Satellite Digital Audio Radio Services and Copyright Law Issues

Congressional research reportJul 12, 2006

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CRS Report for Congress

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Satellite Digital Audio Radio Services and

July 12, 2006

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Legislative Attorney

American Law Division

Congressional Research Service ˜ The Library of Congress

Satellite Digital Audio Radio Services and Copyright

Law Issues

Summary

Satellite radio services such as XM and SIRIUS provide high-quality digital

audio programming to millions of subscribers who pay a monthly fee to enjoy

listening to a wider variety of entertainment and news than traditional terrestrial (AM

and FM) radio stations offer, including many genres of music, sports broadcasts, and

talk radio. However, partly because of the digital nature of satellite radio broadcasts,

when satellite radio providers transmit copyrighted content to their customers, several

legal issues potentially arise that may not be present in terrestrial radio broadcasts.

Copyrights in music are held by composers and recording artists or their record

labels. The rights of these parties under the Copyright Act to control and financially

benefit from third-party use of their creative works may affect the music licensing

fees paid by satellite radio companies, and may limit the manner in which consumers

listen to and enjoy music broadcast by satellite.

This report explains the music copyright issues involved in satellite radio

services, summarizes the concerns raised by some music copyright holders over

particular broadcast recording features offered by satellite radio companies, and

examines legislation introduced in the 109th Congress that seek to reform the current

licensing scheme for digital audio transmissions and online music deliveries,

including S. 2644 (PERFORM Act of 2006) and H.R. 5553 (Section 115 Reform Act

of 2006).

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Description of Satellite Radio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The Interested Parties Involved in Satellite Music Broadcasts . . . . . . . 1

Music Licensing and Satellite Radio Services . . . . . . . . . . . . . . . . . . . . 3

New Recording Functionality Offered by Satellite Radio . . . . . . . . . . . 5

Litigation Against XM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Legislation Introduced in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . 7

S. 2644, the PERFORM Act of 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

H.R. 5553, the Section 115 Reform Act of 2006 (SIRA) . . . . . . . . . . 11

Satellite Digital Audio Radio Services and

Introduction

When satellite radio providers broadcast copyrighted content to their customers,

several copyright issues potentially arise. The rights of music copyright holders

under the Copyright Act to control and financially benefit from uses of their creative

works may affect the music licensing fees paid by satellite radio companies, and may

limit the manner in which consumers listen to and enjoy music broadcast by satellite.

This report explains the music copyright issues involved in satellite radio services,

summarizes the concerns raised by some music copyright holders over particular

recording features offered by satellite radio companies, and examines legislation

introduced in the 109th Congress that seek to reform digital music licensing, including

S. 2644 (PERFORM Act of 2006) and H.R. 5553 (Section 115 Reform Act of 2006).

Background

Description of Satellite Radio. The satellite radio industry comprises two

companies, Washington, DC-based XM Satellite Radio, Inc., and New York, NYbased SIRIUS. These companies broadcast to consumers audio content from

dedicated satellites orbiting over the United States, in the form of “channels” that

offer a wide variety of digital-quality music, sports, traffic, weather, and talk radio

programming. Combined, these two companies provide satellite radio service to

more than 11 million subscribers in the United States.1 To listen to these broadcasts,

a customer pays a monthly subscription fee2 to the company and uses a satellite radio

receiver — a special audio device manufactured by electronics companies such as

JVC, Pioneer, and Samsung. Satellite radio receivers are available in different

configurations for various listening environments (e.g., car, home stereo, and portable

hand-held device).

The Interested Parties Involved in Satellite Music Broadcasts.

Several parties are interested in the offering of satellite digital3 audio radio:

Parity, Platforms, and Protection: The Future of the Music Industry in the Digital Radio

Revolution: Hearing Before the Senate Comm. on the Judiciary, 109th Cong., 2nd Sess.

(2006) (statement of Gary Parsons, Chairman of XM Satellite Radio), available on July 12,

2006 at [http://judiciary.senate.gov/testimony.cfm?id=1853&wit_id=5268].

The current monthly fee charged by both SIRIUS and XM is $12.95.

station broadcasters, are beyond the scope of this report. The Copyright Act creates

particular rights and licenses for music conveyed to the public by digital means, which are

(continued...)

