Senate fails to pass Small Webcaster Act The "Small Webcaster Amendment Act of 2002" NEVER MADE IT to the Senate floor last night, apparently the victim of a last-minute "hold." Please scroll down to see an updated news account of this development. Also in today's issue is some analysis of the current situation, and we hope to be able to include reaction from key industry players. As always, if you'd like to share your thoughts with us on this development, please e-mail us at feedback@kurthanson.com. Thanks!

BY KURT HANSON
During the last several days, it was a pleasure to see the record industry and small commercial webcasters finally working together toward a common goal — the deal negotiated in Sensenbrenner's office that neither side was particularly happy with but that both agreed was better than the status quo.

In fact, it seemed as if might be the harbinger of more cooperation in the future — e.g., figuring out how small webcasters might voluntarily add new features to their webcasts to help labels expose new artists and artists sell more CDs.

It's unfortunate that someone (whether Sen. Jesse Helms or not) threw a monkey wrench into the plan, but that doesn't mean this short-lived period of cooperation has to be dead.

The RIAA and SoundExchange realize that small commercial webcasters can't pay the Librarian of Congress's statutory rate of $.0007/performance. (The amount they owe that's due on Sunday (10/20) is probably more than 200% of all the revenues they've ever taken in! Collecting it will be impossible; trying to collect it will simply shut down the entire class of webcasters.)

And the music industry really doesn't want these webcasters to be bankrupted and shut down, as they are exposing genres of music and developing artists that aren't getting radio airplay on the Clear Channel- and Infinity-owned FMs of the world.

Thus, the RIAA and SoundExchange are willing to accept a royalty rate of 8% of past revenues from this class of webcasters. And most of those webcasters would rather pay 8% of past revenues that than be liable for 200% of past revenues and be forced to shut down.

Everyone wants the same thing. And the plan passed the House and would have passed the Senate except for one vote.

So what's the solution?

Proposed "Plan A"
One solution, of course, is that all parties involved could voluntarily agree to provisionally follow the terms negotiated in Sensenbrenner's office — including commitments from each side that they won't bring up the rates and terms as precedent in a future CARP.

Everyone can then continue to press for passage of the SWAA when the Senate reconvenes later this Fall.

If only one Senator is objecting, Leahy and Hatch can slide the bill through their committee process and it can pass 99-1. Unfortunately it's still unclear is the "holder" of the bill is really the only obstacle to its passing. Nonetheless, the point is is that the bill has enough support to pass the Senate under normal circumstances.

The primary problem with the approach, as I understand it, is that the RIAA and SoundExchange are not empowered to negotiate for record labels that are not members of the RIAA. (That's why everyone wanted a legislated solution, as that would bind everyone involved.)

Even here, there is a potential workaround: In the unlikely event that the SWAA doesn't become law before SoundExchange is ready to begin distributing royalty checks (which will take quite a while, since the Copyright Office hasn't even set recordkeeping and reporting rules yet), the organization could (although not simply) add another bit of math to their calculation process so that they could pay nonmembers the statutory rate and members the negotiated rate.

EXAMPLE: Let's say RadioParadise plays, on average, one song per hour from a non-RIAA member. RadioParadise would have to pay SoundExchange $.0007/listener-hour for that song and 14/15th of 8% of revenues for the other 14 songs they play hour. (In this example, I am assuming they pay 15 songs per hour.)

On a going-forward basis, of course, RadioParadise would be strongly motivated to quit playing material from non-RIAA labels unless those labels also consented to taking a %-of-revenues royalty from qualifying small webcasters. So by the time SoundExchange was ready to start cutting checks, there might be very few exceptions left to worry about.

Proposed "Plan B"
An even simpler approach would be this one: SoundExchange could simply withhold aggressive collection efforts (from qualifying small webcasters) until the Senate reconvenes and the bill has a chance to become law.

Meanwhile, as a show of gratitude and support, those small commercial webcasters could immediately begin improvements to make their webcasts more valuable to the record industry — e.g., making sure they're showing artist/title/album information and the CD cover art for every song they play, making their "Buy it Now" links more prominent, featuring new artists on their home pages, and perhaps running hourly 60-second promos featuring new artists and new releases.

And to keep the lovefest going, perhaps SoundExchange could come through with their long-promised "hobbyist" license (on a going-forward basis) to help that class of webcasters as well!

This could be an excellent opportunity
Ironically, this one Senator's intransigence could be the springboard to a new era of cooperation between the record industry and webcasters. I think everyone finally wants to work together. Let's see if we can't pull this off!

BY KURT HANSON AND PAUL MALONEY
This Sunday is October 20, 2002.

A date given its gravity with the passage of the Digital Millennium Copyright Act in October of 1998, this Sunday is the due date for the first (and in many webcasters' cases the most onerous) of webcasting royalty payments: the "retroactive."

