanied the exemption. Indeed, AM/FM streaming is a conspicuously 
poor fit with the ``webcasting'' services described in the DMCA 
legislative history--and AM/FM streaming presents none of the 
``webcasting''-related concerns that motivated passage of the DMCA.
    Moreover, as I will discuss in greater detail below, the RIAA/DiMA 
deal that was enacted in the DMCA imposed new conditions on the 
statutory license for non-subscription services that were inconsistent 
with the way radio stations are traditionally programmed. Thus, DiMA 
and RIAA agreed to waive the conditions for third party webcasters that 
retransmitted a radio broadcast. However, the waivers did not apply to 
broadcasters transmitting their own programming. In other words, once 
the sound recording right was construed to apply to radio broadcasters, 
those broadcasters were placed at a significant disadvantage compared 
to third party retransmitters of radio broadcasts.
    Broadcasters believed, and still believe, that Congress intended 
radio broadcasters streaming their own programming to be exempt under 
the DMCA, and broadcasters vigorously, but unsuccessfully, pressed that 
position before the Copyright Office in a rulemaking \16\ and on appeal 
in federal court in Bonneville International Corp. v. Peters.\17\
---------------------------------------------------------------------------
    \16\ Copyright Office, Public Performance of Sound Recordings: 
Definition of a Service, Final Rule, 65 Fed.Reg. 77292 (Dec. 11, 2000).
    \17\ 347 F.3d 485 (3d Cir. 2003).
---------------------------------------------------------------------------
    Broadcasters still believe that the Bonneville decision was wrongly 
decided and that the last thing Congress intended was to pass a law 
that required record companies and radio stations to haggle over what 
can be played, how often, who should pay whom what, and the records 
broadcasters must keep of what they play. Yet that is precisely the 
deeply-flawed system we are today confronting. That system must be 
repaired, even starting from the premise that some portion of radio 
broadcast streaming should be subject to the sound recording 
performance right.

  II.  THE UNFULFILLED PROMISE OF SIMULCASTING RADIO OVER THE INTERNET

    In April, 2000 the radio industry believed that simulcast streaming 
was not subject to the sound recording performance right, and therefore 
was not subject to the fees and conditions imposed by the statutory 
license contained in Sections 112 and 114 of the Copyright Act. By 
industry estimates, there were more than 1,700 U.S. radio stations 
streaming their programming via the Internet.\18\ Nearly one hundred 
(100) radio stations were expected to begin broadcasting over the 
Internet each month.\19\
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    \18\ See BRS Media Inc., ``Web Radio Stats,'' www.brsradio.com/
iradio/ analysis.html (viewed April 16, 2000).
    \19\ See BRS Media Inc., ``BRS Media's Web-Radio Report[s] 
Strongest Growth Segment of Webcasting is Radio,'' www.brsmedia.fm/
press000410.html (viewed April 16, 2000).
---------------------------------------------------------------------------
    These bright expectations have not materialized. By the end of 
2002, well over 1,000 U.S. radio stations had stopped streaming their 
signal on the air due to copyright issues.\20\ The stations to come on 
line since that time are overwhelmingly news/talk/sports stations that 
are not hamstrung by the sound recording statutory license. In Texas, 
for example, only 130 of the more than 900 licensed radio stations 
simulcast their streams, and more than half of those are news, talk, or 
sports formats, according to radio-locator.com. In Wisconsin the 
numbers are even more disappointing. Only 41 of the approximately 337 
radio stations reportedly stream their signals. Only nine of those are 
music-intensive commercial stations; the rest are either public radio 
(which operates under a separate, confidential fee structure) or talk.
---------------------------------------------------------------------------
    \20\ See ``BRS Media's Web-Radio reports a steep decline in the 
number of stations webcasting,'' http://www.brsmedia.fm/
press020912.html (viewed June 8, 2004).
---------------------------------------------------------------------------
    The nation's largest radio group, Clear Channel, for example, owns 
more than 1,000 radio stations, but only 180 of them are simulcast 
streaming today, and most of those are news/talk stations rather than 
music stations. After the CARP sound recording fee rates were 
announced, Clear Channel shut down most of its streaming, and has only 
slowly brought back a few stations over the past few years, focusing on 
news or talk stations that do not run up large license fees. The only 
music stations Clear Channel currently streams are in its smaller 
markets, where listenership will not be so large that the license fees 
will eat up the station's entire marketing budget. Our colleagues at 
Emmis Communications have taken a similar approach. Emmis currently 
streams four out of its five (80%) of its news/talk stations, but only 
eighteen percent (4 out of 22) of its music stations. At Entercom, they 
have given up on streaming altogether for their 100 radio stations, 
halting all streaming almost two years ago, in the face of the 
substantial fee burdens and the additional requirements of the 
statutory license.
    Smaller group owned radio is faring even more poorly. Between the 
fees, the need to change business practices that I will discuss, and 
the threatened reporting burden, very, very few smaller group owned 
music stations are streaming.
    At Susquehanna, we are still trying to make a go of it, streaming 
the programming of every station we operate. We were one of the very 
first broadcasters to simulcast our over the air broadcasts. Way back 
in 1995--a lifetime ago, in Internet time--our Dallas news/talk station 
became one of the first radio stations streamed by a little unknown 
outfit called AudioNet, which became Broadcast.com, and ultimately 
Yahoo!Broadcast.
    Despite our long involvement with simulcast streaming and our 
successful broadcast business, we have still not found a viable 
business model for simulcast streaming. Susquehanna has never made a 
dime on streaming; in fact our stations consistently lose money on 
streaming. The sound recording performance fees are simply too high--
right now, license fees are by far the single largest expense of our 
streaming budget, and the vast majority of those license fees are for 
the sound recording right. In fact, we are today paying between 5 and 6 
times more for the sound recording rights than we pay to the musical 
works copyright owners for the right to make the same Internet 
performances of all of the musical works embodied in the sound 
recordings. Moreover, the musical works licenses are broader and do not 
contain the limitations and conditions included in the sound recording 
statutory license.
    We, like most broadcasters, stream in order to provide our local 
listeners with an alternative means of hearing our station. There are 
places radio waves do not easily reach, particularly inside of 
buildings. Studies consistently show that about as many people listen 
to the handful of stations within their local listening area, as those 
who listen to all other stations (U.S. and worldwide) combined.\21\
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    \21\ See, e.g., Internet 9: The Media and Entertainment World of 
Online Consumers, Special Radio Industry Edition, available at http://
www.arbitron.com/downloads/I9NAB.pdf (viewed June 8, 2004).
---------------------------------------------------------------------------
    Streaming is a very small, ancillary part of any broadcaster's 
business. Audiences for simulcasts are universally a small fraction of 
a station's over-the-air audience.
    In addition, the content of a broadcast simulcast is driven by 
local and over-the-air needs, not by considerations relevant to the 
development of a viable Internet business.\22\ Programming is selected 
to compete in the local, over-the-air market, not an Internet market 
characterized by webcasters with tens, or hundreds, of genre-specific 
channels. A single radio station on the Internet simply cannot, and 
does not, try to compete with the likes of AOL's Radio@Network, 
Yahoo!'s LAUNCHcast, Live365, or Virgin Radio. The audience, and the 
business model, are dramatically different.
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    \22\ Thus, whether disseminated solely over the air or 
simultaneously streamed over the Internet, local radio broadcast 
programming serves the needs and interests of the local community in 
which the broadcaster has been licensed by the FCC. The programming 
includes, for example, (1) locally produced public service 
announcements to benefit the local community (Digital Performance Right 
in Sound Recordings Act of 1995: Hearings on H.R. 1506 Before the House 
Comm. on the Judiciary, 95th Cong. 1, at 118 (1995) (hereinafter ``1995 
House Hearings'') (Executive Summary of Broadcasting Features--
independent study submitted by NAB)); (2) local news, sports and 
weather; and (3) station announcements encouraging community members to 
vote in upcoming elections. Id.
---------------------------------------------------------------------------
    Even when streamed over the Internet, local radio broadcast 
transmissions serve the needs and interests of the local community in 
which the broadcaster has been licensed by the FCC. The programming 
includes, inter alia, (1) locally produced public service announcements 
to benefit the local community \23\; (2) local news, sports and 
weather; and (3) station announcements encouraging community members to 
vote in upcoming elections.\24\
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    \23\ 1995 House Hearings, at 118 (Executive Summary of Broadcasting 
Features--independent study submitted by NAB).
    \24\ Id.
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    Broadcasters are proud of their record of local service. Attachment 
A to this Statement gives just a few examples of outstanding local 
service, several of which were honored by NAB on June 14th. They 
include work to combat domestic abuse, extraordinary efforts during 
Hurricane Isabel, and work with students in remote parts of Alaska. The 
Attachment also describes local broadcasters' work with the Amber Alert 
system that works to recover abducted children. To date, local 
broadcasters have helped recover 134 abducted children. Just this past 
May, residents of Hallam, Nebraska credited radio stations KSLI, KTGL, 
KZKX, KIBZ, and KLMY with saving their lives by joining a local 
television station in providing several hours of uninterrupted coverage 
of severe tornados and storms that devastated the town. Residents were 
able to evacuate to safe areas because of the extensive coverage of the 
storms provided by broadcasters.

           III. SPECIFIC CHANGES IN THE LAW THAT ARE NEEDED 
                     TO FOSTER SIMULCAST STREAMING

    The root cause of the problems with simulcast streaming today is 
easy to explain. The rules were developed by the record companies and 
Internet-only webcasters to meet programming and business models that 
differs dramatically from those of radio. A single set of sound 
recording fees have been set for radio simulcasts and for multi-channel 
Internet-only webcasters on the basis of a false premise that the two 
compete in the same market. In fact, radio simulcasting has unique 
needs that must be accommodated in the law, if the public is to have 
access to this service.
    The radio industry's concerns relate to four distinct sets of 
issues--(i) the sound recording performance fee for Internet streaming, 
including the amount of the fee, the fact that it is imposed on 
broadcasters for listeners who are within the broadcaster's local 
service area, and the standard by which that fee is determined, (ii) 
the conditions under which the necessary statutory licenses are 
available, (iii) the law governing the making of copies used solely to 
facilitate lawful performances, and (iv) the threat of impossible and 
unnecessary reporting and record keeping requirements.

A.  Simulcast Streaming to Listeners within a Station's Local Service 
        Area Should Be Exempt.
    Congress should make clear that Internet streaming of a radio 
broadcast to members of a radio station's local over-the-air audience, 
is not subject to the sound recording performance right, just as the 
over-the-air performance is not. Internet transmissions to those local 
audiences are indistinguishable from over-the-air performances. As 
discussed above, they are provided as a service to the public that is 
ancillary to the over-the-air transmission, to facilitate access. 
Transmissions to these local audiences provide the same public service 
benefits to the community as over the air transmissions.
    Further, Internet transmissions to a radio station's local audience 
provide the same promotional benefits to the record companies as the 
station's over-the-air broadcasts. As the arbitration Panel concluded, 
``[t]o the extent that internet simulcasting of over-the-air broadcasts 
reaches the same local audience with the same songs and the same DJ 
support, there is no record basis to conclude that the promotional 
impact is any less.'' \25\ RIAA's own CARP witness agreed that ``[p]er 
capita per listener minute, the promotional benefit to Sony of someone 
listening to a radio signal over-the-air and someone in the same 
geographical area listening to the same signal over their computer is 
going to be very similar.'' \26\
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    \25\ Final Report of the Copyright Arbitration Royalty Panel in 
Docket No. 2000-9 CARP DTRA 1 & 2 (February 20, 2002) (hereinafter 
``Panel Report'') at 75.
    \26\ Transcript of CARP Proceedings at 12861-62 (McDermott).
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    The Copyright Act recognizes that transmissions within a radio 
station's local service area are special, and specifically exempts from 
the sound recording performance right retransmissions of radio 
broadcasts that remain within a 150-mile radius of the transmitter.\27\ 
This exemption is not available if the broadcast is ``willfully or 
repeatedly retransmitted more than a radius of 150 miles.'' \28\ The 
Copyright Office has held that this exemption does not apply to 
Internet retransmissions, as Internet transmissions are not so limited.
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    \27\ Sec. 114(d)(1)(B).
    \28\ Sec. 114(d)(1)(B)(i).
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    Of course, in 1995, when this exemption was enacted, Congress was 
not focused on the fact that Internet retransmissions could not be 
limited to 150 miles. There is no reason to limit this exemption to 
retransmission services that prevent retransmissions beyond the 
station's local service area. Transmissions beyond 150 miles can be 
subject to the right and charged a fee. Transmissions to local 
listeners should not be, regardless of the fact that other listeners 
may be outside the local service area.

B.  The Sound Recording Performance Fee, and the Standard By Which it 
        Is Set, Should Be Reformed.
    The DMCA negotiations also produced a profound change in the 
standard by which the sound recording performance fee is set. In 1995, 
after a fully inclusive process, Congress determined that the fee 
should be based on a consideration of four policy factors that 
previously governed rate setting set forth in section 801(b) of the 
Copyright Act. These factors include affording the copyright owner a 
fair return and the user a fair income, recognizing the contribution of 
both the copyright owner and the service, including the contribution in 
opening new media for communication, and minimizing the disruptive 
impact on the structure of the industries involved and on generally 
prevailing industry practices.
    The DMCA negotiations gave rise to a new standard--``the rates and 
terms that would have been negotiated in the marketplace between a 
willing buyer and a willing seller,'' \29\ a standard that has given 
rise to a presumption in favor of agreements negotiated by the cartel 
of record companies, acting under the antitrust exemption contained in 
the Copyright Act.\30\ The standard, and the RIAA's use of that 
standard, led to an unreasonably high fee in the CARP that set sound 
recording fees.
---------------------------------------------------------------------------
    \29\ Sec. 114(f)(2)(B).
    \30\ Sec. 114(e)(1).
---------------------------------------------------------------------------
            1.  The ``Willing Buyer/Willing Seller'' Standard Is a 
                    Recipe for Abuse.
    In the 1998-2002 proceeding, RIAA relied on 26 agreements its 
``Negotiating Committee'' had reached with webcasters that had specific 
needs and a willingness to pay a fee far above the fee that would 
prevail in a competitive free market. As the arbitration panel found:

        [b]efore negotiating its first agreement, RIAA developed a 
        strategy to negotiate deals for the purpose of establishing a 
        high benchmark for later use as precedent, in the event a CARP 
        proceeding were necessary. The RIAA Negotiating Committee 
        reached a determination as to what it viewed as the ``sweet 
        spot'' for the Section 114(f)(2) royalty. It then proceeded to 
        close only those deals (with the exception of Yahoo!) that 
        would be in substantial conformity with that ``sweet spot.'' 
        \31\
---------------------------------------------------------------------------
    \31\ Panel Report at 48.
---------------------------------------------------------------------------
The ``sweet spot'' was not based on any calculation of a reasonable 
rate of return or any economic study, but ``simply reflected on the 
Negotiating Committee's instinct of what price the marketplace would 
bear.'' Report 48 n. 28. The Panel found a ``consistent RIAA strategy'' 
to develop evidence to present to the CARP.\32\
---------------------------------------------------------------------------
    \32\ Id. at 49. The Panel found that RIAA's denials ``lack[ed] 
credibility'' in light of extensive record evidence. Id. 49-51.
---------------------------------------------------------------------------
    The RIAA Committee adopted a ``take-it-or-leave-it'' approach, 
entering into agreements with services willing to agree to its terms 
for numerous reasons that did not reflect the value of the sound 
recording performance right.\33\ In fact, not a single radio 
broadcaster was willing to pay the fees sought by RIAA. For this, and a 
host of other reasons--including the fact that many of RIAA's licensees 
never paid any fees under their agreements, or never commenced 
operations--the Panel concluded that 25 of the agreements ``do not 
establish a reliable benchmark.'' \34\ The Librarian confirmed the 
Panel's rejection of these agreements.
---------------------------------------------------------------------------
    \33\ Id. at 51.
    \34\ Id. at 51-60.
---------------------------------------------------------------------------
    Nevertheless, the Panel ultimately relied entirely on the twenty-
sixth agreement--the agreement between the RIAA Negotiating Committee 
and Yahoo!--despite the fact that this agreement resulted from the same 
common plan by the Committee to create CARP evidence. Further, despite 
the fact that the Yahoo agreement defined the fee for simulcast 
streaming at .05 cent per listener per song after an initial bulk 
payment, the Panel increased the fee to .07 cent.
    Incredibly, the Panel had before it Yahoo's own testimony that it 
made the deal not because it believed the sound recording fee was 
competitive, but because it wanted to avoid the cost of participating 
in the CARP, estimated to exceed $2,000,000. Not by coincidence, this 
amount was approximately the total amount Yahoo paid under its 
agreement. In short, the deal did not reflect the value of the sound 
recording performance right; it reflected the cost of avoiding 
participation in the CARP litigation.
    Yahoo also testified that it could not pass along to broadcasters 
even the .05-cent per performance fee set forth in its agreement for 
radio retransmissions. Yahoo's representative told the panel:

        [W]e've not passed any of these fees along to the radio 
        stations because we have every interest in keeping those 
        stations signed up with us. So we've made the business decision 
        that it made more sense for us to actually stomach these fees 
        than to try to pass them on to our radio station partners 
        because we're afraid that if we tried to do that, they would 
        terminate their agreements with us.\35\
---------------------------------------------------------------------------
    \35\ Transcript of CARP Proceedings at 11,429 (Mandelbrot).

        Upon further questioning, Yahoo's representative confirmed that 
        ``Yahoo!'s judgment is that if it passed along to the radio 
        stations the radio station retransmission rate that it has 
        negotiated, a lot of those stations would just pull the plug.'' 
        \36\
---------------------------------------------------------------------------
    \36\ Id. at 11,430.