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Musical content creators (individuals who compose music by writing

musical notation and the lyrics of a song — e.g., songwriters).4

Sound recording owners (a performance of a song or other piece of

music that is recorded onto a material object, including digital music

formats such as MP3 — e.g., record companies that produce,

manufacture, and distribute the sound recording).5

Satellite radio providers (entities that deliver music to the public by

means of satellite broadcast — e.g., XM and SIRIUS).

Consumers who enjoy listening to satellite radio.

Customers pay monthly fees to satellite radio companies for the ability to

receive broadcasts; these companies, in turn, compensate music content creators and

sound recording owners for the right to digitally deliver music to their subscribers.

Satellite radio operators are obliged to pay licensing fees to copyright holders

because of several provisions of the Copyright Act.

among other things,6 control:7

the reproduction of a work, meaning copying the work;

the distribution of a work, meaning transferring ownership of a copy

of a work to the public by sale, rental, lease, or lending; and

the public performance of a work, meaning performing, transmitting

or otherwise communicating the work to the public.8

Each of these rights corresponding to the particular use of a copyrighted work

is distinct and divisible; meaning, for example, that a copyright holder could

authorize a third party to distribute a work while denying that same party the right to

perform it publicly. Therefore, a third party interested in doing something with a

(...continued)

largely inapplicable for works made available to the public via analog technologies.

For example, Cole Porter wrote the song “I’ve Got You Under My Skin.”

For example, Frank Sinatra recorded a rendition of him singing Cole Porter’s “I’ve Got

You Under My Skin.” This sound recording is owned by Reprise Records.

17 U.S.C. § 106 also provides the copyright holder with the right to display or prepare

derivative works based upon the work; these rights are beyond the scope of this report.

The holder of a copyright in a work has the right to do, or to authorize others to do, any of

these actions with respect to the work.

17 U.S.C. §§ 101, 106. Section 101 of the Copyright Act provides a more detailed

definition of “publicly,” which is not necessarily relevant to the delivery of digital audio to

the public.

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copyrighted work must first obtain the permission of the copyright holder to do

anything that implicates any one of the holder’s exclusive rights (e.g., reproduce,

distribute, or perform). The unauthorized use of a copyrighted work constitutes an

infringement of the particular right at issue, unless the action is permitted by a

statutory exception, such as “fair use” for limited purposes such as criticism,

teaching, comment, scholarship, or research.9

Music Licensing and Satellite Radio Services. As noted above, the

content — for simplification and convenience, this report refers to these two parties

as the “songwriter” (musical work composer or the music publisher) and the “record

label” (owner of the material object in which the sounds of a musical work are

recorded). Music copyright holders usually grant permission to a third party through

a voluntarily negotiated, private licensing agreement, whereby the third party agrees

to pay royalties to the copyright holder in exchange for the right to use the work

under the conditions set forth in the contract. However, copyright law also provides

several types of “compulsory” licenses for certain uses of music, in which the third

party need not seek authorization of the copyrighted holder, but rather pays a

statutorily prescribed royalty rate for the privilege of using the work in particular,

limited ways that are specified by the Copyright Act.

The compulsory licenses created by the Copyright Act are found in 17 U.S.C.

§§ 112, 114, and 115. Section 112 involves “ephemeral” recordings of digital audio

transmissions; for example, entities that “webcast” (transmission of audio through

the Internet) a sound recording may pay a compulsory license fee under § 112 to

make a temporary reproduction or copy of the recording, generally stored in the hard

drives of computer servers, to facilitate the performance. Section 114 provides a

compulsory license to certain eligible music providers for the public performance of

digitally transmitted sound recordings. Section 115 allows a user to pay a

“mechanical license” to the songwriter for the right to reproduce and distribute the

musical composition, in a manner that may be heard with the aid of a mechanical

device, for songs that have been initially distributed publicly under the authority of

the copyright holder. The Digital Performance Right in Sound Recordings Act of

199510 amended § 115 to include “digital phonorecord deliveries,” or DPDs, thus

ensuring compensation to songwriters for the digital transmission (e.g., digital

downloads) of their musical compositions. The § 115 mechanical license does not,

however, authorize reproduction of the sound recording that is embodied in the

digital music file; permission to duplicate the sound recording must be obtained

through voluntary negotiation and agreement with the record label.