When lawmakers passed the DMCA, it was mandated that although royalty rates for streaming music had not yet been specified, webcasters would begin accruing liability for the music they played from that date forward. Then, after the rate was determined (whether through private negotiation or government determination), webcasters would have to "catch up" by paying their fees for this past period.

It wasn't long ago that the idea of a webcaster being a "victim of his or her own success" meant exploding streaming costs as audience size ballooned. Since the determination of the Librarian of Congress that royalties would be paid on a "per performance" basis — and now the death of the SWAA — webcasters who have managed a sizable audience but little revenue are once again a victim of their popularity.

For many small webcasters, the retroactive royalty obligation represents a debit of (in many cases) multiples of the amount of cash they've been able to bring in.

But will there really be the "deafening silence" of webcasters unable to make their payments shutting down their streams? What will October 21 really be like?

Good faith
First of all, if you're a webcaster who plans on sending in your check this Sunday, something of a good faith effort will be required in estimating your royalty obligation.

In other words, it will be up to you to accurately calculate or estimate your "performances" (songs played times the number of listeners for each song). If this is unknown, it's up to you to estimate the "Aggregate Tuning Hours" (ATH), based perhaps on the number of gigabytes transferred divided by bitrate in which you stream. Multiply by an average number of songs per hour, and don't forget to add in the "ephemeral" charge. You can see SoundExchange's Memo to Webcasters and Simulcasters (in Adobe Acrobat format here) for the estimation rules.

Clicking here (or the screenshot) will take you to a Microsoft XL spreadsheet for your royalty submission).

But remember, your obligation is for you to determine in good faith. If SoundExchange thinks you're underreporting, they have to pay for the initial costs of an audit.

Now, if you happen to not be able to make this payment, it's really up to SoundExchange to instigate an action for it. Consider it another "Account Payable," just like you might sometimes be 20 days late paying your streaming bill or your phone bill. Do keep in mind interest will accrue, but put this expense in context of your business plan.

Reporting requirements not yet set
Here's one more last shot of reality: the reporting requirements haven't yet been determined by the Copyright Office. This is the information you're required to include with your payments so that SoundExchange can properly distribute the income.

Being so, they don't know how to divide up the money that comes in. Along with the fact that the agency has costs reportedly up to $8 million dollars it needs to recoup over the next four years, it will be months (at least) before labels or artists will see any money.

This is just to say that should record labels and webcasters decide to continue negotiating beyond the October 20 date, it would most likely not be at the great expense of artists.

Updated from this morning's early edition...


BY PAUL MALONEY
RAIN learned late Thursday that the Small Webcaster Amendments Act of 2002 (a.k.a. H.R. 5469), which would have provided webcasters a "percentage of revenue" option to the "per-performance" rate determined by the Librarian of Congress, failed to reach the Senate floor on the final day of the Congressional session.

A spokesman for Senate Judiciary Chairman Leahy told Congress Daily the measure was being left off a list of last-minute legislation because a Republican senator had objected to passage of the bill and that it would not come up for a vote before the election recess.

Some RAIN sources believe the bill was the subject of a "hold" by North Carolina Republican Senator Jesse Helms (right).

By 7pm CDT, Washington sources had informed RAIN that the bill was dead. After what seemed to be an endless series of "quorum calls" (strategic delays in the chamber proceedings), the Senate recessed some time around 10pm, without the measure ever reaching the floor.

Senate "suspension rules" voting requires a measure to pass with a unanimous vote. Even one Senator can kill a bill, or "hold" it from reaching the floor for a vote.

It is unknown by RAIN at this time what exactly the objector's rationale was, or when he or she decided that they would place the hold. But, our sources say, the Senator apparently chose the final minutes of the session to let his or her will be known.

If indeed it was Helms, his move may have come as a surprise even to fellow Republicans. As late as yesterday morning it was being reported that while the bill had "cleared" the Republican side of the aisle, there was one holdout from the Democratic party that delayed the vote.

In fact, Margarita Tapia, spokeswoman for Sen. Orrin Hatch (R-UT), told The Hollywood Reporter, "Sen. Hatch was hoping this legislation would pass. He worked hard to pass relief for small webcasters. It was supported by every Republican, and it's unfortunate that the Democrats chose to pull this legislation at the last minute, preventing it from passing."

According to Congress Daily, Leahy had successfully addressed objections from Sens. Sam Brownback (R-KS) and Dianne Feinstein (D-CA). He reportedly negotiated an amendment clarifying the "non-precedential" language of the bill (see RAIN here), and Brownback dropped his objection. Both Brownback and Feinstein said they had no further concerns. Leahy's spokesman told the news source that the Chairman "is greatly disappointed and regrets that anyone with concerns didn't come forward so they could be resolved."

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