    Moreover, Yahoo terminated the deal at the end of 2001, before the 
Panel issued its report recommending a fee. Then, within one week after 
the Librarian announced his decision affirming the Panel's proposed 
fee, Yahoo announced that it was shutting down its radio retransmission 
business.
    Later, after the Librarian's decision was rendered, other evidence 
emerged, further confirming just how unreliable the Yahoo deal was as 
an indicator of a competitive fair market fee. Mark Cuban, the founder 
and President of Broadcast.com, the company that became Yahoo's 
broadcast retransmission business, wrote in June 2002 to the industry 
newsletter ``Radio and Internet News'' to say that ``the deal with RIAA 
was designed with rates that would drive others out of the business so 
there would be less competition.'' \37\
---------------------------------------------------------------------------
    \37\ See Attachment B, hereto.
---------------------------------------------------------------------------
    Why did the arbitration panel rely on this agreement under these 
circumstances? Simply put, the Panel concluded that an effort ``to 
derive rates which would have been negotiated in the hypothetical 
willing buyer/willing seller marketplace is best based on a review of 
actual marketplace agreements.'' \38\ In short, the Panel essentially 
created a presumption in favor of the RIAA agreements, despite the 
overwhelming evidence that those agreements did not represent the 
relevant, hypothetical, competitive free market.
---------------------------------------------------------------------------
    \38\ Panel Report, 43.
---------------------------------------------------------------------------
    The radio industry, of course, believes this decision was grossly 
incorrect, and we are continuing to prosecute an appeal in the D.C. 
Circuit. Unfortunately, that appeal won't be heard until October, and 
no decision is likely for months thereafter. In the meantime, the 
Librarian's decision hangs around our neck like the Ancient Mariner's 
albatross.\39\ Further, the D.C. Circuit has, in the past, applied a 
very deferential standard of review to the Librarian's decision, so 
while our cause is just, there is a significant risk that the courts 
simply will not act to rectify this dysfunctional situation.
---------------------------------------------------------------------------
    \39\ Indeed, in the face of this precedent, the crushing cost of a 
second CARP proceeding after the first had cost millions of dollars, 
and the lack of revenue to justify a second CARP proceeding, several 
large broadcast groups including Susquehanna agreed to a continuation 
of the existing fee through 2004, pending the outcome of the appeal of 
the first proceeding, legislative action on HR 1417, and our hope that 
Congress would act to reform the fee standard and provide the 
legislative relief sought here. This agreement should in no way be 
viewed as acceptance of the reasonableness or validity of that fee.
---------------------------------------------------------------------------
            2.  The Radio Industry Needs Prompt Relief from the Fee Set 
                    in 2001.
    Based on the Yahoo Agreement, Librarian decreed that broadcasters 
engaged in simulcast streaming should be required to pay .07 cents per 
listener per song, plus an additional 8.8% for the right to make server 
copies to facilitate the performances, which I will discuss below. The 
total fee is .07616 cent for each song played to each listener. While 
this may not sound like a lot at this most granular level, the evidence 
presented to the Panel showed that it was more than three times what 
radio stations pay ASCAP, BMI and SESAC combined, for the right to 
perform musical works over the air.
    Further, the fee adds up quickly if a station has any Internet 
audience at all. Considering that a typical music station plays about 
11.5 songs per hour, on average, a station that made performances to an 
average of just 500 listeners at a time would pay more than $38,000 per 
year in sound recording licensing fees. Susquehanna's KPLX, known and 
loved by Dallas radio listeners as Texas Country, 99.5 The Wolf, will 
pay almost $50,000 in fees in 2004, if listenership follows the trend 
set in the first quarter of this year. And that reflects a growth in 
Internet listenership of about 55 percent since 2001, which is still a 
small fraction of our over-the-air audience. If The Wolf's Internet 
listenership were to ever approach its over-the-air audience, the bill 
could eventually become a staggering $15 million a year in sound 
recording royalties alone. And that is just one of our stations.
    Compare this to what the entire radio industry pays for the right 
to stream radio broadcasts over the Internet to the composers, 
lyricists and publishers who combine to create the music that forms the 
core of a recorded song. For example, under a negotiated agreement with 
BMI, which controls about half of the music played on radio, the radio 
industry as a whole pays a flat fee averaging $500,000 per year for the 
unlimited right for each and every radio station to stream its 
broadcast to as many listeners as possible, with no conditions on the 
content of those performances.
    There is absolutely no justification for a system that requires 
radio stations to make payments to record companies that so 
dramatically exceed the freely negotiated amount paid to musical work 
copyright owners. We are aware of no other country in the world where 
this situation exists. The situation is doubly absurd, because record 
companies and artists receive far more benefit from record sales that 
are stimulated by radio airplay than do the musical work copyright 
owners.
    The sound recording performance fees are simply exorbitant. 
Congress should take action, just as it did when it passed the 
Satellite Home Viewer Improvement Act of 1999 in part to vacate the 
decision of a CARP and reduce by one third to almost one half, the 
royalty fees to be paid by satellite television services.\40\ This 
relief could take several forms, including cutting the fee to no more 
than what the radio industry pays to all musical work copyright owners 
for the right to stream their broadcasts over the Internet.
---------------------------------------------------------------------------
    \40\ Pub. Law 106-113, 113 Stat. 1501, Sec. 1004, codified at 17 
U.S.C. Sec. 119(c)(4).
---------------------------------------------------------------------------
C.  The Statutory Performance License Conditions Must Be Reformed To 
        Accommodate Longstanding Industry Practice.
    The statutory performance license applicable to Internet streaming 
contains several conditions that are incompatible with the traditional 
way radio stations are programmed and administered. These conditions 
impose untenable choices on radio broadcasters:

          Change their programming and business practices (an 
        absurd concept given the success of these practices, the 
        relatively miniscule audience that even successful stations 
        obtain over the Internet compared to over the air, and 
        Congress's clearly stated desire not to change radio 
        broadcasting practices);

          Obtain direct licenses from each and every record 
        company whose music they play (an even more absurd concept, 
        considering the impracticability and Congress' longstanding 
        desire to keep record companies and radio broadcasters from 
        direct dealings over what gets played on the radio);

          Stop streaming (an idea wholly inconsistent with 
        Congress' goal of getting more music to consumers over the 
        Internet and contrary to the interest of the listening public, 
        which wants the convenience of hearing their favorite station 
        when they might not have access to a radio); or

          Face the prospect of having to defend uncertain and 
        hugely costly copyright infringement litigation if any claims 
        are made that the statutory license is not available.

    The statutory sound recording performance license for streaming 
contains nine eligibility conditions. Three of these conditions, 
negotiated behind closed doors by the RIAA and DiMA on the eve of House 
passage of the DMCA, are so inconsistent with longstanding broadcasting 
practices that the parties recognized that they could not be complied 
with. Thus, while the statute exempts third-party broadcasters that 
retransmit radio broadcasts from these conditions, it requires 
broadcasters who want to stream their own programming to comply with 
them.\41\ The situation is unfair, unstable, not in the public 
interest, and must be changed.
---------------------------------------------------------------------------
    \41\ See, e.g.,Sec. 114(d)(2)(C)(i), (ii) and (ix).
---------------------------------------------------------------------------
    The specific conditions that cause problems for broadcasters are:

          Condition (i), which prohibits the play of sound 
        recordings that exceed the so-called ``sound recording 
        performance complement'' during any 3-hour period, of 3 
        selections from any one album (no more than 2 consecutively), 4 
        selections by any one artist (no more than 3 consecutively), or 
        4 selections from a boxed set of albums (no more than 3 
        consecutively); \42\
---------------------------------------------------------------------------
    \42\ Sec. 114(d)(2)(C)(i).

          Condition (ii), which calls into question the ability 
        of a disc jockey to announce the songs that will be played in 
        advance; \43\ and
---------------------------------------------------------------------------
    \43\ Sec. 114(d)(2)(C)(ii).

          Condition (ix), which requires the transmitting 
        entity to use a player that displays in textual data the name 
        of the sound recording, the featured artist and the name of the 
        source phonorecords as it is being performed.\44\
---------------------------------------------------------------------------
    \44\ Sec. 114(d)(2)(C)(ix).
---------------------------------------------------------------------------
            1.  The Sound Recording Performance Complement Is 
                    Discriminatory and Inconsistent with Broadcasting 
                    Practice.
    Radio stations often play blocks of recordings by the same artist 
or play entire album sides. These features, such as Breakfast with the 
Beatles, or Seven Sides at Seven, are popular among listeners and 
remind audiences of great music that is available to buy. Tribute shows 
(or entire tribute days) are also common on the death of an artist, an 
artist's birthday, or the anniversary of a major event in music. Thus, 
many radio stations played numerous George Harrison songs throughout 
the day after he died. Radio stations similarly played many Beatles 
songs on the fortieth anniversary of their first arrival in New York. 
All of these practices would violate the statutory license if the 
station were streaming.
    Even if a station wanted to change its practices to comply with the 
complement, it would be virtually impossible to do so without the 
assistance of a computerized music automation system to establish 
playlists that comply with the complement. Many smaller stations do not 
use such systems.
    Again, third-party webcasters retransmitting radio broadcasts are 
protected: this requirement does ``not apply in the case of a 
retransmission of a broadcast transmission if the retransmission is 
made by an entity that does not have right or ability to control the 
programming of the broadcast station.'' \45\
---------------------------------------------------------------------------
    \45\ Sec. 114(d)(2)(C)(i).
---------------------------------------------------------------------------
            2.  The Prohibition on Pre-Announcements Is Discriminatory 
                    and Inconsistent with Broadcasting Practice.
    Condition (ii) prohibits ``prior announcement'' of ``the specific 
sound recordings to be transmitted'' or, even, ``the names of featured 
performing artists'' other than ``for illustrative purposes.'' This may 
well mean that every time one of our DJs says ``Next up, the latest hit 
by Beyonce,'' or even, ``in the next half hour, more Led Zeppelin,'' 
the DJ is violating the license and putting our station at risk for 
being sued for copyright infringement.
    These, and the naming of songs to be played in the near future, are 
all common broadcasting practices. Ironically, in all of the many years 
I have been working in radio, record companies have always encouraged 
radio stations to make such announcements, as they help keep the 
listener tuned in and waiting to hear the latest and greatest song. To 
make saying as much the trigger for copyright infringement is just 
ridiculous, but that is the way the law is written today.
    Of course, the DiMA-RIAA negotiations on the DMCA took care of non-
broadcaster webcasters. Like the other statutory license conditions 
that don't match reality, third party retransmitters received a broad 
exemption from this requirement.
            3.  The Obligation To Provide the Internet Player with a 
                    Simultaneous Display of Title, Artist and Album 
                    Information Is Discriminatory and Beyond the 
                    Capabilities of Radio Stations.
    Condition (ix) requires broadcasters to transmit a visual statement 
of the title, artist, and album of the current song playing. This 
requirement simply does not recognize the realities of the radio 
business, which has developed over the years to meet the needs of its 
over-the-air business model. For example, the condition requires a 
transmitting entity to have a digital automation system to control its 
broadcasts and to have title, artist and phonorecord information loaded 
into that system. Many stations do use such a system. But many smaller 
radio stations, and some of the largest, still run their broadcasts the 
old-fashioned way--production staff place a CD manually into the 
player, hit the play button, and turn dials to fade out one song and 
start the next.
    Further, the great majority of recordings played by radio stations 
are received directly from the record companies, in the form of advance 
promotional singles and albums, or from third party services. Although 
these discs often include a phonorecord title, many do not. Moreover, 
radio stations often do not load that title into their music 
information databases, because it is not relevant to their primary 
over-the-air activity. Even many of those that do capture this 
information haven't been able to figure out the technology to make the 
information appear on the player of the recipient. These stations 
should not be disqualified from Internet streaming.
    Once again, of course, DiMA and RIAA agreed that the statute should 
exempt third party retransmitters of broadcast signals.

                                 ______
                                 
    It makes no sense, and serves no one's interests, to require radio 
stations to alter their programming practices, which have served both 
them and the record industry well for decades. Nor is it fair or 
practical to require broadcasters to incur substantial costs to change 
the way they do business in order to stream their broadcasts over the 
Internet. This would be worse than the tail wagging the dog, as 
Internet streaming today isn't even a hair on the tail, compared to 
radio's core business.
    There has never been a showing that these three conditions offer 
any benefit to anyone. They should be eliminated.

D.  Congress Should Provide an Exemption for Reproductions of Sound 
        Recordings and Underlying Works Used Solely To Facilitate 
        Licensed or Exempt Performances, and Should Ensure That the 
        Conditions Applicable to Those Exemptions Are Consistent with 
        Modern Technology.
    Section 112 of the Copyright Act provides the right to make certain 
royalty-free temporary copies of musical works and sound recordings 
from which transmissions are made and that have no purpose other than 
to facilitate licensed or exempt public performances. These provisions 
need to be expanded and adapted to accommodate modern realities.
    The ephemeral recording exemption of Section 112(a) of the 
Copyright Act allows an entity entitled to make a public performance of 
a work to make one copy of the material it is performing in order to 
facilitate the transmission of that performance, subject to certain 
restrictions. This exemption is based in large measure on the premise 
that if a transmitting entity had paid for the right to perform the 
work, it would be unreasonable (and a form of double dipping) to make 
the entity pay a second time for the right to make a copy that had no 
other role than facilitating that performance.\46\ The exemption was 
created during the 1976 revision of the Copyright Act and was crafted 
to reflect the technology of the time, namely, the use of program tapes 
by radio and television stations to facilitate their performances.\47\
---------------------------------------------------------------------------
    \46\ Likewise, if public policy interests decreed that the 
performance should be exempt, there was no rationale for charging a fee 
to make a copy used solely to facilitate the exempt performance.
    \47\ See H.R. Rep. No. 94-1476, at 101 (1976) (noting that ``the 
need for a limited exemption [for ephemeral recordings] because of the 
practical exigencies of broadcasting has been generally recognized.'').
---------------------------------------------------------------------------
    Of course, program tapes are no longer the staple of broadcasters. 
Now, radio stations typically use digital compact discs and digital 
music servers to make their performances. However, stations still have 
the practical need to make recordings in order to make licensed 
performances. In fact, broadcasters may need to create multiple copies 
in order to engage in Internet streaming, and the transmission 
technology itself may cause additional copies to be made.
    The DMCA recognized this practical reality when it created the 
statutory license in Section 112(e) for multiple ephemeral recordings 
of sound recordings performed under the new sound recording performance 
license. However, by creating a statutory license instead of expanding 
the Section 112(a) exemption, the law created an artificial opportunity 
for record companies to double dip and earn added fees based on the 
technology used by the transmitting entity rather than on the economic 
value of the sound recording.
    The Copyright Office opposed this statutory license in 1998 and has 
recently restated its opposition and its belief that an exemption 
should be enacted. In the report ordered under Section 104 of the DMCA, 
the Copyright Office commented that the Section 112(e) ephemeral 
recording license ``can best be viewed as an aberration.'' \48\ The 
Office went on to say that it did not ``see any justification for the 
imposition of a royalty obligation under a statutory license to make 
copies that have no independent economic value and are made solely to 
enable another use that is permitted under a separate compulsory 
license. . . . Our views have not changed in the interim, and we would 
favor repeal of section 112(e) and the adoption of an appropriately-
crafted ephemeral recording exemption.'' Id.
---------------------------------------------------------------------------
    \48\ See U.S. Copyright Office, DMCA Section 104 Report at 144 
n.434 (Aug. 2001).
---------------------------------------------------------------------------
    Further, the DMCA left a significant gap in the law that has 
created further risk and uncertainty for all transmitting 
organizations, even those paying the double-dip ephemeral recording 
royalty to the record companies. The Section 112(e) statutory license 
applies to the sound recording, but does not apply to the musical or 
other works embodied in those sound recordings. It makes no sense to 
differentiate between the sound recording and the underlying work that 
is the subject of the recording. Such copies should be exempt for the 
same reason that multiple ephemeral recordings of sound recordings made 
solely to facilitate a licensed performance should be exempt.\49\
---------------------------------------------------------------------------
    \49\ Further, there is no known licensing mechanism available to 
license the ephemeral recording of all works embodied in performed 
sound recordings.
---------------------------------------------------------------------------
    Moreover, three conditions applicable to the existing ephemeral 
recording exemption (two of which also apply to the Section 112(e) 
statutory license) discriminate against broadcasters and ignore the 
realities of today's technology. First, the exemption in Section 112(a) 
applies only to copies made to facilitate performances made in the 
transmitting organization's ``local service area.'' The legislative 
history of the DMCA made clear that, where the Internet was involved, 
the ``local service area'' was congruent with the reach of the 
Internet.\50\ However, in its December 11, 2000 rulemaking holding 
radio subject to the sound recording performance right, the Copyright 
Office attempted to support its conclusion by taking the position that 
broadcasters, but not Internet-only webcasters, were subject to a 
narrower ``local service area'' (their primary broadcasting area) and 
that the Section 112(a) exemption was not available when broadcasters 
streamed their programs on the Internet.\51\ Unfortunately, in making 
these comments, the Copyright Office was focused on sound recordings, 
which are subject to the Section 112(e) statutory license; it failed to 
consider the impact of its position with respect to musical works, 
which are not covered by Section 112(e). If the Office's dictum is 
correct, radio stations that stream their broadcasts would face 
significant uncertainty and risk with respect to ephemeral recordings 
of the musical works they broadcast. Congress could not have intended 
this result. Any ephemeral recording exemption should extend beyond 
transmissions within a ``local service area.''
---------------------------------------------------------------------------
    \50\ See Digital Millennium Copyright Act, H.R. Conf. Rep. No. 105-
796, at 80 (Oct. 8, 1998) (clarifying that Section 114(f)-licensed 
``webcasters,'' whose local service area is the Internet, ``are 
entitled to the benefits of section 112(a)'').
    \51\ See 65 Fed. Reg. at 77,300.
---------------------------------------------------------------------------
    Second, the exemption provides that ``no further copies or 
phonorecords'' may be made from the exempt or licensed ephemeral 
recording. While that limitation worked for program tapes, it does not 
work with today's transmission technologies. The Internet operates by 
making intermediate copies. Cache and other intermediate copies are 
essential to any transmission.\52\ Digital receivers also typically 
make partial buffer copies of the works being performed. The ``no 
further copies'' condition should be amended so that it does not apply 
to copies or phonorecords made solely to facilitate the transmission of 
a performance.\53\
---------------------------------------------------------------------------
    \52\ See H.R. Rep. No. 105-551, Part 2, at 50-51 (July 22, 1998).
    \53\ For the same reason, the law should deal clearly with those 
cache and buffer copies, which may or may not qualify within the scope 
of the existing Section 112(e) license. The Copyright Office, in its 
Section 104 Report, supports this recommendation; after extensive study 
of the issue, the Copyright Office recommended ``that Congress enact 
legislation amending the Copyright Act to preclude any liability 
arising from the assertion of a copyright owner's reproduction right 
with respect to temporary buffer copies that are incidental to a 
licensed digital transmission of a public performance of a sound 
recording and any underlying musical work.'' See DMCA Section 104 
Report at 142-43.
---------------------------------------------------------------------------
    Third, broadcasters more and more are using digital music servers 
to make licensed performances. Music from compact discs may now be 
loaded onto computers, from which the performances are transmitted. 
These server copies have no use other than to facilitate the 
performance. It serves no purpose, and creates a dead-weight economic 
loss, to require transmitting organizations to purge these servers 
every six months.
    The ephemeral recording exemption is designed to ensure that 
transmitting entities that are providing performances to the public can 
operate efficiently and without uncertainty and risk. These 
performances are already fully compensated or have been deemed exempt 
from copyright liability. There should be no further payment needed to 
make copies used only to facilitate the permitted performance.