The chart below provides a summary and comparison of the royalties that are

paid by a digital music service, and the copyright holders to whom they are owed, for

music delivered to the public through digital means — either by digital “downloads”

of music files (implicating the reproduction and distribution rights) or by broadcast

(implicating the performance right). As the chart illustrates, both copyright holders

(the songwriter and record label) are entitled to compensation for any reproduction,

17 U.S.C. § 107.

P.L. 104-39 (1995).

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distribution, or performance of their works, although the rates may vary between the

type of use and the type of music copyright holder. Generally, the royalty rates

increase in direct proportion with the amount of control the listener may exercise

over the music received:

Royalty Rates and Digital Music Services

Reproducing or Distributing

a Work

Publicly Performing a

Work Through Digital11

Transmission

Songwriter: the author As provided by § 115 of the

of a musical work, or the Copyright Act, a “mechanical

holder of a copyright in license”: 9.1 cents for songs 5

minutes or less, or 1.75 cents

a musical composition

per minute or fraction thereof

(the music publisher).

for songs over 5 minutes.12

Royalty rate set by

voluntarily negotiated

private agreement between

the third party and the

Record label: the holder Royalty rate set by voluntarily

of a copyright in a sound negotiated private agreement

between the third party and the

recording of a musical

composition.

As provided by § 114

(d)(2) of the Copyright Act,

a compulsory license for

public performance of

sound recordings: 0.0762

cents per performance.14

While there is no general public performance right in sound recordings, copyright law

provides a limited right to sound recording copyright holders for the performance of a sound

recording by means of a digital audio transmission. 17 U.S.C. §106(6). However, terrestrial

radio stations (AM and FM stations) that broadcast through analog means, do not need to

compensate recording artists or record labels, only the composer of the music.

This is the statutory rate effective from January 1, 2006, to December 31, 2007. U.S.

on July 12, 2006, at [http://www.copyright.gov/carp/m200a.html]. However, the Harry Fox

Agency, a wholly owned subsidiary of the National Music Publisher’s Association, typically

negotiates and issues these licenses on behalf of songwriters, and the mechanical license is

seldom used for the permission to make or distribute copyrighted musical compositions;

such rate rarely exceeds that set by the U.S. Copyright Office.

See

[http://www.harryfox.com/public/FAQ.jsp].

ASCAP, BMI, and SESAC are “performing rights societies” that represent their members

(composers, songwriters, lyricists, and music publishers) in the licensing of public

performances of their works. See, e.g., [http://www.ascap.com/about].

Digital Performance Right in Sound Recordings and Ephemeral Recordings, 69 Fed. Reg.

5693 (Feb. 6, 2004), available on July 12, 2006 at [http://www.copyright.gov/fedreg/

2004/69fr5693.html]. This is the current rate set by the Copyright Royalty Board of the

Library of Congress, which determines the rates and terms of statutory royalty payments.

Pursuant to 17 U.S.C. § 804(b)(3)(B), the Copyright Royalty Board commenced proceedings

in January 2006 to determine a new rate to be paid by satellite digital audio radio services,

for the period beginning on January 1, 2007, and ending on December 31, 2012. Adjustment

of Rates and Terms for Preexisting Subscription and Satellite Digital Audio Radio Services,

71 Fed. Reg. 1455 (Jan. 9, 2006), available on July 12, 2006 at [http://www.loc.gov/crb/

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Services

New Recording Functionality Offered by Satellite Radio. When

satellite radio services broadcast copyrighted content to their subscribers, they pay

performance royalties to the songwriter and record label as specified on the previous

page. However, in early 2006, XM Satellite Radio and SIRIUS introduced portable

hand-held devices that allow their subscribers to program in advance the digital

recording of up to 50 hours of broadcast music for later playback.15 The Recording

Industry Association of America (RIAA), which represents record companies that

comprise approximately 90% of all sound recordings produced and sold in the United

States, alleges that these recording devices hold the potential to infringe their

Summarizing the nature of the complaint, the chairman of a major record label

testified before Congress as follows:

[B]y virtue of the rapid advancements in technology, [satellite radio services] are

quickly being transformed into much more than the traditional, passive,

listening-only experiences from which their original compulsory license was

derived. Many of these services have already morphed from listening services

into download services. Satellite services are now offering new devices, which

can essentially transform a satellite service like XM and Sirius into a distribution

service like iTunes.16

SIRIUS has reached agreements with the four major record labels (EMI Music

Group, Warner Music Group, Vivendi Universal’s Universal Music Group, and

Sony-BMG) to pay a fee to the labels for each sale of its S50 recording device in

exchange for the right to market the device.17 However, XM Satellite Radio has, to

date, been unsuccessful in negotiating a similar agreement with the record labels. In

defense to charges of copyright infringement, XM has asserted the following:

[The recording devices] simply enable listeners to save songs off the radio for

playback later — the 21st century equivalent of a cassette recorder, in the same

way that TiVo allows them to save TV shows for later viewing. XM subscribers

cannot choose the tracks that XM plays. And unlike download services, XM

(...continued)

fedreg/2006/71fr1455.html].

See, e.g., the Pioneer Inno, described at [http://www.xmradio.com/pioneerinno/index.jsp],

the Samsung Helix, described at [http://www.xmradio.com/samsunghelix/index.jsp], and the

SIRIUS S50, described at [http://www.sirius.com/gs/s50/index_product.html].

Parity, Platforms, and Protection: The Future of the Music Industry in the Digital Radio

Revolution: Hearing Before the Senate Comm. on the Judiciary, 109th Cong., 2nd Sess.

(2006) (statement of Edgar Bronfman, Chairman and CEO of Warner Music Group),

available on July 12, 2006 at [http://judiciary.senate.gov/testimony.cfm?id=1853&

wit_id=5267].

Peter Kafka, Sirius, EMI Agree On Player Deal, Forbes.com (Apr. 13, 2006), available

on July 12, 2006 at [http://www.forbes.com/2006/04/13/sirius-emi-music_cx_pk_0413

sirius.html].

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subscribers never own the programming that they record from XM — it cannot

be burned to a CD, transferred to other radios or uploaded to the internet. In

addition, XM subscribers can only listen to recorded XM content as long as they

keep an active XM subscription.18

Litigation Against XM. In a federal lawsuit filed against XM Satellite Radio

on May 16, 2006,19 the major record labels argue that XM has only paid for the right

to perform (broadcast) music under a § 114 compulsory license, but that it has not

voluntarily negotiated or paid for the right to reproduce and distribute a copy of such

music to subscribers. Section 114 of the Copyright Act provides that the limited

compulsory license available for the public performance of a sound recording does

not “annul, limit, impair, or otherwise affect” the reproduction and distribution rights

of a holder of copyright in sound recordings.20 Under the plaintiffs’ characterization,

the defendant XM Satellite Radio, by offering the recording devices, is effectively

functioning as a digital download “service” rather than solely as a satellite radio

broadcaster, and thus XM should have to pay higher royalties fees for the right to

distribute music, such as those paid by an online music stores like Apple Computer’s

iTunes service.21

XM company officials respond to this allegation by presenting its recording

device as a lawful, digital audio recording device that is fully compliant with the

Audio Home Recording Act (AHRA).22 Congress enacted the AHRA23 in 1992 to

provide for a royalty payment system and a serial copyright management system for

consumer electronic devices that allow digital copying of sound recordings in

exchange for a prohibition on copyright infringement lawsuits against the

manufacturers of such devices and consumers who use them for noncommercial

purposes. In addition, or in the alternative, XM officials claim that the devices allow

for legitimate “time-shifting” of radio broadcasts similar to that offered by a VCR,24

a “fair use” approved by the U.S. Supreme Court in the 1984 case, Sony Corp. of

America v. Universal City Studios, Inc.25

Eric Logan, An Open Letter From XM Satellite Radio to Artists, Musicians and

Songwriters, available on July 12, 2006 at [http://www.xmradio.com/lineup/openletter.

jsp?refsrc=hp_ex].

Atlantic Recording Corp., et al., v. XM Satellite Radio, Inc., No. 1:06-cv-03733 (S.D.N.Y.

filed May 16, 2006).

17 U.S.C. § 114(d)(4)(C).

Charles Duhigg, Labels Sue XM Over Its Device, L.A. TIMES, May 17, 2006, at C3.

See Logan, supra note 18.

P.L. 102-563 (1992), codified at 17 U.S.C. § 1001 et seq.

Parity, Platforms, and Protection: The Future of the Music Industry in the Digital Radio

Revolution: Hearing Before the Senate Comm. on the Judiciary, 109th Cong., 2nd Sess.

(2006) (statement of Gary Parsons, Chairman of XM Satellite Radio), available on July 12,

2006 at [http://judiciary.senate.gov/testimony.cfm?id=1853&wit_id=5268].

464 U.S. 417 (1984). While “time-shifting” for non-commercial, private use was deemed

a fair use, the Court defined such practice to mean the recording of a program for viewing

(continued...)

CRS-7

As of the writing of this report, the outcome of this litigation is not yet known,

and thus the validity of the legal theories offered by the parties to the dispute remains

open to question.

Legislation Introduced in the 109th Congress

In recognition of the technological advances in music delivery methods to the

public, the potential blurring of distinctions between reproduction, distribution, and

performance rights when music is transmitted digitally,26 and the perception that

music licensing laws are antiquated,27 several bills have been introduced in the 109th

Congress that seek to reform the Copyright Act with respect to the use of copyrighted

music in a digital context. Among other things, the purpose of these bills, according

to their sponsors, is to ensure that music copyright holders are fairly compensated and

their works protected against unauthorized further reproduction, redistribution, or

retransmission, and to streamline the process through which digital music services

obtain permission from music publishers and record labels to use their songs and

recordings. Critics, however, raise concerns that the proposed licensing reform

legislation may hinder technological innovation and the ability of consumers to enjoy

music in ways that are most convenient to them.28 Some digital music providers,

particularly the satellite radio companies, also observe that the bills are being

(...continued)

once at a later time, and thereafter erasing it. Id. at 423. In contrast, however, the Court

arguably did not appear to sanction “library-building,” in which a user records a program

in order to keep it for repeated viewing.

See Music Licensing: Hearing Before the Senate Comm. On the Judiciary, 109th Cong.,

1st Sess. (2005) (statement of Marybeth Peters, The Register of Copyrights), available on

July 12, 2006, at [http://judiciary.senate.gov/testimony.cfm?id=1566&wit_id=4446] (“For

various reasons that made sense at one time, the domestic music licensing structure for

nondramatic musical works has evolved as a two-track system, one for licensing public

performance rights and the other for licensing the reproduction and distribution rights. This

worked reasonably well when the two sets of rights rarely intersected. But the reality of

digital transmissions is that in many situations today it is difficult to determine which rights

are implicated and therefore whom a licensee must pay in order to secure the necessary

rights.”).

See id. (“There is no debate that section 115 needs to be reformed to ensure that the

United States’ vibrant music industry can continue to flourish in the digital age.... [T]he

operative question is not whether to reform section 115, but how to do so.... It is now time

to modernize section 115 holistically not only to address immediate needs, but also to

establish a functional licensing structure for the future.”).

See, e.g., Consumer Electronics Association, CEA Urges Congress to Reject the

PERFORM Act, May 12, 2006, available on July 12, 2006, at [http://www.ce.org/shared_

files/pr_attachments/20060512_perform.doc] (“Americans have been making

noncommercial recordings off the radio for decades. This bill would turn back the clock on

home recording. Indeed, if this bill applied to video content, your TiVO would be

outlawed.”).

CRS-8

introduced at an inopportune time: when some digital music providers and music

S. 2644, the PERFORM Act of 2006. Senators Feinstein, Graham and Frist

introduced S. 2644, the Platform Equality and Remedies for Rights Holders in Music

Act of 2006 (PERFORM Act) on April 25, 2006. The PERFORM Act is primarily

concerned with the digital public performance right of sound recording copyright

holders; thus, satellite radio companies would be directly affected by this bill. If

enacted, S. 2644 would:

Create an additional eligibility precondition30 for the use of a § 114

compulsory licenses (for public performance of a digitally

transmitted sound recording), which mandates that the transmitting

entity “takes no affirmative steps to authorize, enable, cause or

induce the making” of a phonorecord,31 by or for the listener.32

Require content protection — a transmitting entity that avails itself

of a § 114 compulsory license must use “technology that is

reasonably available, technologically feasible, and economically

reasonable” to disallow the reproduction of the music transmitted to

the listener,33 except for “reasonable recordings.”34

Parity, Platforms, and Protection: The Future of the Music Industry in the Digital Radio

Revolution: Hearing Before the Senate Comm. on the Judiciary, 109th Cong., 2nd Sess.