E.  Congress Should Ensure that Reporting Requirements Do Not Preclude 
        Broadcasters from Engaging in Simulcast Streaming.
    The Copyright Act directs the Copyright Office to ``establish 
requirements by which copyright owners may receive reasonable notice of 
the use of their sound recordings'' under the statutory license and 
``under which records of use shall be kept.'' \54\ The Copyright Office 
has construed these provisions to require each and every service 
performing sound recordings to provide identification of numerous data 
points for each sound recording performed in order to facilitate 
distribution of royalty fees, regardless of whether a service receives 
such data in the first instance (e.g., from the record company 
providing the sound recording for play, or from a third party 
syndicators that creates the program) and regardless of whether the 
service maintains such data in the ordinary course of its business.\55\ 
The Office has, on an interim basis, required these reports for two 
weeks each calendar quarter. However, the Office has stated that ``it 
is highly likely that additional requirements will be set forth after 
the Office has determined the effectiveness of these interim rules'' 
and that its ``ultimate goal is to require comprehensive reporting on 
each performance a webcaster makes.'' \56\
---------------------------------------------------------------------------
    \54\ Sec. 114(f)(4)(A).
    \55\ See 69 Fed. Reg. 11,515, 11,521 (March 11, 2004).
    \56\ Id. at 11,518, 11,522.
---------------------------------------------------------------------------
    To the Copyright Office's credit, the interim regulation is far 
more manageable than its original proposed rule.\57\ That proposed rule 
was based on the recording industry's wish-list of census reporting of 
a multitude of data points for each and every performance, and would 
have eliminated virtually all broadcasters from the Internet. The 
industry is assessing the interim regulation, and I am confident that 
those who are streaming are doing their best to comply.
---------------------------------------------------------------------------
    \57\ 67 Fed. Reg. 5761 (Feb. 7, 2002).
---------------------------------------------------------------------------
    Unfortunately, the interim regulation is still inconsistent with 
the way many broadcasters--particularly smaller stations--do business. 
Thus, it all but assures that such stations will be kept from streaming 
their programming on the Internet. Moreover, the threat of added 
burdens in the future weighs heavily on the decision to stream or not.
    It is important to keep in mind that broadcasters have developed 
their internal systems to run their primary over-the-air business, not 
an ancillary Internet service that generates very few listeners. Most 
of the sound recordings played by radio stations are provided to those 
stations by the record companies themselves. Typically, these sound 
recordings are provided on special promotional disks, not the retail 
album sold to consumers. The precise nature of these promotional 
recordings varies. In some cases, they are in slickly produced special 
promotional singles. At other times, the recordings are on ``homemade'' 
CD-Recordables, or ``CD-Rs,'' not unlike the discs consumers would burn 
using their home computers, that contain one or more songs and are 
identified by nothing more than a handwritten or typed label. Some 
stations get their music by direct electronic download into the 
broadcast group's servers, or are sent MP3 files. Smaller labels 
provide music with even less formality. There is only one constant--the 
music provided by the record labels to radio Broadcasters commonly do 
not contain all of the information required even by the interim rule, 
much less the information that would be required by a ``more 
comprehensive'' final rule. For example, record companies routinely 
send radio stations songs with only title and artist information.
    In addition, almost all radio stations broadcast third-party 
content at some point during their broadcast day. These syndicated and 
other third-party programs, provided for over-the-air use, are often 
accompanied by little, if any, information about the music they 
include. Nevertheless, the Copyright Office has concluded that it does 
not have ``authority'' in the Act to exempt such programs from any 
reporting obligation, despite the fact that the Act required only 
``reasonable'' notice and recordkeeping.\58\
---------------------------------------------------------------------------
    \58\ 69 Fed. Reg. at 11,521.
---------------------------------------------------------------------------
    Further, even those radio stations that have automated their music 
scheduling, have done so around the needs of their over-the-air 
broadcasts. Thus stations typically have not captured the name of the 
record label or the album name in their computers. Others don't rely on 
automated scheduling, and it would cost millions of dollars to redesign 
systems or to create new systems. Many stations simply cannot justify 
such cost for the limited benefits of streaming.
    The type of census reporting the Copyright Office says it intends 
to require in the future is not necessary in order to permit reasonable 
accuracy in royalty payments. Indeed, the large music performing rights 
organizations (PROs), ASCAP and BMI use sampling for their 
distribution, and require a smaller sample than the Copyright Office 
has included in its interim rules--typically one or two weeks per year. 
The PROs even shoulder most of the burden of gathering data themselves 
by listening to radio stations.
    Moreover, the music PROs, as well as standard recording industry 
publications, identify recordings by title and artist information 
alone. This information, which is consistent with the information 
provided by record labels to radio stations when they provide the 
records we play, should provide sufficient information to permit 
distribution.
    Congress should either clarify the law or make clear that the 
``reasonable'' reporting obligation it imposed contemplates reasonable 
sample periods, permits the exclusion of information a station lacks, 
and would be satisfied by the reporting of sound recording title and 
artist name.

                               CONCLUSION

    We appreciate the Subcommittee's interest in this matter of great 
concern for radio broadcasters. We hope that, as a result of this 
hearing, the Subcommittee has the basic background information it needs 
to repair the law governing the simulcast Internet streaming of radio 
broadcasts.
    The webcasting provisions of the DMCA were written with Internet-
only webcasters, not radio broadcasters, in mind. We urge the 
Subcommittee to act promptly and decisively to begin the process of 
fixing the law in a manner that properly accounts for longstanding 
radio programming and business practices and recognizes the ancillary 
nature of Internet streaming to radio broadcasters. The NAB stands 
ready to work with the Subcommittee to reform the system so that radio 
broadcasters will not continue to be kept off the Internet by excessive 
fees and unrealistic and overly burdensome statutory license conditions 
and reporting requirements.
    The current state of affairs harms not only radio broadcasters, but 
their listening public, who often are unable to listen to their 
favorite stations in places where over-the-air reception is hampered. 
It also harms the copyright owners of musical works, who are deprived 
of their public performance revenues, and performing artists, who are 
deprived of this additional avenue of exposure and promotion for their 
music by an industry that for decades has worked hand-in-hand with the 
recording industry to create demand for those sound recordings through 
the airplay they receive through radio.

    Mr. Smith. Mr. Marks.

   TESTIMONY OF STEVEN M. MARKS, GENERAL COUNSEL, RECORDING 
             INDUSTRY ASSOCIATION OF AMERICA, INC.

    Mr. Marks. Good morning, Mr. Chairman, Ranking Member 
Berman, and Members of the Subcommittee. I am Steven Marks, 
General Counsel of the Recording Industry Association of 
America; and we appreciate the opportunity to present our views 
concerning the balance between the interest of sound recording 
creators and users.
    I would like to begin by thanking the Subcommittee under 
the leadership of Chairman Smith and Ranking Democratic Member 
Berman for its commitment to ensuring that sound recording 
creators continue to have the incentives necessary to make 
music.
    Today, we are at a critical juncture in ensuring that those 
economic incentives continue to exist. New developments 
threaten to undermine key assumptions of legislation designed 
to protect the creators of sound recordings. Let me explain.
    In the Digital Performance Right and Sound Recordings Act, 
and the Digital Millennium Copyright Act, Congress recognized 
that America's unique lack of a sound recording performance 
right leaves creators of recordings singularly dependent on 
sales income. This recognition led to the fundamental premise 
of that legislation, that services performing recordings 
through new digital technologies should not be allowed to 
displace sales.
    To that end, the DPRA and DMCA struck a carefully balanced 
multifaceted compromise among competing interests. Congress 
distinguished among three main categories of services:
    First, free local over-the-air broadcasts were exempted 
because they were thought not to pose a threat to the 
description of recordings;
    Second, digital subscription services and webcasters were 
granted a statutory license with conditions designed to ensure 
that sales would not be displaced;
    Finally, interactive services were made subject to full 
copyright protection because they were thought most likely to 
displace sales.
    Now, new recording functionality allows users to cherry-
pick recordings meant only to be performed, vitiating the 
assumptions underlying the DPRA and DMCA. For example, software 
such as Streamripper and Replay Music enable users to easily 
record streaming music from webcasters and its simulcasters, 
save it as individual, high-quality MP3 files which are 
automatically tagged with the artist and song title. Some even 
offer integrated CD burning.
    Likewise, as broadcasters switch to digital over-the-air 
broadcasting, opportunities for people to take music without 
paying for it are inevitable unless the recordings in those 
broadcasts are protected. The FCC has tentatively decided to 
permit digital broadcasting ``in the clear,'' that is, without 
any protection for the copyrighted works being broadcast. If 
the FCC sticks with that decision, digital radio receivers will 
permit listeners to automatically build CD-quality libraries of 
music without ever listening to the broadcast. There will be 
little reason for most consumers to buy a download from a 
legitimate online service like iTunes or to buy a CD if they 
only need to plug in a digital radio receiver to compile a 
collection of every popular recording. Indeed, such copying 
will replace peer-to-peer services as a source of music for 
many who would rather take it than pay for it.
    The effects of these kinds of products is to transform the 
passive listening experience we know today as radio into the 
equivalent of an interactive performance and distribution 
service. Such a transformation dramatically changes the nature 
of these services, which will become the next platform for 
piracy. Such a transformation would also turn the policies of 
the DMCA and DPRA on their head. That leaves the question of 
how to maintain the balance struck by the DPRA and DMCA.
    With respect to digital broadcasting, we are pleased that 
the FCC is looking at the issue now. Hopefully, the Commission 
will do the right thing and provide adequate protection for 
recordings. We also hope that broadcasters will join us in 
embracing use of such content-protection features because it is 
not in their interest for users to automatically record 
selected music and strip out the advertising.
    Today, we ask this Subcommittee to support our efforts in 
the FCC process to ensure that the FCC's regulation of 
broadcasting does not undermine Congress' consistent copyright 
policy. For webcasting, we understand that there is technology 
available to protect webcast streams from unauthorized and 
illegal copying, but webcasters and simulcasters do not employ 
that technology.
    The statutory license does not require webcasters and 
simulcasters to use streaming technologies that effectively 
protect recordings from widely available piracy tools. That 
should change. And it is also why providing even less content 
protection as some are proposing by relaxing the performance 
complement or otherwise picking apart the compromises struck in 
the DPRA and DMCA is not the way to restore balance to this 
legislation.
    Instead, we hope this Subcommittee will ensure that 
protections put in place in the DPRA and DMCA are meaningful. 
The recording industry wants nothing more than to be able to 
keep creating the music that Americans enjoy and that make the 
broadcasting and webcasting industries viable. The way to keep 
the music playing is for Congress to remain true to its 
consistent policy of maintaining real balance in copyright 
legislation.
    Thank you.
    Mr. Smith. Thank you, Mr. Marks.
    [The prepared statement of Mr. Marks follows:]

                 Prepared Statement of Steven M. Marks

    Good morning. I am Steven Marks, General Counsel to the Recording 
Industry Association of America (``RIAA''). I am grateful for the 
opportunity to present our views concerning the use of sound recordings 
by broadcasters, particularly as they move into the new business of 
webcasting and rely upon the statutory licensing provisions of Section 
114 of the Copyright Act. The provisions of Section 114 provide 
important protection for creators at a time when the economic 
incentives necessary for the creation of new musical recordings 
increasingly are under assault from new uses that do not incorporate 
protections against abuse of copying and redistribution technology. I 
would like to begin by thanking the Subcommittee, under the leadership 
of Chairman Smith and Ranking Democratic Member Berman, for its 
dedication to assuring that the public enjoys access to a steady stream 
of new creative works by providing protections in copyright law such as 
those contained in Section 114. However, there is a substantial danger 
that Congress' efforts in this regard will be undermined by the abuse 
of new recording technologies not envisioned when Congress last 
addressed this subject. I hope this Subcommittee will consider action 
to ensure that the important protections it previously has written into 
law are not erased by the current threats faced by creators.
    As you probably know, RIAA is the trade group that represents the 
U.S. recording industry. Its member record companies create, 
manufacture or distribute approximately 90% of all legitimate sound 
recordings produced and sold in the United States and comprise the most 
vibrant national music industry in the world. This morning I will begin 
with some background concerning the provisions of Section 114. I will 
then explain why the content protection provisions of Section 114 
protect vital interests of RIAA member companies that make it 
financially possible for the music industry to keep bringing American 
consumers the music they enjoy, and why it may now be necessary to 
enhance the protective provisions of Section 114 to ensure that 
Americans continue to have access to creative new music.

                               BACKGROUND

    As the Committee knows well, copyright law confers upon creators a 
bundle of exclusive rights. These rights are intended to ensure that 
creators can receive a fair return from their creative investment and 
so are encouraged to create--and able to finance the creation of--new 
creative works for the benefit of the American people. These rights 
generally include rights of reproduction, adaptation and public 
distribution, performance and display. Today's hearing primarily 
concerns performance rights. In the case of most kinds of copyrighted 
works, performance rights allow creators to be paid for all means by 
which works can be rendered, including to a live audience and by 
broadcast, satellite, cable, Internet and other transmissions.
    However, American copyright law has never afforded to the creators 
of sound recordings the performance rights enjoyed by the owners of 
copyright in every other kind of work, and by recording artists and 
producers in many other countries. This is an historical anomaly. When 
Congress comprehensively revised the Copyright Act in 1909, there was 
little in the way of a commercial recording industry, and accordingly, 
the legislation did not provide any protection for sound recordings. 
The first efforts to amend federal copyright law to protect sound 
recordings date to the 1920s. However, as the industry matured, and it 
increasingly became clear that creators should be compensated for the 
use of their recordings, proposals for extending copyright protection 
consistently faced opposition from broadcasters and others who 
benefited from the uncompensated use of recordings. Thus, it was not 
until 1971 that sound recordings received any federal copyright 
protection at all, and then it was only half copyright protection--
bereft of any performance right.
    In the ensuing years, the Copyright Office twice studied the 
absence of a performance right and unequivocally recommended that a 
general performance right be extended to sound recordings. Over time, 
the absence of a performance right became increasingly problematic in 
light of new digital technologies--such as digital cable and on-demand 
delivery technologies--that were clearly the wave of the future and 
held the potential to replace record sales with uncompensated 
performances. Eventually, record companies came to believe that this 
risk was so great that they should accept a severely limited 
performance right to equip the industry for the future. Under the 
leadership of members of this Subcommittee and others in Congress, 
input was sought from the Copyright Office and all the affected 
industries: record companies, musicians' unions, broadcasters, cable 
music services, cable providers, business music services, music 
publishers and others. Through those consultations, a complex 
compromise was fashioned in the Digital Performance Right in Sound 
Recordings Act of 1995 (``DPRA'').
    The key elements of that package of compromises are as follows:

          Sound recording copyright owners received a 
        performance right, but it was severely limited: It only 
        extended to performances by means of digital audio 
        transmission.\1\ Thus, live performances, analog transmissions, 
        and audiovisual transmissions were not covered.
---------------------------------------------------------------------------
    \1\ 17 U.S.C. Sec. 106(6).

          Within the scope of that limited right, there were 
        numerous exemptions.\2\ Broadcast transmissions, certain 
        retransmissions of broadcasts, and certain other kinds of 
        transmissions were all exempted.
---------------------------------------------------------------------------
    \2\ 17 U.S.C. Sec. 114(d)(1).

          Most non-exempt digital audio transmissions were made 
        subject to a compulsory license so that users were assured that 
        they would have the ability to use recorded music at royalty 
        rates set by the government, so long as they complied with 
        certain content protection requirements carefully crafted to 
        prevent licensed transmissions from displacing sales.\3\ Those 
        requirements include:
---------------------------------------------------------------------------
    \3\ 17 U.S.C. Sec. 114(d)(2), (f).

            A numerical limitation, called the ``sound 
        recording performance complement,'' on the number of tracks 
        from the same album, artist or box set that can be transmitted 
        within a three hour period.\4\ By preventing transmission of 
        entire albums or larger numbers of works by an artist, the 
        complement encourages consumers to buy albums and therefore 
        diminishes the displacement potential of licensed 
        transmissions.
---------------------------------------------------------------------------
    \4\ 17 U.S.C. Sec. 114(d)(2)(B)(i), (j)(13).

            A prohibition on pre-announcement intended to 
        minimize home recording by withholding the identity of the 
        recordings to be transmitted.\5\
---------------------------------------------------------------------------
    \5\ 17 U.S.C. Sec. 114(d)(2)(B)(ii).

            A prohibition on automatic channel switching 
        intended to prevent evasion of the complement and otherwise 
        prevent a licensee from complying with channel-specific 
        requirements while offering a service with all the sales 
        displacement potential of an interactive service.\6\
---------------------------------------------------------------------------
    \6\ 17 U.S.C. Sec. 114(d)(2)(A)(ii).

          One important kind of transmission was not made 
        subject to the compulsory license: an interactive 
        transmission.\7\ Creators of recordings were permitted to 
        control interactive digital audio transmissions because they 
        posed the greatest threat to sales.
---------------------------------------------------------------------------
    \7\ 17 U.S.C. Sec. 114(d)(2)(A)(i).

    In 1998, Congress clarified that this basic arrangement applies to 
Internet webcasting. Congress also refined some of the existing 
conditions on the compulsory license, and added new ones, to strengthen 
the protection of sound recordings against activities that would 
undermine sales.\8\ Of these, perhaps the most important is a 
requirement that transmitting entities not cause or induce copying by 
users, and if the technology used by a transmitting entity enables the 
transmitting entity to limit copying, the transmitting entity uses that 
technology to limit copying.\9\
---------------------------------------------------------------------------
    \8\ 17 U.S.C. Sec. 114(d)(2)(C).
    \9\ 17 U.S.C. Sec. 114(d)(2)(C)(vi).
---------------------------------------------------------------------------
    Thus, the current statutory system recognizes a basic tension 
between the benefits and risks to the creation and dissemination of 
music posed by digital technologies. As the Senate Report to the DPRA 
observes:

        new digital transmission technologies may permit consumers to 
        enjoy performances of a broader range of higher-quality 
        recordings than has ever before been possible. These new 
        technologies also may lead to new systems for the electronic 
        distribution of phonorecords with the authorization of the 
        affected copyright owners. Such systems could increase the 
        selection of recordings available to consumers, and make it 
        more convenient for consumers to acquire authorized 
        phonorecords.
          However, in the absence of appropriate copyright protection 
        in the digital environment, the creation of new sound 
        recordings and musical works could be discouraged, ultimately 
        denying the public some of the potential benefits of the new 
        digital transmission technologies.'' \10\
---------------------------------------------------------------------------
    \10\ S. Rep. No. 104-128, at 14 (1995).

    The current statutory system carefully balances these concerns by 
distinguishing various kinds of digital transmissions, and dealing with 
them differently. At one extreme, free, nonsubscription, over-the-air 
broadcasts consisting of a mix of entertainment and non-entertainment 
and other local public interest activities were not in 1995 thought to 
pose much risk to creators, even if digital broadcasting involved a 
higher sound quality than analog, because the passive activity of 
listening to broadcasts did not appear to pose a threat to distribution 
of recordings.\11\ Accordingly, broadcasts were exempted from the new 
performance right. At the other extreme, creators were given the 
strongest rights with respect to interactive services, because
---------------------------------------------------------------------------
    \11\ See Id. at 15.

        Of all the new forms of digital transmission services, 
        interactive services are most likely to have a significant 
        impact on traditional record sales, and therefore pose the 
        greatest threat to the livelihoods of those whose income 
        depends upon revenues derived from traditional record 
        sales.\12\
---------------------------------------------------------------------------
    \12\ Id. at 16.

    In between are subscription services and webcasting, which were 
thought to pose a risk of substitution, so that compensation to 
creators and content protection provisions were clearly warranted, but 
were not though to pose so much of a risk that creators should have the 
power to withhold their content to make their own decisions about the 
degree of risk posed by these services.

       CONTENT PROTECTION IS A VITAL PART OF THE DPRA COMPROMISE

    The basic architecture of the DPRA described above and the specific 
content protection provisions of the DPRA protect the very core 
interests of the recording business. The economics of the recording 
industry reflect the scope of copyright protection for recordings. 
Because the creators of recordings enjoy exclusive rights of 
reproduction and distribution, they are paid for selling copies and, to 
a much smaller degree, for licensing reproductions and distributions. 
Because the creators of recordings have only an extremely limited 
performance right, they receive only a tiny portion of their revenues 
from licensing performances. That means that sales income is necessary 
to finance the creation of new works, and displacement of sales by 
uncompensated performances poses a grave threat to the industry's 
ability to continue to produce the music Americans enjoy. The 
limitations on the scope of the compulsory license and the specific 
conditions on the license were included as an integral part of the 
package of compromises represented by the DPRA to prevent transmissions 
from substituting for sales.
    Now would be a terrible time to consider picking apart the DPRA 
compromise by weakening its content protection provisions. Anyone who 
has read the newspapers in the last several years has heard about the 
tremendous pain that piracy--particularly that caused by peer-to-peer 
services--has inflicted on the music industry. Sales of recorded music 
products have declined some 30% over the past three years. Likewise, 
sales of the top selling albums for each of the past three years has 
steadily decreased. Because the top selling albums provide the profits 
that make possible creation of the vast majority of recordings that do 
not achieve commercial success, these twin factors have deprived the 
public of creative new music as record companies have been forced to 
slash their artist rosters and support for new artists. Moreover, the 
revenue loss occasioned by this reduction in sales of CDs affects not 
only the record companies themselves, but the rest of the music 
industry as well. Lost sales have reduced royalties paid to artists, 
songwriters and music publishers, and thousands of Americans have lost 
their jobs due to retail store closings. For example, during the first 
half of 2003 alone, 600 record stores closed, probably in large part 
due to the pressures of piracy.
    Weakening the protections provided by the DPRA by giving creators 
even less control over the use of their works is to invite more of the 
same. By contrast, these protections should be an immaterial limitation 
on broadcasters. It bears emphasis that the digital performance right 
does not apply at all to the traditional analog broadcast activities of 
broadcasters, or to their new digital over-the-air broadcasts. The 
provisions of the compulsory license apply to broadcasters only to the 
extent they choose to enter the new business of webcasting in search of 
new profit opportunities. And even then, limitations such as the 
complement were ``intended to encompass certain typical programming 
practices such as those used on broadcast radio.'' \13\ In addition, 
should a broadcaster wish to make webcasts in excess of the complement 
or other limitations on the compulsory license, it is always free to 
ask permission. The marketplace works. Broadcasters obtain clearance 
for all the other copyrighted material they transmit, and many 
webcasters have struck private licensing deals. Nothing in the DPRA 
prevents a broadcaster from seeking permission to transmit sound 
recordings on whatever basis the broadcaster and copyright owner might 
agree.
---------------------------------------------------------------------------
    \13\ S. Rep. No. 104-128, at 34 (1995).
---------------------------------------------------------------------------
             NEW THREATS WARRANT MORE, NOT LESS, PROTECTION

    Today, the vital interests the DPRA was designed to protect, and 
Congress' intent that the DPRA ``ensure that performing artists, record 
companies and others whose livelihood depends upon effective copyright 
protection for sound recordings, will be protected as new technologies 
affect the ways in which their creative works are used,'' \14\ are in 
real jeopardy from risks not foreseen nine years ago when the DPRA was 
negotiated and enacted. At this critical juncture, attention should be 
given to more, rather than less, protection of those interests.
---------------------------------------------------------------------------
    \14\ Id. at 10.
---------------------------------------------------------------------------
    Perhaps the greatest threat the creators of recordings face today 
comes from recording devices and software that use the identifying 
information or ``metadata'' transmitted in digital radio and by 
satellite services, webcasters and others to allow users to selectively 
record or disaggregate programs into individual tracks to be listened 
to again and again apart from the original transmission program, or to 
be redistributed. Within the basic architecture of the DPRA, such 
automated recording is a threat because it blurs the distinctions 
between broadcasts, noninteractive and interactive services--giving 
listeners on-demand access to recordings that have been transmitted and 
so giving any kind of transmission the sales displacement potential of 
an interactive service.
    We already see this phenomenon in the case of webcasting, where 
software such as ``Streamripper'' allows users to copy all of the 
recordings transmitted on a webcast channel, disaggregate them, save 
them to substitute for purchases of legitimate downloads or CDs, and 
redistribute them with peer-to-peer software.\15\ Replay Music likewise 
enables users easily to record streaming music from webcasters or 
subscription services and saves them as individual, high-quality MP3 
files that are automatically tagged with the artist and song title. The 
program even offers integrated CD burning. Creators have little ability 
to prevent webcasters from fueling the use of such software, since the 
compulsory license does not require webcasters to use new secure 
streaming technologies as and when they become available, but only to 
take advantage of the security features of the technologies they do 
use.
---------------------------------------------------------------------------
    \15\ As Streamripper's own website explains, using Streamripper 
``you can now download an entire collection of goa/trance music, an 
entire collection of jazz, punk rock, whatever you want.'' http://
streamripper.sourceforge.net/about.php.
---------------------------------------------------------------------------
    As broadcasters switch to digital broadcasting, we fear that we are 
on the verge of devastation to the industry that will dwarf the harm 
wrought by the peer-to-peer piracy problems of the last several years. 
Digital broadcasting is a whole new medium dramatically different from 
analog broadcasting. The FCC has tentatively permitted digital 
broadcasting ``in the clear''--that is, without any protection for the 
copyrighted works being broadcast--even though the technical 
specifications for the approved transmission technology indicate it 
incorporates a sophisticated digital rights management system. Today, 
digital radio receivers like The Bug\16\ have storage that permits 
features such as pause and rewind. Someday soon, digital receivers will 
have built-in hard drives, multi-channel decoding, and electronic 
program guide features that will permit users automatically to compile 
enormous collections of near CD-quality recordings from digital 
broadcasts, and to access whatever specific recordings they want 
whenever they want them.
---------------------------------------------------------------------------
    \16\ http://www.pure-digital.com/Releases/Release.asp?ID=212.
---------------------------------------------------------------------------
    The unrestricted copying, disaggregation and redistribution of 
digital transmission programs threatens to turn noninteractive 
services, like webcasts and broadcasts, into the equivalent of on-
demand interactive services. This risk is particularly acute because 
the music broadcast on radio tends to be the most popular music, which 
fuels the economic engine of the recording industry, as well as pre-
release recordings, where copying in the days before a recording is 
released in stores could eat substantially into sales. There would be 
little reason for most consumers to buy a download from a legitimate 
online service like Apple's iTunes store or buy a CD if they only need 
plug in a digital radio receiver to compile a collection of every 
popular recording. Indeed, such copying threatens to replace peer-to-
peer services as a source of music for those who would rather steal it 
than pay for it. Why run the risks and endure the bother of using Kazaa 
if one only need plug in a digital radio receiver to obtain 
consistently high-qualities copies of every popular recording? This 
kind of technology would mark an unprecedented shift in the nature of 
broadcasting and home recording, and upset the delicate balance that 
Congress and this Subcommittee have tried so hard to maintain over the 
years.
    We are pleased that the FCC is looking at this issue right now. We 
hope that the Commission will do the right thing and require that the 
content protection features we understand are in the digital broadcast 
technology tentatively approved by the FCC be used to protect the 
livelihoods of everyone in the music industry dedicated to providing 
new music to American consumers. We also hope that broadcasters will 
join us in embracing use of such content protection features, because 
it is not in their interest for users to be able to record 
automatically selected music they want to listen to and to strip out 
the advertising and other broadcast programming. However, digital 
broadcasting is only part of the problem, so the action we are 
requesting from the FCC can only be part of the solution. We hope this 
Subcommittee will consider adding to Section 114 of the Copyright Act 
similar content protection requirements for the non-broadcast 
transmissions covered by Section 114's compulsory license and will keep 
an eye on the proceedings before the FCC to ensure that the Commission 
acts with respect to broadcast transmissions in a manner consistent 
with federal copyright policy.

    Mr. Smith. Mr. Potter.

TESTIMONY OF JONATHAN POTTER, EXECUTIVE DIRECTOR, DIGITAL MEDIA 
                       ASSOCIATION (DiMA)

    Mr. Potter. Chairman Smith, Mr. Berman, and Members of the 
Subcommittee, thank you for the opportunity to speak today 
about whether the sound recording performance right 
appropriately balances the interests of creators, broadcasters 
and webcasters, and consumers.
    My testimony will focus on how the performance right 
impacts Internet radio services offered by DiMA member 
companies, including Yahoo, AOL, RealNetworks and Microsoft.
    DiMA members are pleased that in some respects section 114 
is working as planned. By exposing new and diverse music to 
enthusiastic audiences and paying many millions of dollars in 
royalties, Internet radio has greatly benefited recording 
artists, record companies and consumers. Unfortunately, the 
potential success of Internet radio is limited by imbalances in 
the legal standards for determining performance royalties under 
the section 114 license and uncertainties in legislative 
license requirements.
    Perhaps the most fundamental imbalance is the continuing 
exemption of broadcasters from sound recording royalties and 
digital programming restrictions. As a result, cable radio, 
satellite radio and Internet radio are competitively 
disadvantaged as a matter of law.
    Even more disturbing is the inequity suffered only by 
Internet radio as a result of the new royalty-setting standard 
that was enacted in 1998. Rates for most statutory licenses, 
including for cable and satellite radio, are set using a long-
established standard in section 801(b) of the Copyright Act. 
That equitable standard requires royalties to be reasonable and 
fair to both copyright owners and users.
    In the 1995 Digital Performance Right in Sound Recordings 
Act, Congress and the Justice Department's Antitrust Division 
considered the 801(b) reasonableness standard as an essential 
safeguard against the collective licensing power of the 
recording industry.
    In 1998, without extensive consultation with the Antitrust 
Division, Congress created a new standard only for Internet 
radio, lacking a fairness or reasonableness requirement. In 
fact, the new standard effectively compelled the CARP to adopt 
above-market rates.
    Under the new willing buyer-willing seller standard, the 
Librarian of Congress ultimately imposed a royalty rate for 
fledgling Internet radio services that was 50 percent higher 
than that paid by more established competitors in cable and 
satellite radio. This enormous rate disparity is indisputably 
unfair and could not have been the result Congress intended. 
Recently, Register of Copyrights Marybeth Peters suggested to 
the Subcommittee that the standards for cable, satellite and 
Internet radio be conformed. DiMA echoes that request.
    Experience under the 1998 amendments has revealed a second 
significant flaw, the new definition of interactive service. 
For good reason, the 1995 act made interactive services 
ineligible for the statutory license and defined them as 
essentially on-demand music services. The 1995 definition was 
clear and there were no disputes regarding whether or not a 
service was interactive. In 1998, to address new services 
enabled by new technologies, Congress modified the interactive 
services definition, but the new standard was significantly 
more ambiguous.
    As the Copyright Office noted in a proceeding on this very 
question, the amended definition of ``interactive service'' 
requires such an intensive, fact-specific analysis of each 
service and its individual features that one cannot be certain 
just how much consumer input is permissible before a service 
crosses the line. However, the Copyright Office agreed with 
DiMA that the new definition of ``interactive'' clearly permits 
qualified statutory license services to utilize some amount of 
consumer influence when creating programming and play lists.
    Despite the Copyright Office decision, the recording 
industry has sued for infringement virtually every innovative 
company that provided consumers a modicum of influence in 
programming. In fact, in one infringement litigation against a 
service that sought to invoke and pay royalties under the 
statutory license, the recording industry is asserting that any 
element of consumer influence in Internet radio programming 
makes a service interactive and thus infringing.
    The combination of statutory ambiguity with the enormous 
potential infringement liability if a service guesses 
incorrectly how a court will rule on its eligibility for the 
statutory license has chilled innovation, experimentation and 
investment in Internet radio which would benefit consumers and 
creators.
    DiMA strongly urges the Committee to reconsider the 1998 
amendment to the definition of ``interactive service,'' and to 
either provide legislative clarity or authorize the Copyright 
Office to provide regulatory guidance in ways that will not 
impose retroactive and inappropriate infringement liability.
    These and other issues described in my written testimony 
have hindered the development of new, compelling services that 
will better enable legitimate royalty-paying online music 
services to compete against piracy. DiMA urges the Subcommittee 
to consider legislative solutions that help bring the full 
benefits of Internet radio to the creative community and to 
consumers.
    Thank you.
    Mr. Smith. Thank you, Mr. Potter.
    [The prepared statement of Mr. Potter follows:]

                 Prepared Statement of Jonathan Potter

    Mr. Chairman, Representative Berman, and Members of the 
Subcommittee:
    Thank you for inviting me to testify today on behalf of the 
Internet broadcast music performance services offered by DiMA member 
companies, including by AOL, Apple, Live365, Microsoft, MusicMatch, 
Napster, RealNetworks, and Yahoo!.
    The subject of today's hearing is ``balance'' between the creators 
and owners of copyrighted works on the one hand, and broadcasters of 
sound recordings of all types--including broadcast radio, cable radio, 
satellite radio and Internet radio--on the other hand. DiMA was formed 
in 1998 to promote balanced copyright law and fair competition, as 
reflected by our two core public policy principles:

        1.  Creators and copyright owners deserve fair compensation for 
        uses of their content; and

        2.  Copyright and commercial law should not discriminate 
        between classes of media companies based solely upon their 
        choice of technology to deliver content to consumers.

    Since the Internet radio sound recording performance license was 
enacted in 1998 as part of the Digital Millennium Copyright Act, DiMA 
companies have paid several millions of dollars in royalties to 
recording companies and recording artists. In part, these payments 
reflect our first core principal, as we support and promote America's 
creators and copyright owners. They also evidence widespread consumer 
adoption of Internet radio. However, the very fact of and the amount of 
these payments serves to underscore how the law discriminates against 
Internet media companies based solely on our choice to deliver music to 
consumers via the Internet, rather than broadcast, cable or satellite 
radio technologies.
    Congress' creation of a sound recording right for digital audio 
transmissions explicitly exempted broadcast radio transmissions. 
Accordingly, Internet radio services are significantly disadvantaged 
vis-a-vis their direct competitors in broadcast radio, who are not 
required to license or pay royalties for their performances of sound 
recordings. In addition, 1998 amendments to the performance right made 
it unequivocally favor satellite and cable radio--even when those 
services compete directly with Internet radio in the broadband music 
marketplace.
    Internet radio competes directly against terrestrial radio for a 
limited universe of listeners and advertisers, and competes directly 
against cable and satellite radio for an even smaller universe of 
subscribers and advertisers. Paying higher royalties requires Internet 
radio to reduce programming or performance quality, or increase 
advertising prices or frequency, in ways that unfairly inhibit Internet 
radio's competitive opportunity. With respect to the point of this 
hearing, if, as the Subcommittee will hear today, the sound recording 
performance right is out of balance with respect to any music 
performance service--then it is most out-of-balance with respect to 
online media, as only Internet-based services are subjected to royalty 
rates set under the ``willing buyer-willing seller'' standard.
    Additionally, with respect to Internet radio only, there is a 
further imbalance, namely, whether an online music service is 
permissibly consumer-influenced within the scope of the Section 114 
statutory license or is ``interactive'' and thereby fails to qualify 
for the statutory license. The definition of ``interactive'' as amended 
by the DMCA created an ambiguity in the law that has spawned two court 
cases, has been the subject of an administrative proceeding in which 
the Copyright Office declined to set standards or to provide a roadmap 
for well-intended royalty-paying compliance, has materially inhibited 
innovation, and has even driven DiMA companies into liquidation. Today, 
more than five years since these legal proceedings were initiated, we 
ask the Subcommittee to end this legal quagmire and fix the definition 
of ``interactive'' service so that it reflects Congress' intention to 
promote rather than inhibit innovative royalty-paying music performance 
and discovery services.
    Finally, I will discuss two additional points of imbalance in the 
sound recording performance right: (a) the requirement that online 
services pay a mechanical royalty for server copies of sound recordings 
associated with licensed royalty-generating public performances; and 
(b) the sound recording performance complement, which is overly 
restrictive and significantly hinders Internet radio's competitiveness.

I.  THE PERFORMANCE RIGHTS ACT IS GENERALLY UNBALANCED IN ITS TREATMENT 
 OF COMPETING NEW MEDIA SERVICES, AS INTERNET RADIO SUFFERS A MARKEDLY 
                LESS FAVORABLE ROYALTY-SETTING STANDARD.

    When the sound recording performance right was enacted it was 
expressly imposed only on new digital music services--not on FCC-
licensed broadcasts, which Congress exempted even for digital audio 
terrestrial broadcasts. Thus, Internet radio and all digital music 
performance services suffer a significant copyright royalty 
disadvantage compared to our competitors in broadcast radio. I hope 
this imbalance is not permanent, but I appreciate political reality and 
the remote possibility--at best--that this Subcommittee will reconsider 
the inequity between my powerful friends in traditional terrestrial 
radio and their new online competitors as it respects sound recording 
copyright royalties.
    What is perhaps more surprising and unfair is how the law 
advantages cable and satellite radio, even when those entities compete 
against us on our own turf--in the broadband marketplace. This cannot 
be what Congress intended when it created or amended the performance 
right statute, and we are pleased that the Copyright Office has 
suggested that the Committee review the issue.

a.  Background: Though Imposed Only Upon New Digital Music Services, 
        the 1995 Act Balanced the Performance Royalty With Reasonable 
        Protections.
    Understanding today's imbalance in royalty-setting standards 
requires a brief review of the history of the performance right.
    In 1995, when enacting the first sound recording performance right, 
the legislative history documents Congress's dual and balanced 
intentions: to protect and promote the interests of copyright owners 
and recording artists and to promote the development of new 
technologies. Congress wished to provide a new right and royalty 
(benefiting creators and copyright owners), to promote efficient 
collective licensing processes (benefiting licensors and licensees), 
and also to incorporate the lessons of decades of antitrust controversy 
that had confronted similar collective licensing efforts, most notably 
of ASCAP and BMI.
    After consulting with the Antitrust Division of the Department of 
Justice, Congress incorporated into the Digital Performance Right in 
Sound Recordings Act several provisions that sought carefully to 
balance the goals of enabling efficient licensing processes and 
ensuring that a new recording industry licensing cooperative would not 
have unrestrained pricing power. The provisions that furthered these 
goals included (a) a statutory license (rather than an exclusive right) 
to ensure the availability of blanket licenses to play music over new 
digital services; (b) an antitrust exemption to promote efficient 
license negotiations; and (c) the availability of a royalty-setting 
arbitration, or CARP, as a backstop or safeguard to ensure that above-
market royalties would not be imposed on licensees.
    Integral to the safeguard provided by the CARP process were the 
standards and factors to be used by the arbitrators to determine the 
appropriate rates and terms for the new statutory license. In 1995 
Congress applied the traditional standards set forth in the Copyright 
Act at 17 U.S.C. Sec. 801(b)(1), that balance the interests of 
licensors, licensees, and the public interest:

        (1) To make determinations concerning the adjustment of 
        reasonable copyright royalty rates--[which] shall be calculated 
        to achieve the following objectives:

          (A) To maximize the availability of creative works to the 
        public;
          (B) To afford the copyright owner a fair return for his 
        creative work and the copyright user a fair income under 
        existing economic conditions;
          (C) To reflect the relative roles of the copyright owner and 
        the copyright user in the product made available to the public 
        with respect to relative creative contribution, technological 
        contribution, capital investment, cost, risk, and contribution 
        to the opening of new markets for creative expression and media 
        for their communication;
          (D) To minimize any disruptive impact on the structure of the 
        industries involved and on generally prevailing industry 
        practices.

    This standard was applied in the first CARP under the 1995 Act, and 
yielded a royalty rate that applied to the three then-existing cable 
and satellite digital music services. Today, this royalty standard 
continues to apply to cable and satellite radio services.

b.  1998 Amendments Unraveled the 1995 Balance By Stripping Away the 
        Act's Original Protections--but Only for the Newest Digital 
        Music Services: Internet Radio.
    In 1998, Congress again considered how to appropriately balance 
creative and new media interests, and clarified the applicability of 
the sound recording digital performance right to Internet webcasters. 
At that time, webcasting was in its embryonic stages and new business 
models were just beginning to develop. DiMA companies were appreciative 
of Congress' intent and accepting of the new royalty obligation that 
would benefit creators, so long as it was competitively fair and set at 
a reasonable level so as to permit the continued rapid growth of this 
nascent industry.
    To ensure the appropriate balance between licensing efficiency and 
anticompetitive risk, Congress relied again upon the same three 
elements: a statutory license, an antitrust exemption, and a CARP 
safeguard. This time, however, at the RIAA's urging and without 
consulting with the Department of Justice, Congress adopted a different 
standard to be applied by the CARP to determine statutory license rates 
and terms:

        In establishing rates and terms for transmissions by eligible 
        nonsubscription services and new subscription services, the 
        copyright arbitration royalty panel shall establish rates and 
        terms that most clearly represent the rates and terms that 
        would have been negotiated in the marketplace between a willing 
        buyer and a willing seller. In determining such rates and 
        terms, the copyright arbitration royalty panel shall base its 
        decision on economic, competitive and programming information 
        presented by the parties, including--

          (i) whether use of the service may substitute for or may 
        promote the sales of phonorecords or otherwise may interfere 
        with or may enhance the sound recording copyright owner's other 
        streams of revenue from its sound recordings; and

          (ii) the relative roles of the copyright owner and the 
        transmitting entity in the copyrighted work and the service 
        made available to the public with respect to relative creative 
        contribution, technological contribution, capital investment, 
        cost, and risk.

        In establishing such rates and terms, the copyright arbitration 
        royalty panel may consider the rates and terms for comparable 
        types of digital audio transmission services and comparable 
        circumstances under voluntary license agreements negotiated 
        under subparagraph (A).

17 U.S.C. Sec. 114(f)(2)(B) (emphasis added). Unfortunately, the 
legislative history offers no explanation or any reasons why Congress 
adopted this different standard for Internet radio, and little guidance 
as to how the standard is to be applied:

        The test applicable to establishing rates and terms is what a 
        willing buyer and willing seller would have arrived at in 
        marketplace negotiations. In making that determination, the 
        copyright arbitration royalty panel shall consider economic, 
        competitive and programming information presented by the 
        parties including, but not limited to, the factors set forth in 
        clauses (i) and (ii).

H.R. Rep. No. 105-796, 105th Cong., 2d Sess. at 86.
    Given the care that Congress undertook in 1995 to prevent excessive 
pricing power by antitrust-exempt licensors (including several written 
consultations with the Antitrust Division of the Department of Justice) 
and to ensure that the CARP would serve as an appropriate backstop, 
Congress surely could not have intended that this new standard be more 
susceptible to market power-based pricing by collective licensors. 
Unfortunately that is precisely what the arbitrators concluded in the 
first CARP under this new standard.
    In their decisional Report the arbitrators in the first CARP under 
the willing buyer-willing seller standard recount in some detail how 
the RIAA adopted a ``take-it-or-leave-it'' licensing approach with a 
limited group of impecunious webcasters likely to accept whatever deal 
was offered them, in order to create a body of evidence of overpriced 
agreements and then argue to the arbitrators that only these executed 
agreements should be permitted as evidence of willing buyers and 
willing sellers. The arbitrators found that the RIAA ``devoted 
extraordinary efforts and incurred substantial transactional costs'' to 
negotiate agreements only with ``minor'' webcasters ``that promised 
very little actual payment of royalties'' in return--``sacrificial 
conduct mak[ing] economic sense only if calculated to set a high 
benchmark to be later imposed upon the much larger constellation of 
[Internet radio] services.'' Id. at 50-51. Illustrating the strength of 
the evidence supporting this conclusion, the arbitrators specifically 
found that RIAA's effort to deny this manipulative intent ``lacked 
credibility.'' Id. at 50.
    More important to this Subcommittee than the RIAA's behavior is 
that the strategy ultimately was successful because the arbitrators 
concluded that their hands were tied, believing that the willing buyer-
willing seller statutory standard required them to consider only a few 
executed agreements, but not the relevant experience of thousands of 
services with music licensing royalty rates. The arbitrators, 
therefore, ignored compelling evidence that would have led to a far 
more reasonable and justifiable rate if they could have considered the 
four factors utilized in the traditional CARP standard found in 17 
U.S.C. Sec. 801(b), or even if they could have considered ``fair market 
value,'' the CARP standard utilized in cable television royalty 
proceedings.
    This conclusion caused the Panel to adopt rates based on what the 
arbitrators conceded were ``above market'' benchmarks obtained as a 
result of RIAA's single-seller market power and its ``take-it-or-leave-
it'' licensing approach, and to ignore the most compelling and 
analogous evidence in the case--the rates paid by thousands of radio 
stations and webcasters to composers, lyricists and publishers to 
perform their copyrighted music.
    Setting aside whether the arbitrators incorrectly applied the 
willing buyer-willing seller standard, DiMA urges the Subcommittee to 
consider that the courts most experienced in the consideration of 
collective licensing agreements--the ASCAP and BMI rate courts--
consistently have rejected evidentiary use of voluntary agreements 
entered into at the inception of an industry, because such agreements 
generally reflect extraneous factors such as the desire to avoid or 
settle litigation, and rarely evidence fair market value. See, e.g., 
United States v. ASCAP; Application of Showtime/The Movie Channel Inc., 
912 F.2d 563, 579-82 (2d Cir. 1989). These very concerns underlie 
provisions in the most recent ASCAP consent decree which preclude 
agreements entered into during the first five years of licensing music 
users in a new industry as evidence of a reasonable royalty. In support 
of this provision the Department of Justice Antitrust Division 
explained that ``[new] music users are fragmented, inexperienced, lack 
the resources [to litigate over rates] and are willing to acquiesce to 
fees requiring payment of a high percentage of their revenue because 
they have little if any revenue.'' See United States v. ASCAP, No. 41-
1395 at 13-14 (S.D.N.Y. June 11, 2001). See Memorandum of the United 
States in Support of the Joint Motion to Enter Second Amended Final 
Judgment, at 35, United States v. ASCAP. Thus, the very type of 
agreements that courts and the Department of Justice have rejected as 
evidence of fair value were the only agreements that the arbitrators 
believed the law allowed them to rely on using the willing buyer-
willing seller standard.
    Consequently, by requiring arbitrators to ignore long-established 
music performance license rates, by requiring reliance on inherently 
unreliable licenses intended by RIAA to yield above-market rates, and 
by eliminating the concept of fairness, balance or fair market value 
from the rate-setting standard, the willing buyer-willing seller 
standard resulted in a royalty rate for the performance of sound 
recordings by Internet radio that is:

          more than three times higher than the rates 
        historically paid for public performances of compositions, and

          50 percent higher than sound recording performance 
        royalty rate paid by cable and satellite radio.

    There is no principled basis why digital media services should be 
favored or disfavored relative to one another merely because they 
transmit performances to the consumer using different technologies. 
There is also no principled basis why the recording industry utilizes 
the traditional four-factor Sec. 801(b) rate-setting standard when it 
is a licensee in proceedings to set songwriters' royalties, but 
benefits from the more favorable willing buyer-willing seller standard 
when it is licensor in the Internet radio context. DiMA respectfully 
asks the Subcommittee to rectify these imbalances. We note that 
Register of Copyrights Marybeth Peters--in responding to a written 
question from Chairman Smith following a 2003 hearing on the issue of 
CARP reform--also has suggested that the Subcommittee reconsider the 
rate-setting standards that apply to essentially competitive digital 
radio services.

a.  The Law May Disfavor Internet Radio Even Against Digital Music 
        Competitors That Compete Directly in the Broadband Marketplace.
    Recently DiMA has learned that Music Choice, a cable radio provider 
that is defined as a ``pre-existing service'' under Section 114, and 
therefore has its royalties set pursuant to the traditional 801(b) 
standard rather than the willing buyer-willing seller standard, is 
competing directly against DiMA companies and broadcasters in the 
broadband radio marketplace, but Music Choice is not paying royalties 
equivalent to those paid by online radio or broadcaster simulcasters.
    Music Choice is utilizing the broadband connections of its cable 
partners such as Comcast to essentially webcast its traditional cable 
music channels plus additional new channels to cable broadband 
subscribers. This may be a brilliant idea that earns Music Choice and 
its cable partners lots of money. But it highlights the unprincipled 
foundation of a performance rights law that enables two companies to 
provide competing subscription broadband music services, but requires 
them to pay different royalty rates to creators and copyright owners. 
This law is unbalanced with regard to the competing services, and also 
is unbalanced with regard to copyright owners and performing artists.
    The Music Choice example (or loophole if Music Choice's legal 
position is correct) highlights DiMA's core policy principle--that 
copyright law should be technologically neutral so that all competing 
media services pay the same royalty rates and compete on a level 
playing field--and highlights the prejudice and disparities that result 
when the law does not follow that basic principle.

    III.  CONTRARY TO CONGRESS'S INTENT, THE 1998 AMENDMENT TO THE 
``INTERACTIVE'' SERVICES DEFINITION HAS PROMOTED LITIGATION RATHER THAN 
                              INNOVATION.

    Congress enacted the DMCA statutory Internet radio license to 
promote the growth of Internet radio as an innovative, competitive 
medium. Whether a particular Internet radio service qualifies for the 
statutory license is dependent on several statutory factors, most 
notably that it:

          complies with programming restrictions, e.g., that 
        limits the number of songs of a single artist or album that can 
        be played in a 3-hour period, and

          is not ``interactive'' as defined in the statute.

    The ``interactive'' service exclusion was first included in the1995 
Act, to ensure that statutory performance licenses were not available 
to ``on-demand'' music services that threatened to directly displace 
sales of pre-recorded music. The DPRSRA defined an ``interactive'' 
service as ``one that enables a member of the public to receive, on 
request, a transmission of a particular sound recording chosen by or on 
behalf of the recipient.'' This definition was clear, and there was 
never any question whether a service qualified or did not qualify for 
the statutory license on the basis of whether it was or was not 
interactive. In the statute Congress even confirmed that a consumer's 
ability to request a song was not enough to make a service interactive, 
inasmuch as broadcast radio and other media regularly perform consumer 
requests.
    In 1998 Congress amended this clear, bright-line definition of 
``interactive'' service. Unfortunately, the revised standard makes it 
much less certain whether a service qualifies for the statutory 
license. The amended law defines an ``interactive service'' as

        one that enables a member of the public to receive a 
        transmission of a program specially created for the recipient, 
        or on request, a transmission of a particular sound recording, 
        whether or not as part of a program, which is selected by or on 
        behalf of the recipient.

    As in the original definition, the 1998 definition continues with a 
safe harbor: ``The ability of individuals to request that particular 
sound recordings be performed . . . does not make a service 
interactive, if the programming on each channel of the service does not 
substantially consist of sound recordings that are performed within 1 
hour of the request or at a time designated . . . by the individual 
making the request.''
    Relying on this safe harbor and their interpretation of the 
``interactive'' restrictions, several DiMA companies developed Internet 
radio services in 1999 and 2000 that permitted varying levels of 
consumer influence. ``Consumer influence'' features included the 
ability to rate songs, artists and albums, and to request that specific 
songs or artists' recordings be performed (but not at a specific time 
or in any specific order). Recording companies complained that these 
services did not qualify for the DMCA license and threatened to sue. In 
an effort to clarify the situation DiMA petitioned the U.S. Copyright 
Office for regulations interpreting the definition. The Copyright 
Office declined to propose regulations, or to specify specific features 
that individually or in combination would disqualify programming from 
the DMCA license. The Copyright Office did, however, affirm 
unequivocally that services can incorporate consumer influence in their 
programming without making the service interactive.
    In May, 2001, several recording companies filed a copyright 
infringement suit against Launch Media (now Yahoo!), contending that 
the service's consumer-influence features disqualified it from the 
statutory license. In a second effort to resolve the issue without 
rancor, DiMA filed a declaratory judgment action on behalf of the 
Internet radio industry, but that court declined to hear the action and 
referred it instead to the court hearing the pre-existing infringement 
lawsuit.
    In a follow-on action the recording industry also sued several 
additional DiMA companies, seeking again to disqualify consumer-
influenced radio from the statutory Internet radio license. Some DiMA 
companies settled by agreeing to pay extraordinarily high royalties and 
maintain some consumer influence features; others agreed to eliminate 
all consumer influence features; and others went out of business.
    As the Register of Copyrights determined, Congress clearly 
expressed its intent that some amount of consumer influence be a part 
of basic Internet radio and compliant with the statutory license. The 
recording industry, through its licensing behavior and public 
statements has agreed. However, through its litigation and conflicting 
public statements, the recording industry has also proffered more 
restrictive interpretations of the definition of ``interactive'' and 
intentionally fostered an uncertain, litigious environment.
    For example, the RIAA has entered into statutory licenses with 
services that offer programs based upon listener preferences and with 
services that allow users to skip songs and pause songs, but has sued 
other services offering similar functionality. In fact, strikingly, in 
the litigation that continues today, the last remaining recording 
industry plaintiff has asserted that non-interactive webcasts are not 
permitted to allow any level of individual consumer influence over a 
program. This assertion clearly conflicts with the RIAA's own licensing 
practices and the Copyright Office decision, and suggests that to be 
non-interactive a service must replicate the experience of broadcast 
radio. This would be an absurd result, as it would prohibit webcasters 
who already operate under significantly more restrictions than 
broadcast radio to utilize any functionality of the digital medium, 
absent direct licenses from the recording labels that would cause even 
greater anticompetitive impact than does the statutory license.
    DiMA believes that the recording industry is taking unfair 
advantage of the unfortunate uncertainty that was created by the 1998 
amendments to the definition of ``interactive service,'' in pursuit of 
grossly higher royalties for Internet radio services' use of any 
consumer influence features, notwithstanding clear Congressional intent 
and the Register of Copyrights' decision to the contrary. Moreover, the 
higher royalties for so-called ``interactive'' services (or for 
services that do not have million-dollar litigation budgets) will not 
have to be divided evenly with recording artists as they will fall 
outside of the statutory license.
    As DiMA has testified in other contexts, in a strict liability 
environment with high statutory damages, uncertainty chills innovation 
and can destroy the entrepreneurial spirit. We urge the Subcommittee to 
clarify the definition of Internet radio interactivity, or to revise 
the statute to delegate regulatory authority to the Copyright Office so 
that it periodically can re-define ``interactivity'' in light of newly 
developing services and market conditions. DiMA companies want to focus 
our energy on developing exciting royalty-paying products and services 
that combat piracy, rather than on lawyers and litigation.
    1.
       Although Broadcasters Have a Copyright Exemption to Utilize 
``Ephemeral'' Reproductions of Compositions In Support of Broadcast 
Performances, Webcasters Do Not Have An Analogous Exemption for 
``Ephemeral'' Reproductions of Sound Recordings And Are Required to Pay 
Significant Royalties for Such Copies.
  As the U.S. Copyright Office pointed out in its August 2001 Section 
            104 Report to Congress, there is an imbalance between the 
            legal and financial treatment of so-called ephemeral copies 
            of compositions in the broadcast radio context, and similar 
            copies of sound recordings in the Internet radio context. 
            This imbalance in favor of sound recording copyright owners 
            disadvantages Internet radio services, as well as broadcast 
            radio simulcasters.
  Since 1976 broadcast radio has had a statutory exemption, and thus 
            royalty-free authority, to make reproductions of 
            copyrighted compositions so long as the reproductions 
            remain within their possession and are used solely to 
            facilitate licensed royalty-generating performances of the 
            same music. Internet radio services also require the same 
            ephemeral recordings to enable their webcasts; but whereas 
            a typical radio station requires only one copy to transmit 
            over the air, webcasters need copies in different formats 
            in order to let consumers listen using different software 
            players (such as RealPlayer or Windows Media Player) and at 
            different bandwidth speeds (for dial-up and broadband 
            access). Although each one of the webcasters' ephemeral 
            recordings functions exactly the same way as the copies 
            exempted for radio broadcasters, recording companies 
            persuaded Congress to provide it with a statutory license 
            for the same ephemeral recording for which terrestrial 
            radio stations are exempt. The CARP and Librarian of 
            Congress awarded the recording industry nearly a 9 percent 
            bonus on top of the performance royalty for the making of 
            these ephemerals.
  In the Section 104 Report, the U.S. Copyright Office noted this 
            imbalance between the exemption that is provided 
            broadcasters for composition ephemerals but that is not 
            provided to broadcasters or webcasters for sound recording 
            ephemerals. The Copyright Office said that the compulsory 
            license for sound recording ephemerals, found in section 
            112(e) of the Copyright Act, ``can best be viewed as an 
            aberration'' and that there is not ``any justification for 
            the imposition of a royalty obligation under a statutory 
            license to make copies that have no independent economic 
            value and are made solely to enable another use that is 
            permitted under a separate compulsory license.'' Section 
            104 Report, p. 144, fn. 434. The Copyright Office urged 
            repeal of section 112(e); DiMA agrees.
    2.
       The Section 114 Programming Restrictions are Overly Rigid, and 
Prevent Internet Radio from Engaging in Traditional Broadcast-Style 
Practices That Do Not Undermine the Recording Industry's Interests.
  Another disparity between the rights of broadcasters versus the 
            restrictions imposed upon webcasters is created by the 
            programming controls imposed by Section 114, namely, the 
            prohibitions against advance announcements and the sound 
            recording performance complement. See 17 U.S.C. 
            Sec. 114(d)(2)(c)(i) and (ii). While intended by Congress 
            to limit the digital public performance license to radio-
            like activities, in reality these provisions prevent 
            Internet radio from engaging in many of the most common 
            practices of radio broadcasters that have proved, over 
            decades of experience, to promote rather than harm the 
            interests of the record labels and performing artists.
  For example, radio stations typically announce specific songs that 
            are going to be performed either next or at an unspecified 
            time in the near future, as an inducement to keep listeners 
            tuned to their stations; Internet webcasters cannot. Or, 
            when a famous artist such as Ray Charles passes away, radio 
            stations have complete latitude to pay tribute by playing 
            extended blocks of the artist's work; the sound recording 
            performance complement limits the ability of Internet radio 
            to honor the artist to no more than two songs 
            consecutively, and four songs total over a three-hour 
            period. There is no evidence, however, that the 
            broadcasters' practices have harmed the record industry, or 
            that webcasters' adoption of these practices would be 
            harmful. Given the clear promotional benefits of webcasting 
            to the recording industry and performing artists, there is 
            no reason why webcasting should not also be permitted this 
            additional programming latitude to better attract and 
            maintain its audience against broadcast competition.
  These restrictions, if they ever served a meaningful purpose, became 
            even more anachronistic in the age of personal computers as 
            media centers. Any consumer can use the same personal 
            computer to listen to webcasting or, by merely installing a 
            PC card with an FM tuner (or, soon, a digital radio tuner), 
            to broadcast radio. Soon it will not even be necessary to 
            use a PC card, since software-based radio tuners are being 
            developed and tested.
  Under current law, nothing restricts that PC from digitally recording 
            broadcasts on a hard drive either temporarily or 
            permanently. And nothing prevents PCs from redistributing 
            those recordings over the Internet utilizing peer-to-peer 
            software. Yet, even though the very same PC can be used to 
            either listen to the radio or to webcasting, only 
            webcasting has unfairly been saddled with programming 
            restrictions. Indeed, webcasters even have additional 
            obligations under Section 114 that broadcasters do not 
            have, such as to identify all songs they perform, to 
            utilize available technological means in their transmission 
            technologies to prevent direct recording of the webcast 
            signal, and to prevent automatic scanning and switching of 
            channels to find particular songs.
  The Section 114 programming-based restrictions cannot be justified, 
            particularly in light of the introduction of digital FM 
            radio and technological convergence. If Congress perceives 
            no danger from what consumers can do with broadcast radio 
            on a PC, then there is similarly no danger with respect to 
            webcasting. Therefore, the sound recording performance 
            complement and the restrictions on advance announcing 
            should either be eliminated or substantially relaxed, as a 
            matter of fairness, logic and parity.
    3.
       CARP Reform Legislation Accomplishes Much, But Additional Change 
is Needed to Ensure Balance in Sound Recording Performance Rights
  In recent years this Subcommittee has responded several times to 
            promote the business and legal environment of legitimate 
            online music services. The sound recording performance 
            right amendments provided a needed measure of stability to 
            our industry in 1998, and the Small Webcasters Settlement 
            Act was a lifesaver for many small webcasters.
  Additionally, DiMA is most appreciative of the Subcommittee's efforts 
            and accomplishments with regard to H.R. 1417, and we are 
            hopeful that the Senate will soon approve this bill and 
            that it will be signed into law by the President. However, 
            as Chairman Smith and Ranking Member Berman stated clearly 
            as that legislation was being considered, H.R. 1417 only 
            corrects procedural flaws in the CARP system, and not the 
            substantive flaws that are equally important.
  DiMA's goal with regard to the sound recording performance right is 
            the same goal we have urged before--that the law balance 
            the interests of copyright owners, creators and users, and 
            that all media companies be treated alike regardless of 
            whose business was created first or what technology a 
            service chooses to utilize.
  DiMA hopes the Subcommittee will recognize that consumers and 
            creators should be indifferent, to the technological means 
            by which their music or other entertainment programming is 
            delivered, so long as the content is of a high quality, is 
            reasonably priced, is secure against piracy, and is 
            accounted for and reasonable compensation is paid. Rather 
            than focusing on fiber versus satellite versus copper wire 
            versus coaxial cable, the law should ensure fair payment 
            based on the value of the work and the use--and then the 
            law will be well-balanced.
    Thank you for the opportunity to testify today.

    Mr. Smith. First, it seems to me that under the umbrella of 
the general subject of our hearing today are half a dozen 
substantive issues. I don't know if we are going to be able to 
address them all. It is rare that we would have so many issues 
that come up, and it will probably be the future, probably next 
year before we get to all of them, but at some point they do 
need to be addressed.
    Mr. Carson, in your testimony you implied a fairly bleak 
future for performing artists. You did not use of the word that 
is of interest to a lot of us, and that is ``piracy,'' but I 
think that is what you meant in some cases.
    How great a threat do you think that is to performing 
artists?
    Mr. Carson. Piracy is a very great threat to performing 
artists, depending on how you define ``piracy,'' of course. But 
just look at what is happening with peer-to-peer services right 
now. They pose a major threat to recording artists and record 
companies.
    Beyond that, talking about other kinds of conduct that are 
possible now or will be possible in the future, given the roll-
out of new technologies which do all sorts of wonderful things 
for the consumer, but they may not be so wonderful for the 
recording artist or record company trying to make a living off 
the recordings.
    Mr. Smith. Mr. Halyburton and Mr. Potter, do you agree with 
what Mr. Carson said; and if you agree that there is a real 
threat, who should be most responsible for preventing the 
misuse that Mr. Carson talks about?
    Mr. Potter. Mr. Chairman, that is a good question. The 
business of many DiMA companies is the distribution of sound 
recordings by sale, by subscription, by performance. So DiMA is 
wholeheartedly aligned with the RIAA, with performers against 
piracy.
    We are very sympathetic to these technological concerns, 
and as Mr. Marks has referred to, there are content protection 
standards in the DMCA today, standards that we agreed to when 
the DMCA amendments were developed.
    Mr. Halyburton. In terms of broadcasting, we believe that 
broadcast and even high definition broadcast do not represent a 
threat. Our content is not presented in a way that makes it 
kind of suitable content for the kind of process that is being 
talked about. The music is played tightly together, the disk 
jockeys talk over the fronts of the recordings and the backs of 
the records. There are musical drop-ins.
    It is not for radio stations just a back-to-back music 
situation like it is on the Internet for webcasters. It is 
really an entirely different kind of content and product.
    Mr. Smith. What are the odds, Mr. Halyburton and Mr. Marks, 
of you all, that is NAB and RIAA, reaching some kind of 
consensus on the subject of content protection?
    Mr. Marks. We have had preliminary discussions with the 
National Association of Broadcasters and look forward to 
further discussions to work cooperatively and to coordinate on 
finding a resolution to this problem.
    We would welcome further participation from Mr. 
Halyburton's company and other broadcasters to sit down with us 
and figure out the resolution here in a way that does not hold 
up HD radio. That is not our goal. We are excited by the 
opportunities that are presented by digital radio and do not 
want to interfere with the roll-out of that to consumers.
    Mr. Smith. Mr. Halyburton, do you agree with that?
    Mr. Halyburton. I agree with that. It is important that we 
not impair the roll-out of HD. We too face a lot of new 
technologies and new services, and we need to move aggressively 
into that area.
    Mr. Smith. Another question for you, Mr. Halyburton, and 
this is contracts with the performing rights organizations like 
ASCAP and BMI that already require broadcasters to report the 
songs they play. Given that, why do you consider it to be more 
difficult to report this type of information in order to 
qualify for the benefits under the 114 and 112 licenses?
    Mr. Halyburton. I believe if we stay somewhere near where 
we are now with the interim regulations, where we are talking 
about title, artist and the name of an album, those are the 
kinds of fields of information that are readily available to us 
and could be reported. Just in the interim regulations, we 
would be reporting a far greater number of times and a far 
greater amount of information to the RIAA as a result of that. 
So we believe these interim regulations are, for the most part, 
workable.
    What we really worry about is if we go beyond that and 
increase the frequency or the amount of fields, it will be very 
difficult to keep up with that.
    Mr. Smith. Mr. Potter, what is DiMA's response to the 
Copyright Office and also to NAB's suggestion that ephemeral 
copies have no independent economic value and ought not to be 
subject to a separate royalty payment?
    Mr. Potter. DiMA believes that the full value of our 
activities in the Internet radio space is found in the actual 
performance and that the performance royalty should cover 
essentially what we are doing.
    DiMA also believes that the law should be technologically 
neutral and where broadcasters and their over-the-air 
activities have an exemption from ephemeral copies, there is a 
reason for it, and we should have equal exemptions for 
ephemeral copies vis-a-vis music publishing royalties, and we 
should also have equal exemptions or equal obligations with 
regard to sound recording royalties.
    Mr. Smith. Thank you.
    Without objection, I am going to yield myself one more 
minute since we will only have one round of questions.
    This question is in an effort to run some interference for 
Mr. Boucher. If you all could very briefly respond to the point 
he made which is, we ought to treat regular broadcast and the 
streaming as virtually the same when it comes to royalties.
    Mr. Carson.
    Mr. Carson. We agree. Broadcasters should pay just like 
webcasters should.
    Mr. Halyburton. We believe local broadcasters should be 
exempt in their local area from any fees. It is the same. It is 
over the air, it is over the Internet. It is really the same 
service.
    Mr. Marks. We believe they should be treated the same.
    It is worth noting that the United States is the only 
country with sophisticated copyright laws that grant such as 
exemption, and that exemption is all the more extraordinary 
when you look at the facts in the marketplace today, where our 
industry is being devastated by piracy and is in need of more 
revenue streams, not less.
    Mr. Smith. Okay.
    Mr. Potter.
    Mr. Potter. Mr. Chairman, if this is the only round of 
questioning, I should thank you for your scheduling indulgence. 
Particularly on behalf of my bride, who appreciated it at least 
as much as I did.
    In response to your substantive question, I think there are 
two parts here. At least with regard to digital radio, Internet 
radio, cable radio and satellite radio, it seems unfair we are 
paying 50 percent higher royalties than satellite radio and 
cable radio.
    With regard to broadcast radio, we have a standing 
principle that all technologies, all media, should be treated 
the same. That is obviously a harder political effort, and we 
welcome that discussion; but at least in the interim, we would 
prefer, those of us in the digital space, to be treated the 
same.
    Mr. Smith. The gentleman from California, Mr. Berman, is 
recognized for his questions.
    Mr. Berman. Thank you, Mr. Chairman.
    It is good to know at least three of the four witnesses 
agree with Mr. Boucher that there should be a performance right 
for all kinds of broadcasting and streaming.
    Section 114 has language--and this is really for Mr. 
Marks--has language about accommodating and not interfering 
with digital rights management. Has that language aided in 
protecting piracy or the technical measures being utilized; and 
if not, why not?
    Mr. Marks. In addition to that statutory license condition, 
there is another statutory license condition, as well, that 
requires webcasters to implement protection measures in 
technologies that they are using. At the time that the 
legislation was passed, we thought that adequately addressed 
the content protection needs we had.
    As it has turned out, the content protection within the 
streaming technologies that are being used by webcasters and 
simulcasters are not effective against the literally hundreds 
of stream-ripping technologies that exist. Therefore, we 
believe giving some teeth to those conditions so that effective 
technologies are required to be used by webcasters and 
simulcasters should be considered by Congress.
    Mr. Berman. Given your answer, then, I would like to throw 
out sort of just at least a hypothetical grand bargain, which 
is the sound recording complement, from what you said, really 
is not--none of these provisions are achieving the goal of 
preventing piracy; and it is a problem for the licensees, such 
as the broadcasters and webcasters. You are complaining of 
different aspects of things you have to do which are not 
achieving the goal that the recording companies and the 
recording artists wanted to achieve.
    So would it be a fair trade-off to remove the sound 
recording complement requirements and, at the same time, 
strengthen the requirements of copy protection and perhaps 
shift that cost to the webcasters? In that situation, the DMCA 
would be able to be a backstop for one who is attempting to 
circumvent the anticopying technology; the copy protection 
would aid in the interoperability of the standards when 
accounting for different media players, like Microsoft or Real 
Networks, and would possibly prevent a future problem with the 
copying from HD radio. I would be interested in the panel's 
reaction to that kind of a trade-off.
    Mr. Carson. It is certainly worth thinking about. One part 
which I would need to give more thought to is the part that 
would shift the cost of that to the webcasters and 
broadcasters. I am not sure who should be bearing that cost.
    One could argue that record companies need to be thinking 
about that protection, not just on the Internet, so maybe it is 
a cost they are already going to bear. But I would agree that 
the current provisions in section 114 with respect to 
technological protection are pretty weak. There is a lot to be 
said for doing something to strengthen those, and if the trade-
off is you strengthen those and you get rid of the complement, 
we would want to hear what the interested parties have to say, 
but it is well worth thinking about.
    Mr. Potter. Let me start by saying that we have never been 
approached by the recording industry to discuss strengthening 
these technological protection measures, either as a matter of 
negotiation or as a matter of law, so this is a new subject.
    We clearly discussed it in 1998 leading up to the DMCA 
legislation, and we were all fairly comfortable that there were 
specific copy and no-copy possibility flags or bits in 
streaming technologies that our companies were certainly 
interested in using. DiMA companies are not interested in 
creating radio programming that people can copy and 
redistribute.
    As for a compromise or the grand trade-off, I think we are 
always interested in discussions that will inhibit piracy, and 
we are always interested in freeing up some regulatory 
restrictions. We might prefer to trade off willing buyer-
willing seller for technological protection measures, but if 
there is going to be a grand negotiation, we are looking 
forward to working with the Subcommittee and the stakeholders.
    Mr. Berman. Let me ask one additional question. The 
broadcasters and DiMA both say it is unfair to pay a separate 
license fee under section 112 when you need to make the 
multiple ephemeral copies to operate under the section 114 
license and you claim there is no independent economic value.
    Would it therefore makes sense to have that determination 
made in the course of establishing the 114 webcasting rate? In 
other words, do away with that provision of section 112, but 
allow a 114 CARP to adjust the rate if, and only if they find 
there is a value in certain aspects of making more copies to 
facilitate webcasting?
    Mr. Halyburton. Our big problem with the CARP and the whole 
process of it is the willing buyer-willing seller does not 
work, and then the sheer cost for both sides of litigating that 
and going through the process. It ends up, we end up paying 
more in legal fees than we would have paid in royalties. While 
we do not like the fees that we operate under today, and yes, 
they were negotiated, we did not have much choice because a 
CARP would be a far worse process.
    The CARP process is clearly flawed. This Committee has 
taken steps to try to work on that, and there is more that 
needs to be done.
    Mr. Berman. But what about--I understand your answer, 
although it did not focus on the specific issue. Wherein 
ephemeral copies have no real inherent value, I think DiMA 
makes not a bad case, why are we paying that? If that is the 
test, why not fold that into the 114 process, whether through 
negotiations or the CARP, too, I guess.
    And let me ask, Mr. Potter, your reaction.
    Mr. Potter. As a matter of practice, Mr. Berman, if we 
review the transcripts of that CARP, it was one king of a CARP, 
we would find that very, very little attention was actually 
paid to the 112(e) royalty and the value of those ephemeral 
copies. All of the testimony and all of the witnesses focused 
on the value of the performance.
    [11 a.m.]
    Mr. Potter. It was only in the very late stages that people 
threw a few quick arguments into the proceedings because they 
realized that the CARP would have to make a separate decision 
about whether the 112 ephemerals had any value. As a matter of 
practice, I think the CARP almost went there and then realized 
they had to make a decision, so they essentially threw in a 10 
percent kicker.
    We are not uncomfortable with saying the performance 
royalty should compensate for all uses of the sound recording 
associated with that performance, and essentially that glosses 
over the issue, but including all the reproductions of the 
sound recording, all the cache copies, all the network copies, 
all the formats. Ultimately, we think there's a fair argument 
that the value is in the performance, and whatever is 
associated with that, we are happy to pay our fair share.
    Mr. Berman. I am told that in certain situations, to get it 
faster and better, you need more ephemeral copies than in other 
situations. Some ephemeral copies are just a requirement to 
actually do the act, but others actually enhance the value.
    Mr. Potter. You're right, but they enhance the value of the 
performance, and therefore, if the value of the performance--if 
the consumer receives a higher-quality performance because more 
ephemerals are out there in the network, then the value is 
still in the performance, and the advertising dollars or the 
subscription fees are associated with the performance. So you 
might be correct that if there are more ephemerals cached out 
in the network, you will get a higher-valued performance.
    For the arbitrators to sit there and say, oh, my goodness 
there is an Intel server farm over here, and there is a Qwest 
server farm over there, and there's cache copies flying around, 
and how much are they worth is a very hard thing. It is much 
easier to say, how much is the performance being valued at, 
what are the advertising rates, what are the subscription 
rates, and it is a much more tangible economic argument. So I 
think we would agree with you generally.
    Mr. Marks. Can I give a brief answer on that? I think some 
of this is a little bit of semantics. The question is whether 
there is an independent economic value, whether you roll that 
into a performance royalty or you have a separate statutory 
license is really a different question. And as a practical 
matter, the arbitrators for the performance did address at the 
same time the ephemeral issue and found there should be an 
additional fee. And in the negotiations that we had in the 
marketplace last year, there was one fee--those two fees were 
rolled into one for purposes of the fee that exists today.
    But there is a misperception, I think here, that there is 
no economic value. In truth, there are a variety of reasons why 
there is economic value for those additional copies. Mr. Berman 
touched on one of them, making additional copies that could be 
on a distributed network architecture so that the reliability 
of streams and the user experience is better, therefore 
enabling a particular Webcaster to attract more listeners. Same 
thing for making available different formats to give the 
consumers choice so that one Webcaster versus another would be 
attracting more listeners to its site. All of those are 
examples of things that may lead somebody to make additional 
ephemeral copies and, therefore, would be evidence of 
independent, economic value.
    Mr. Smith. Mr. Halyburton, you would like to respond to Mr. 
Berman's question?
    Mr. Halyburton. Broadcasters, we just need one copy. We 
need it for our on-the-air performance, and it happens to be 
the same on-the-air performance that ends up on the Internet.
    Mr. Smith. The gentleman from Virginia Mr. Boucher.
    Mr. Boucher. Thank you very much, Mr. Chairman, and I also 
want to thank you for using some of your time to inquire into 
one of the issues I raised. I appreciate very much your doing 
that, and I think you have exhausted that particular point 
thoroughly, so I will move on to other matters.
    Let me at the outset just inject a bit of a note of caution 
about the idea of applying a broadcast flag to digital--
terrestrial radio. I wouldn't want Members of the Committee to 
make the underlying assumption that this is going to be 
accepted without debate or controversy, and that the only 
question is what do we trade it for, because I think this is 
going to be extraordinarily controversial in and of itself. And 
it implicates not only broadcasters and the RIAA, but it also 
implicates the manufacturers of equipment and ultimately 
consumers of broadcast radio services.
    And so the debate, if this proposal is put forward in a 
serious way, I think will be extensive, and it will not be 
something that is easily resolved in and of itself, and I 
wanted to note that at the outset.
    Mr. Carson, I have a couple of questions for you. Fairness 
and reasonableness is the standard that guides royalty rate-
setting with respect to the delivery of recorded music over 
satellites, over cable, and even when the recording industry is 
a licensee under the mechanical performance--the mechanical 
royalty. But the willing body, willing seller standard governs 
rate-setting under Webcasting, and experience has shown us that 
that produces a higher rate. So there is a, in my view, 
discriminatory treatment with regard to the Internet as 
compared to these other means of delivering the same service.
    When Mrs. Peters, the director of your office, testified 
before this Subcommittee in a previous hearing, Chairman Smith 
asked her if she thought that there should be harmonization of 
the standard for rate-setting across these various mediums 
given the fact that essentially the same service is delivered, 
and the only thing that differs is the platform upon which the 
service is delivered. And her answer to that question was yes, 
that she believed that the same standard should apply. Now, I 
don't think she went so far as to say what that standard should 
be.
    My question to you is this: Does the copyright office stand 
by that position today? Do you believe that we should have the 
same rate-setting standard with respect to all of the platforms 
over which recorded music is delivered for these purposes? And 
if you do stand by that recommendation, would you urge the 
Subcommittee to take action to harmonize that standard?
    Mr. Carson. You didn't get to the hard question.
    Mr. Boucher. I am going to get to it in a moment.
    Mr. Carson. The answer to that two-part question is yes.
    Mr. Boucher. Now let me get to the hard one. You have seen 
these two standard operations in operation. The fairness and 
reasonableness standard has, in my view, withstood the test of 
time. It is even enjoyed, as I indicated, by the recording 
industry itself when it is in the position of being a licensee 
and is paying royalties to songwriters and music publishers. 
But the recording industry is in a very different position when 
it is a recipient of royalties, and in that instance enjoys, 
from its perspective, a far more favorable willing buyer, 
willing seller standard. The way I'm posing the question, you 
might guess what my answer to it is, but I would like to hear 
yours. Which standard should we adopt once we go to parity and 
uniformity?
    Mr. Carson. I don't think the office has come to an 
official position on that, but we are aware of the issue. I 
spoke to the Register about it yesterday, and probably the best 
way to state it is that it would be the present inclination of 
the office to support a fair market value standard, which is 
probably a lot closer to and, frankly, probably tantamount to a 
willing buyer and willing seller standard. And the reason for 
that is simply that compulsory licenses are exceptions to the 
normal rule of exclusive rights, and the reason you have 
compulsory licenses is generally----
    Mr. Boucher. My time is limited, but I have an important 
question about that. How do you establish a fair market value? 
You are sort of endorsing by implication the willing buyer, 
willing seller test when the market itself is broken, when you 
really only have one seller, and that seller of the product has 
an antitrust exemption given by this Committee so it can 
collectively sell its product on the market. There is no 
competition in the offering of this service. You wind up with a 
take-it-or-leave-it proposition. Why in the face of that market 
structure which is inherently nonmarket-oriented would you 
suggest that willing buyer, willing seller or fair market value 
should prevail?
    Mr. Carson. Well, to say that fair market value is the 
standard is not necessarily to say that in order to determine 
what the fair market value is, you look to a particular 
agreement that might have been arrived at under those 
circumstances.
    Mr. Boucher. How would you get to it?
    Mr. Carson. I think there are a number of ways you can get 
to it. There was another model that was proposed.
    Mr. Boucher. Would you give me an example?
    Mr. Carson. I will give you one example, and I am certainly 
not endorsing it, but in that CARP that many people are upset 
with, there was another model that was, in fact, to say let's 
argue by analogy based upon what's happening with respect to 
musical compositions (ASCAP, BMI, and so on). Had the CARP 
elected to go in that direction, it would have been perfectly 
permissible to do so. That would have been another way of 
determining fair market value.
    Mr. Berman. You mean percent of revenue?
    Mr. Carson. It might have been.
    Mr. Boucher. Your recollection of this may be better than 
mine because I have to focus on lots of other things. You have 
the luxury of being able to focus on this. But my recollection 
of that CARP is that the arbitrators felt that their hands were 
tied because they were restricted by the statute, and they had 
to look at these transactions exclusively and couldn't go 
beyond the bounds of those to look at anything else. In fact, 
they protested that, did they not?
    Mr. Carson. I don't recall them protesting, but if that was 
their view, I think they had a rather inflexible reading of the 
law.
    Mr. Boucher. Well, I'm happy to hear you say that. Maybe if 
we're confronted with this situation again, we can show them 
the transcript of your answer here, and they will be a little 
more flexible in the way they apply things.
    I am going to ask one more question, with the Chairman's 
indulgence.
    Mr. Smith. Without objection, the gentleman is recognized 
for an additional minute.
    Mr. Boucher. I thank the Chairman.
    I understand the concern of the recording industry that the 
more interactive a service becomes, the more likely that 
service is to displace sales; that it was on the theory of that 
reality that the compulsory license was denied for interactive 
services. But we have had a very difficult time in establishing 
what is interactive and what is not, and it now appears that 
even the slightest amount of listener influence is sufficient 
to stimulate litigation and a potential denial of the 
compulsory license.
    For example, even these rating services that are nothing 
more than a public opinion poll, where the station is saying to 
the listeners in a Webcast, rate on a scale of 1 to 5 who your 
favorite performers are, not--or something such as that, not so 
that they can customize something for that particular listener, 
but so they can get a response and feedback from the audience 
in order to influence the general programming that that 
particular Webcaster offers, and even that tiny amount of 
listener influence, nothing more than a public opinion poll, 
has generated litigation against some of the major Webcasters. 
Even Yahoo has been involved in this litigation. And I think 
that experience cries out for more certainty. We need to know 
where the line is.
    Would you support this Committee giving you rulemaking 
authority so that you could draw the line and determine to the 
certainty of all parties concerned exactly what is the proper 
amount of listener influence in terms of deciding whether or 
not the compulsory license is available?
    Mr. Carson. Well, I'm not sure whether we don't already 
have that authority. We were invited by Mr. Potter to assert 
that authority.
    Mr. Boucher. Do you believe you have it?
    Mr. Carson. I think we may well have it, but I think it's a 
much more difficult task than one might imagine.
    Mr. Boucher. I don't discount the difficulty perhaps of 
achieving the task, but my question is a different one, and 
that is do you have the authority to undertake the rulemaking?
    Mr. Carson. I think we probably do.
    Mr. Boucher. Have you discussed this with Mrs. Peters?
    Mr. Carson. Not since the year 2000. I don't have an active 
recollection, but that was the last time it was on anyone's 
agenda.
    Mr. Boucher. Would you respond to us in writing with a 
simple answer as to whether or not it is the position of the 
office that you have rulemaking authority?
    [The response from Mr. Carson follows:]
    
    
    Mr. Smith. The gentleman's 9 minutes have expired, and the 
gentlewoman from California is recognized.
    Ms. Lofgren. I don't mind that 4 of my 5 minutes went to 
Mr. Boucher because he was asking questions that I had in mind 
as well. Just for clarification, as I was listening to the 
discussion that I found quite fascinating on ephemeral copies, 
it occurred to me that if instead of Members of Congress we had 
18-year-olds who know how to use computers listening to the 
concept that you would charge a special fee for cashing copies 
so that you could adequately stream, that that would be an 
additional fee is just astonishing. Is that what is really 
being proposed here?
    Mr. Potter. Actually that is what exists in the law, and I 
think what Mr. Berman was asking is can we capture the value 
that might or might not exist in those ephemeral copies in the 
performance royalty. And my response was it is much easier to 
quantify the number of performances and the value of the 
performances than it is to have any clue as to the number of 
ephemeral copies that are flying around a network or to assert 
a value on any one of those or all of those, since all of the 
value is upstreamed into the performance.
    Ms. Lofgren. I think--I know we have been notified we are 
going to have a vote in a few minutes, but it seems to me that 
if we step back from arguing about technology and look instead 
to analogizing the experience to the analog world, that this 
would be a lot simpler for us to propose.
    For example, on interactive, I do think that we need to 
have some certainty. And I would--if the office does not feel 
it has the ability to issue regulations, I look forward to 
hearing that, because I think we need to have some certainty so 
that the market can actually, you know, exist lawfully and 
there is not all this litigation. People need to know what the 
rules are. Having said that, if my kid can call into an on-air 
radio station and request a song that will someday be played, 
and that is not interactive in the real radio world, why would 
it be interactive on a Webcast.
    Mr. Marks. Could I address that point? I am not aware of 
any copyright owner or label or artist that has taken the 
position in a litigation that the mere calling in, so to speak, 
over the Internet, providing views on programming that is not 
especially created for the recipient, which is the test, is 
interactive. So I don't think the uncertainty that is being 
discussed now exists. Indeed, the definition is very 
straightforward, the definition of interactive. It is whether 
the programming, based on input from the user, is being 
specially created for that user.
    Mr. Potter. I would be happy to respond. I notice Mr. Marks 
tempered his response with the phrase ``in litigation,'' and 
nobody has asserted that in litigation. Under the threats of 
litigation--first of all, the threats. Obviously, the 
litigation is done by the individual companies. But the 
discussions about what is legal or not often do not happen in 
litigation because most of our companies do not have the 
sizeable litigation budgets that the record industry has, and 
therefore, they--having seen the first huge litigation when 
every company, MTV settled, Musicmatch settled, Xact Radio went 
out of business--having seen these companies driven out of 
business or driven to their knees by an ambiguous statute, they 
have decided not to innovate and not experiment and not to 
invest in those sorts of technologies.
    Ms. Lofgren. That is the impression that I had had. And it 
seems to me that some certainty here, wherever we draw the 
line, would be very helpful, and we ought to--I mean, if you 
can go on the radio, and they do, and say, what is the top 
tune, and Billboard says, what's the top tune, I mean, 
basically the surveys are the same function. So I am just 
urging, I guess, that we look to the consumer experience and 
measure that against the analog world rather than, as we have 
done for the past several years, chase our tails trying to 
control technology, which we will fail at because the 
technology is going to continue to change. We'll never be able 
to contain it. And I think that the experience of the recording 
industry is the poster child for how that is a losing strategy.
    We need to get some certainty, and we need to make sure 
that we do not deter different platforms from delivering 
content. And I think that the system we have now is certainly 
broken, and hopefully, with your efforts, we can fix it.
    I just want to make one other comment on the broadcast flag 
issue raised by Mr. Boucher. Too often, I think, we are 
discussing these issues here between content owners, creative 
artists, distributors of material. But Mr. Boucher is correct, 
there is a whole other world that's involved in this. And 
technology developers. And you could have any standard in the 
technology world, and we'll live within it.
    I am very concerned and alert to the possibility that we 
might enable monopolistic approaches to the consumer electronic 
world or software world that would be adverse to all of us, 
including creative artists and content holders. So if there is 
any interest in doing a broadcast flag, I do agree that we have 
to have substantial review of this to prevent that kind of 
adverse outcome that would really end up squeezing every other 
act, including the RIAA and everyone else in this whole area. 
And with that, thank you, Mr. Chairman.
    Mr. Smith. Let me thank all the panelists. This was very, 
very interesting. You all know that we are not likely to move 
this legislation this year, but we do hope to get an early 
start next year, and we will consider everything you mentioned 
in your testimony and look forward to hearing from you again.
    Thank you for being here, and we stand adjourned.
    [Whereupon, at 11:20 a.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Howard L. Berman, a Representative 
     in Congress From the State of California, and Ranking Member, 
    Subcommittee on Courts, the Internet, and Intellectual Property
    Mr. Chairman thank you for holding this oversight hearing on 
balancing the interests of sound recording copyright owners and the 
broadcasters. I'm looking forward to hearing from the witnesses about 
the impact of internet streaming on various business models. While I am 
confident in the outcome of the Bonneville case, I am not convinced 
that pure webcasting and the simultaneous webcasting of an ``over the 
air'' radio broadcast are identical activities that should be subject 
to the same licensing conditions. It may be that the rules should be 
technology neutral, or it may serve a greater public need to carve out 
exceptions to the rules to account for the differences between the 
technologies.
    However, before we get to the points of controversy, it is 
important to note that at least all the witnesses here today, 
acknowledge that the prevention of piracy of sound recordings is an 
important goal.
    With the advent of new technologies we are once again faced with 
the problem of ensuring that performing artists, record companies and 
others whose livelihood depends upon effective copyright protection for 
sound recordings, will be protected.
    The Copyright Office has suggested granting copyright owners of 
sound recordings a full performance right to harmonize the rights of 
owners of sound recordings with those of other copyright owners once 
and for all. There is great appeal to that proposal in that we need not 
focus only on the immediate problem and seek the particular solution, 
we can stop having the tail wagging the dog of whatever technology is 
next. Just a short time ago we proposed the sound recording complement 
to prevent copying of music, which would replace sales of sound 
recordings. Now, there is already technology which allows users to copy 
all of the recordings transmitted on a webcast channel, disaggregate 
them, save them to substitute for purchases of legitimate downloads or 
CDs and redistribute them with peer to peer software. In the near 
future, we will probably be back here to discuss in depth the effect of 
digital audio broadcasting or HD radio on the sound recording 
performance right as well.
    I doubt the witnesses before us today will express unified support 
of a full performance right for sound recordings. Instead, broadcasters 
and webcasters take issue with some of the provisions of the Section 
114 license. For its part, the record industry illuminates problems 
emanating from the ease of copying sound recordings from a broadcast or 
webcast.
    Clearly, if we are to have a Section 114 webcasting license, it 
should be a workable license. Therefore, we should ensure that its 
terms do not unduly burden licensees, nor unduly impair the legitimate 
interests of copyright holders. On the latter issue, I am concerned 
that several provisions of Section 114 designed to deter piracy and 
preserve the recorded media market are not working. Specifically, I 
refer to the sound recording performance complement, and the 
requirement that transmitting entities accommodate copy protection 
technologies used by sound recording copyright owners. It appears these 
provisions have fallen short in terms of protecting the interests of 
sound recording copyright owners. I expect to ask our witnesses a 
number of questions about the continued utility of these provisions as 
currently structured.
    There will also be testimony about the need, or lack there of, for 
a separate license to cover multiple ephemeral copies. Section 112(e) 
created a statutory license to allow any service operating under the 
Section 114 statutory license to make one or more ephemeral recordings 
of a sound recording to facilitate the digital transmission of these 
works governed by section 114. Even the Copyright Office had stated 
that Section 112(e) ``can best be viewed as an aberration.'' However, 
the marketplace has borne out that there is a value to multiple 
ephemeral copies. There seems to be a discrepancy as to what the 
valuation of an ephemeral copy is. Instead of computing a separate 
value for the 112 license to copy could we put before the CARP 
establishing the rate for the 114 license the requirement to include in 
its evaluation the value, if any, of the multiple ephemeral copies?
    I am aware as described in the written testimony of NAB and DiMA, 
that there is some distrust among the broadcasters and webcasters of 
the CARP proceeding. After all the claim is made that stations pay at 
least 5 to 6 times as much for sounds recording royalties that for 
musical works. However, I am not sure that speaks as much to the CARP 
as it does to the inequity of royalties paid to musical works copyright 
owners. That being said I agree that to some extent the CARP needs to 
be reformed and therefore support HR 1417.
    Technology provides many new opportunities to reach new audiences. 
We must be wary though of trampling on certain rights in order to get 
there.
    Thank you and I yield back the balance of my time.

                               __________
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
 in Congress From the State of Michigan, and Ranking Member, Committee 
                            on the Judiciary

    I believe that our laws are where they should be on digital music 
rights. It is the songwriters, the recording artists, and the record 
labels that actually create the content that the other industries 
profit from; it is only fair that they get paid for it.
    In the mid-1990's, I was a lead proponent of the idea that there 
should be a digital performance right. The lay of the land, as we all 
know, was that artists and labels received no royalties for radio play 
of their music, although the songwriters did. When a new technology, 
the Internet, came along, I believed it was the right thing to do to 
make sure that all of the creators of music were compensated for their 
creativity and efforts.
    After all, it is copyrighted works that are the driving force of 
our economy, providing what may be the only positive balance of trade 
for our nation. It would be unwise to bite the hand that feeds us by 
saying they should not be compensated for what they do.
    I do not think that the fact that artists do not get paid for over-
the-air radio broadcasts is an effective argument for saying Internet 
transmissions should be royalty free. An oversight in one technology 
does not mean there should be an oversight in another.
    I also believe that, as we develop newer technologies, we should 
ensure that content is adequately protected. The development of 
technology that permits copyright law to be evaded is not something to 
cheer; in such instances, the copyright laws must be updated.

                               __________
 Prepared Statement of the American Federation of Television and Radio 
  Artist (AFTRA), the American Federation of Musicians of the United 
States and Canada (AFM), the Recording Artists Coalition (RAC), and the 
                    Future of Music Coalition (FMC)

    On behalf of the thousands of recording artists--both musicians and 
vocalists, and both royalty artists and studio artists--who belong to 
our organizations, the American Federation of Musicians of the United 
States and Canada (``AFM''), the American Federation of Television and 
Radio Artists (``AFTRA''), the Recording Artists Coalition (``RAC'') 
and The Future of Music Coalition (``FMC'') would like to thank the 
Chairman, the Ranking Minority Member, and the Members of the 
Subcommittee for holding a hearing on the transmission of sound 
recordings and in particular for their continued concern, oversight and 
leadership on the many issues of crucial importance to recording 
artists and the industries that depend upon their artistic product.

                              INTRODUCTION

    The theme of the hearing is balance, and representatives of the 
industries that are built upon selling, broadcasting and transmitting 
our recordings appeared on the panel before this Subcommittee and 
argued that elements of the current system are sufficiently out of 
balance as to cause serious harm to their industries. Ironically, the 
panel itself was off-balance in a critical way: it did not include any 
representatives of the musicians and vocalists whose recorded 
performances are at the heart of the recording, broadcasting and 
webcasting industries. To be sure, as creators we desire the success of 
the recording companies who invest in our art, as well as of the old 
and new industries that help bring our art to the public. But it must 
always be remembered that it is our music that the public wants to hear 
and therefore our music from which these industries profit. Simply put, 
without our creative work, there would be no sound recordings and no 
musical product to broadcast or transmit.
    Given that fact, there really is no feasible way to achieve a 
balance in and among these industries unless the needs of recording 
artists are met and our voices are heard. As we discuss in more detail 
below, recordings do not spring by magic from our instruments, and 
although innate talent is necessary, talent alone is not sufficient to 
bring recorded work to fruition. Recording careers require hard work 
and the investment of vast amounts of time, effort and perseverance on 
the part of musicians and vocalists. Moreover, as we also discuss 
below, most recording artists--whether they are royalty artists or 
studio artists--do not fit the public stereotype of rich celebrities. 
Very few talented and hardworking artists can manage to survive 
economically, and those that do for the most part earn only modest 
livings. Historically, a key part of those modest earnings hinged on 
the sale of recordings because the lack of a performance right in sound 
recordings deprived recording artists of any income stream from the 
broadcast of their work. Now, even these modest earnings from sales are 
threatened by the ongoing transformation of the business from one based 
on the sale of product to one based on the sale of a listen. Unless 
performers can survive economically during this time of change and in 
whatever new world arrives, the relevant industries--and American 
culture--will most assuredly be out of balance because there will be no 
recording artists left who can afford to dedicate their working lives 
to making recorded music. Before turning to our detailed discussion of 
these issues, we set forth additional information about our 
organizations.

  AFTRA, THE AFM, RAC AND FMC REPRESENT THOUSANDS OF RECORDING ARTISTS

    The American Federation of Television and Radio Artists (``AFTRA'') 
is a national labor organization representing approximately 80,000 
performers and newspersons that are employed in the news, 
entertainment, advertising and sound recording industries. AFTRA's 
membership includes more than 11,000 recording artists, including more 
than 4,500 singers who have a royalty contract with a record label 
(``featured artists'') and roughly 6,500 singers who are not signed to 
a royalty contract (``non-featured artists'').
    The American Federation of Musicians of the United States and 
Canada (AFM) is an international labor organization composed of over 
250 Locals across the United States and Canada, with over 100,000 
professional musician members. AFM members perform live music of every 
genre and in every size and type of venue and include over 10,000 
musicians actively involved in recording music as featured artists or 
studio musicians.
    The Recording Artists Coalition (``RAC'') is a nonprofit coalition 
formed to represent artists with regard to legislative issues and to 
address other public policy debates that come before the music 
industry.
    The Future of Music Coalition (``FMC'') is a nonprofit organization 
that identifies, examines and translates the challenging issues at the 
intersection of music, law, technology and policy for musicians and 
citizens.
    Our groups represent a wide range of diverse royalty artists at all 
levels and stages in their careers from Blink 182, the Temptations, 
Elton John, Billy Joel, Jay Z, David Sanborn, Mandy Patinkin, Aimee 
Mann, Quincy Jones, Lowen & Navarro, Anthony Hamilton to Ruth Brown, as 
well as most of the professional studio musicians and session singers.

   SOUND RECORDINGS ARE UNIQUE WORKS OF ART THAT ARE CREATED BY THE 
             TREMENDOUSLY HARD WORK OF TALENTED PERFORMERS

    Traditional broadcasters and the new digital transmission services 
often point out with some asperity that they already pay one set of 
creators, the songwriters, for the right to broadcast or transmit the 
underlying musical work embodied in the sound recordings they play. It 
is absolutely essential that they do so, because songwriters, like 
performers, are at the creative core of the music industry and must be 
able to earn a living if American culture and its varied entertainment 
industries are to be healthy. But it is equally essential to understand 
that the act of recording the song involves an additional and different 
creative process which also must be compensated if recordings are to be 
made.
    Thus, Harold Ray Bradley, the most recorded guitarist in history, 
frequently adds his own conclusion to the songwriters' motto. ``It all 
starts with a song,'' he agrees, ``but it doesn't end there.'' Songs 
are beautiful and unique works of art, but they are meant to be heard, 
and unless they are performed by musicians and vocalists, they can 
reach no one at all. It is when a song is recorded, and the recording 
is played and heard, that a song can reach out to hundreds of thousands 
or millions of people.
    Recording musicians and vocalists breathe life into a song, not 
only by making it audible, but also by shaping its tone, style, rhythm, 
sound and color--interpreting it, and in the process, creating yet 
another unique work of art, the recorded musical performance. Two 
recordings of the same song can be utterly different, and reach 
completely different levels of success. In the 1960s, Ray Price 
recorded the Kris Kristofferson song ``Help Me Make It Through the 
Night'' in a Frank Sinatra, two-beat style. Ray Price was a popular 
recording artist, but that recording was not a hit. In 1970, Sammi 
Smith recorded the same song, and with it won a gold record, a Grammy, 
and a #1 spot on the country charts. What was different? The song was 
the same great song in both versions. But in the Sammi Smith version, 
she contributed her beautiful, seductive voice. And the musicians made 
an important creative contribution as well--they slowed the song down 
and put it into a straight 8ths rhythm that gave Sammi Smith the space 
she needed to put a lot of feeling into the lyrics.\1\
---------------------------------------------------------------------------
    \1\ Guitarist Harold Ray Bradley described and analyzed the two 
recordings of ``Help Me Make It Through the Night'' in detail in his 
written testimony submitted to the Copyright Arbitration Royalty Panel 
that set certain Section 114 compulsory license rates for digital 
performances of sound recordings. Direct Case of the American 
Federation of Musicians of the United States and Canada, In the Matter 
of: Digital Performance Right in Sound Recordings and Ephemeral 
Recordings, Docket No. 2000-9 CARP DTRA 1&2, April 2001. Bradley 
performed on the Ray Price recording.
---------------------------------------------------------------------------
    Recording artists work long and hard at their craft, whether they 
are the ``featured'' or ``royalty'' artists whose names are most 
associated with the recording, or whether they are the studio musicians 
and vocalists whose performances form the musical backbone of the 
recording. There is no one model of how the recording process works, 
but the bottom line of every kind of recording is the talent, skill, 
time, effort and work required of the performers in the process.
    For example, recording artist Jennifer Warnes' 1986 recording 
Famous Blue Raincoat was a tremendous commercial, critical and 
audiophile success.\2\ She conceived of the album as a tribute to 
songwriter Leonard Cohen, and in it, she reframed many of his songs 
from folk renditions to edgy combinations of acoustic, electronic and 
synthesized sounds. She invested a year of her time and worked on all 
the creative and practical elements necessary to bring her concept to 
fruition. She not only contributed the featured vocals, but also 
secured the funding, chose material to be recorded, rented the studio, 
found musicians, and with the collaboration of the fellow-artists she 
chose, arranged, recorded, mixed and mastered the album. It takes 
innate talent to be a recording artist, but it takes much more as well. 
Royalty artists--whether they are primarily vocalists like Jennifer 
Warnes, primarily instrumentalists, or a combination of all the 
creative disciplines like singer-songwriter-instrumentalists--work hard 
for many years to develop all the skills and abilities that allow them 
to express their creative vision in the recording process. The whole 
course of their professional lives, and each recording project 
individually, represent investments of time, skill, energy and plain 
hard work.
---------------------------------------------------------------------------
    \2\ Jennifer Warnes described the creative process involved in 
Famous Blue Raincoat in her written testimony written testimony 
submitted to the Copyright Arbitration Royalty Panel that set certain 
Section 114 compulsory license rates for digital performances of sound 
recordings. Direct Case of the American Federation of Television and 
Radio Artists, In the Matter of: Digital Performance Right in Sound 
Recordings and Ephemeral Recordings, Docket No. 2000-9 CARP DTRA 1&2, 
April 2001.
---------------------------------------------------------------------------
    Although the listening public often does not learn the names of 
most of the studio musicians and vocalists who perform on the 
recordings they love, the creative contributions of those performers 
are also critical to the sound and success of the recordings. The 
``background'' musicians and vocalists in a recording session style the 
song with intros, fills, chord changes, solos, tempo and rhythms. Their 
talent, insight and skills are necessary to achieve a truly great 
arrangement, interpretation and performance.
    A classic (and frequently analyzed) example that beautifully 
illustrates the work and collaboration in the recording studio is Patsy 
Cline's recording of the Willie Nelson song, ``Crazy''--the number one 
jukebox hit of all time.\3\ Seven studio musicians were called to that 
session, and with producer Owen Bradley they created a perfect 
arrangement and performance that transformed the song into a timeless 
hit. For example, bass players Bob Moore and Harold Ray Bradley are 
said to have achieved the apex of country bass with the rhythms they 
created together,\4\ Walter Haynes added a tremolo sound on pedal steel 
and Floyd Cramer added a blues element on the piano, all of which, 
together with the inimitable background vocals of the legendary 
Jordanaires, are an integral part of the greatness of the recording. 
Like the royalty artists, studio musicians and vocalists must have 
innate talent, but they also must work hard to develop their skills and 
hone that talent in order to deliver the performances that transform 
songs. It is a lifetime career, and takes an investment of all their 
time and abilities.
---------------------------------------------------------------------------
    \3\ Guitarist Harold Ray Bradley described the ``Crazy'' recording 
session in his written testimony submitted to the Copyright Arbitration 
Royalty Panel that set certain Section 114 compulsory license rates for 
digital performances of sound recordings. Direct Case of the American 
Federation of Musicians of the United States and Canada, In the Matter 
of: Digital Performance Right in Sound Recordings and Ephemeral 
Recordings, Docket No. 2000-9 CARP DTRA 1&2, April 2001.].
    \4\ ``30 Essential Bass Albums You Must Own,'' Bass Player, June 
1997.
---------------------------------------------------------------------------
           PERFORMERS DEPEND ON COMBINING MANY INCOME STREAMS

    The popular image of recording artists as fabulously rich 
celebrities is very far from the reality. A few creators in the music 
business do earn substantial livings. Many more fail to survive at all 
in the industry--despite being gifted musicians or vocalists who work 
hard at their craft. And, of the successful creators--those who do 
manage to survive financially--most either struggle financially or earn 
no more than a modest living. They are ordinary, hard-working 
Americans. What sets them off from the general population, other than 
their musical talent, is the fact that living by their talents does not 
provide them with a normal job or a steady paycheck. Instead, they are 
participants in the unique and complicated music industry, and earn 
their livings--or don't--from complicated statutory and contractual 
arrangements that produce sporadic and varied income streams.
    For example, royalty artists are not paid for all of the many 
varied creative tasks they perform when they make a recording. Whether 
they are vocalists or instrumentalists, they are, for the most part, 
small businesspersons or entrepreneurs, with a complex web of creative 
and business relationships developed to enable them to make their 
recorded product. Typically, royalty artists enter into complex 
contracts with recording companies in which the companies invest in the 
production and promotion costs and then make royalty payments to the 
artist based on sales. Later, those monies are recouped from the 
artist's royalties. In most cases, the additional costs of marketing 
and publicity, videos, tour support and other promotions are recouped 
as well, all from the artist's small share of the pie. The bottom line 
is that a royalty artist can be quite successful in terms of sales and 
artistic value without making a substantial profit on recording sales. 
Sales are crucial to recognition, survival and success--but they almost 
never produce sufficient income on which to live. Royalty artists must 
also develop--and they depend on--other income streams such as live 
concert fees, T-shirt sales and other merchandising, songwriting income 
(for those who are also songwriters) and other business opportunities 
to help them make a living.
    The income stream that all recording artists historically have 
lacked is, of course, any income based on the performance of their 
recorded work on the radio--even though radio airplay of recordings 
built broadcasting into an enormously profitable industry. Under 
current law, performers receive no payments as a result of digital or 
analog radio airplay because there is no full performance right in 
sound recordings in the U.S. However, since 1995 there has been a 
limited digital performance right from which royalty artists benefit. 
Royalty artists share in the license fees for interactive digital 
performances (like on-demand streams on the Rhapsody or Napster 2.0 
subscription services) in accordance with their royalty contracts (or 
through direct licenses if they own their copyright in the sound 
recording). As to the compulsory license payments made for non-
interactive streams transmitted by webcasters, satellite radio and 
cable subscription services, royalty artists are paid 45% of the 
license proceeds in accordance with a sharing scheme mandated by 
Congress, and because this money is paid to artists directly, it is not 
recoupable. The income streams produced for recording artists by the 
digital performance right are very small now, but artists have a vital 
stake in the growth of this new market for their work and its potential 
to expand as an important income stream, one of the many streams 
necessary for them to earn a living.
    Like royalty artists, studio musicians and vocalists are far from 
the typical employee of a standard business. They don't have nine-to-
five jobs but work in recording sessions for a host of different 
employers whenever they are called. And, like royalty artists, they 
historically are dependent upon the sales of recordings as a critically 
important part of their income.
    Musicians working under the AFM's Sound Recording Labor Agreement--
which is negotiated with all five major recording companies and later 
agreed to by hundreds of small and independent companies--earn scale 
wages, pension contributions, health and welfare payments, and ``re-
use'' fees if the recording later is used in another medium like a 
movie. In addition, musicians earn deferred income based on sales. 
Signatory record companies are required to make contributions to the 
Sound Recording Special Payments Fund. These contributions are made 
according to negotiated formulas based on sales. The Fund is then 
distributed annually to recording musicians in accordance with a 
formula based on their scale earnings in the industry over a five year 
period. It is important to note that royalty musicians also earn these 
benefits when they record for signatory companies.
    Similarly, studio vocalists working under the AFTRA National Code 
of Fair Practice for Sound Recordings--which is negotiated with all 
five major recording companies and later agreed to by hundreds of small 
and independent companies--also earn scale wages, contributions to the 
AFTRA Health and Retirement Funds, and ``re-use'' fees if the recording 
later is used in another medium. Health and welfare contributions are 
based on earnings (not just scale wages, but all earnings including 
royalty earnings for royalty artists) and thus form an important source 
of health care coverage for vocalists. Under the Sound Recordings Code, 
vocalists also benefit from sales because they receive ``contingent 
scale'' (i.e., additional) payments when the records on which they 
perform reach certain sales plateaus. As noted, royalty vocalists also 
earn these benefits when they record for signatory companies.
    Finally, studio musicians and vocalists also benefit from the 
digital performance right in sound recordings created by Congress in 
1995. Studio musicians and vocalists are entitled to receive a portion 
of the major recording companies' interactive digital license income 
pursuant to a 1994 agreement between those companies, the AFM and 
AFTRA. In addition, they are entitled by law to 5% of the compulsory 
license fees (2\1/2\% for musicians and 2\1/2\% for vocalists) paid by 
the non-interactive digital streaming services such as webcasters, 
satellite radio and cable subscription services pursuant to the Section 
114 compulsory license for non-interactive digital transmissions. As 
yet, these income streams are very small, but studio musicians and 
vocalists have a vital stake in their growth.
    The AFM and AFTRA are proud of the standards they have set in the 
recording industry, which allow many musicians and vocalists to earn 
decent livings in an occupation that is characterized by uncertainty 
and intermittent employment. But overall, the earnings of studio 
musicians and vocalists, like those of royalty artists, are modest, and 
dependent on the ability to add together income from many sources.

      INDUSTRY CHANGES AND NEW TECHNOLOGIES POSE SERIOUS THREATS 
                AS WELL AS NEW OPPORTUNITIES TO ARTISTS

    As we move into the twenty-first century, new technologies, 
services and business realities are affecting--and in some instances, 
threatening--artists' ability to earn a living.
    While the reasons for the reduction in sales of recorded music are 
hotly contested, there is no question that in the United States and 
internationally sales have dropped precipitously. Fewer sales 
translates into real financial hardships for recording artists--less 
money to invest in new recordings, even lower royalty payments, lost 
Special Payment Fund contributions which decrease musicians' income, 
lessened potential for contingent scale payments to vocalists, and 
overall the contraction of the industry in which we work and strive to 
earn a living.
    Meanwhile, new technologies and new services offer exciting new 
ways to deliver music. Digital downloads, digital subscription 
services, internet radio, digital audio broadcasts are all developing 
and are, or soon will be, competing with each other and hopefully 
expanding the marketplace for music. Obviously, much of this new 
development focuses not on selling recordings (in any format) but 
rather on selling the opportunity to listen to the broadcast or 
transmission of a chosen recording or genre of recordings.
    How ever these new services and markets will develop, one abiding 
truth will remain: an essential part of the balance that must be struck 
by our copyright law is that the new models must provide adequate 
compensation to recording artists, both royalty artists and studio 
artists. If the recording, broadcasting and transmitting industries are 
allowed to seek only to balance their business interests vis-a-vis each 
other, without providing for the livelihoods of artists, there 
ultimately will not be a varied, lively or vibrant creative product on 
which to base their businesses.

                     THE NEED FOR PERFORMANCE RIGHT

    In this new era, we would like emphatically to reiterate the 
Copyright Office's call for a comprehensive performance right in sound 
recordings. The denial of a full public performance right is 
inconsistent with the philosophy of copyright law to secure the 
benefits of creativity to the public by the encouragement of the 
individual effort through private gain. Without a full performance 
right, especially as we move into an era of digital technologies and 
new business models, recording artists must rely disproportionately on 
a dwindling sales income, which will not provide the necessary 
incentive for recording artists to create in the twenty-first century.
    The historical denial of a performance right to recording companies 
and recording artists has always been inconsistent with the structure 
of the ``bundle of rights'' that make up copyright in our country. 
Copyright owners of every other copyrighted work that is capable of 
being performed also enjoy a performance right in that work and, thus, 
have the right to profit from their creative effort by licensing 
performances and earning performances royalties. The Copyright Office 
has explained the historical anomalies that resulted in denying sound 
recording copyright owners and performers the same ability that other 
creators have to benefit financially from their work when others 
perform it publicly. We agree wholeheartedly that this situation should 
not be allowed to continue.
    The U.S. is one of the few industrial countries--if not the only 
one--that does not have a broad performance right for sound recordings. 
At least 75 nations, including most or all European Union member 
states, have a performance right. Entertainment is America's number one 
export and more U.S. recordings are performed overseas than foreign 
recordings are performed here. As a result, in addition to not 
receiving compensation when their works are broadcast here, U.S. 
performers and record labels lose hundreds of millions of dollars each 
year that are collected when U.S. recordings are broadcast overseas 
because we do not have this right in the U.S.
    This situation is all the more untenable in light of the fact that 
radio stations have built vibrant and successful businesses--and earned 
huge profits--based upon the broadcast of our members' work. It is our 
music that attracts listeners to radio stations, and enables them to 
sell advertising on the basis of market share. Broadcasters receive 
their biggest resource--our recorded performances--at no cost, and then 
do not share any revenue with the creators whose sound recordings are 
actually responsible for the revenue.
    The broadcasters' mantra--that radio broadcasts promote sales, and 
that therefore they should have no obligation to pay for the 
performance, is neither universally true nor particularly relevant. 
``Promotional value'' of a performance does obviate the requirement to 
pay creators of other creative works; for example, a novelist can 
expect to see increased book sales if the novel is made into a movie, 
but no one would suggest that the novelist therefore need not be paid 
for the visual interpretation. In any event, the promotional value of 
radio airplay cannot be universally assumed. Many recordings race up 
the airplay chart but never make it out of the middle of the sales 
chart. In addition, oldie sound recordings provide the radio stations 
with an entire format and stream of revenue but do not result in 
commensurate sales for the performer or record label.
    Moreover, the rationale of the twentieth century no longer applies 
in the twenty-first century. Even if the promotional argument provided 
a justification for denying a performance right in sound recordings in 
the twentieth century, business paradigms are now changing. As the 
music industry changes, revenue streams also are changing--some are 
new, some are growing and some are now less important. The public 
performance revenue income stream is taking on increased importance in 
the new business models. As we noted above, the time may soon arrive 
when the presumed--and most important--``consumption'' of a sound 
recording is no longer a sale but is a ``listen.'' In the future, 
especially as we become wireless, many music fans may never ``buy'' 
product, but rather will rely on broadcast/transmission services to 
hear all the music they desire. A great variety of such services, many 
of them without any component of a traditional sales distribution, 
already are becoming more important. There are many radio streaming 
services such as XM, Sirius and Rhapsody where the consumer purchases 
``listens'' instead of product or downloads.
    The music industry must change, and we need to encourage new 
creative legitimate models that serve customers and music fans in new 
ways that the customers want. But as much as we support the development 
of new technologies and new models--and we do support them because we 
believe that they can be good for our art--we urge this Subcommittee 
and all of the relevant industries to take seriously the fact that 
these new developments cannot thrive if they result in imbalances that 
harm our ability to survive as creators. The digital music services 
that are subject to the Digital Performance Right in Sound Recordings 
Act must pay performance royalties in order to use our music; but, 
unfortunately, FCC licensed radio stations are not required to do so, 
even when they are competing for the same listeners. That certainly is 
not a level playing field. XM has to pay for using sound recordings, as 
it should; why should Clear Channel have an unfair advantage when they 
are both competing for the same listeners?
    Copyright law must regain its focus so that it continues to provide 
incentives for investment and creative works in the digital landscape. 
In the past, Congress has worked to ensure that the Copyright Act 
strikes the appropriate balance to provide incentive for the creation 
of sound recordings and exploitation of those works in a digital world. 
The balancing act must be an ongoing one. As technology propels 
broadcasting and performances, rather than just sales, into the 
ultimate consumptive use, it is more important than ever that sound 
recordings be given a performance right, and that the real needs of 
artists remain a critical consideration in the policy debates.

                        DIGITAL AUDIO BROADCAST

    The emergence of digital audio broadcasting (``DAB'') reinforces 
the immediate need for a performance right.
    Digital audio broadcast has developed, and likely will continue to 
develop, differently from what was envisioned in 1995. It is not simply 
the same as analog radio transmitted digitally. Rather, DAB is being 
advertised as ``radio you'' because it will be able to provide 
individualized services and will have the capacity to broadcast--or, 
more accurately, to ``narrowcast''--programming that is tailored for 
each recipient. DAB receivers store data, while analog radios do not; 
DAB provides audio ``on-demand,'' while analog radio does not; DAB can 
provide customized programming, while analog radio does not; DAB allows 
the listener to pause and then go back to where they left off, while 
analog radio does not; DAB includes a program guide, telling the 
listener what's coming, while analog radio does not; DAB is accompanied 
by meta-data indicating artists and title, while analog radio generally 
is not; DAB isn't limited to audio, while analog radio is; DAB is a 
``fat'' data pipe, while analog radio is not.
    Given these characteristics, DAB will provide the type of service 
that Congress intended to be covered by a performance right. When 
enacting the DPRA in 1995, Congress said

        The limited right created by this legislation reflects changed 
        circumstances: the commercial exploitation of new technologies 
        in ways that may change the way prerecorded music is 
        distributed to the consuming public. It is the Committee's 
        intent to provide copyright holders of sound recordings with 
        the ability to control the distribution of their product by 
        digital transmissions, without hampering the arrival of new 
        technologies, and without imposing new and unreasonable burdens 
        on radio and television broadcasters, which often promote, and 
        appear to pose no threat to, the distribution of sound 
        recordings.\5\
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    \5\ S. Rep. No. 104-128, at 15 (1995), reprinted in 1995 
U.S.C.C.A.N. 356 (``DPRA Report'').

    If DAB develops into a service which will be so personalized and so 
narrow--and which will include the ability to rewind, skip, or scan the 
channels in order to receive only the recordings a listener wants, and 
then to record, store and catalog them--it will threaten both the 
distribution of sound recordings via sales and, as well, the new 
business models such as digital subscription services on the internet, 
subscription digital satellite radio, and other services that are 
subject to the digital performance right and pay royalties for the use 
of recorded music. With DAB, members of the public may be able to 
receive what they want, when they want it. They will no longer have to 
purchase product or even ``listens.'' But if that is the case, how will 
the services that pay us survive, and how will we, the artists, earn a 
living? There will be no financial incentives left for the creators of 
and investors in sound recordings.

                               CONCLUSION

    The balance that Congress struck between record companies and 
performing artists, on the one hand, and digital technologies and 
broadcasters, on the other hand, is now off kilter. We firmly believe 
that technological advances and fairness require Congress to revisit 
the Copyright Act and enact a broad performance right for sound 
recordings, in a form that ensures a fair benefit to artists.
    Congress must be mindful that this is not simply one business 
versus another. At the heart of these important issues are the 
individuals whose talents create the sound recordings. Performance 
royalties will provide critically important income to famous and 
ordinary musicians and vocalists. Without recording artists, there 
would be no music on any station. Please don't make sound recording 
creators wait any longer for fair compensation for the performance of 
their music.

                                 
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