(2006) (statement of Gary Parsons, Chairman of XM Satellite Radio), available on July 12,

2006 at [http://judiciary.senate.gov/testimony.cfm?id=1853&wit_id=5268] (“The proposed

Perform Act would give the recording industry unwarranted control over the business of

satellite radio, and would unfairly change the rules governing our upcoming royalty rate

arbitration just as that arbitration is about to begin.”).

Section 114 currently contains several preconditions that a transmitting entity must satisfy

before qualifying for the use of a compulsory license, the specific details of which are

beyond the scope of this report.

The Copyright Act defines the term “phonorecord” to mean a material object in which

fixations of sound are embodied, and from which the sounds may be perceived, reproduced,

or otherwise communicated, either directly or with the aid of a machine. 17 U.S.C. § 101.

A sound recording and a musical work may be embodied in a physical phonorecord.

S. 2644, § 2(c) (bill as introduced). Thus, if a digital music provider took actions that

violate this condition, such as by allowing its users to create “music libraries,” it would not

be eligible for a compulsory license to perform the sound recording, and must instead

voluntarily negotiate licensing agreements with sound recording copyright holders (the

record labels) to gain the right, not only to digitally transmit the work, but also to reproduce

and distribute it as well.

Although the focus of this report is concerned with satellite radio broadcasts, it is worth

noting that this provision of the PERFORM Act would likely require webcasters (Internet

radio broadcasters) to stream music to the public using a digital rights management (DRM)enabled digital music file format, such as Microsoft’s Windows Media Audio (WMA) or

Real’s RealAudio (RA) format. MP3-encoded audio is not DRM-compliant, and thus

webcasters may need to switch their Internet radio streams to a non-MP3 format. See Fred

(continued...)

CRS-9

Define “reasonable recording” to mean the making of a phonorecord

for private, noncommercial use, where the recording device and the

entity transmitting the music employ technological measures that (1)

allow automated recording or playback based on specific programs,

time periods, or channels, as selected by the user; (2) prevent

automated recording or playback based on specific sound recordings,

albums, or artists; (3) prevent the user from separating the recording

into component segments and manipulating the sequence of

playback of those components; and (4) prevent the redistribution,

retransmission, or other exporting of the phonorecord from the

recording device through a digital output or by burning it onto

removable media such as a blank CD or memory card.35

Establish “rate parity” between businesses that use the § 114

compulsory license — digital music providers that transmit audio

through Internet, cable, and satellite technologies.36 Currently, the

royalty rate for a § 114 license varies depending on the medium or

technology being used to transmit the music.37 In an attempt to

(...continued)

von Lohmann, The Season of Bad Laws, Part 3: Banning MP3 Streaming, Apr. 26, 2006,

available on July 12, 2006, at [http://www.eff.org/deeplinks/archives/004587.php].

S. 2644, § 2(c) (bill as introduced).

S. 2644, § 2(d) (bill as introduced). The recording devices introduced by XM and SIRIUS

currently appear to abide by (1) and (4), but may not satisfy the conditions specified in (2)

and (3).

S. 2644, § 2(a), (b) (bill as introduced). Recall that traditional terrestrial radio stations

(AM and FM) pay nothing in performance royalties to sound recording copyright holders,

as the Copyright Act does not provide a general performance right in sound recordings, only

a right in sound recordings performed through digital audio transmissions.

According to an executive of an Internet radio company, satellite radio services pay sound

recording royalties of approximately 5-7% of their revenue, whereas subscription webcasters

typically pay 10.9% of their revenue. Parity, Platforms, and Protection: The Future of the

Music Industry in the Digital Radio Revolution: Hearing Before the Senate Comm. on the

Judiciary, 109th Cong., 2nd Sess. (2006) (statement of N. Mark Lam, Chairman and CEO

of Live365, Inc.), available on July 12, 2006 at [http://judiciary.senate.gov/testimony.cfm?

id=1853&wit_id=5270]. However, a representative of the satellite radio industry testified

before Congress that such rate disparity is justified because it takes into account the costs

that are incurred by satellite radio providers in operating their services:

Of all the entities that pay performance royalties, satellite radio is the only

industry that creates and pays for its entire delivery infrastructure. Webcasters

like Yahoo! did not have to create the Internet, and did not have to license

spectrum from the FCC. By contrast, we acquired an FCC broadcast license at

a cost of $90 million. We have spent close to a billion dollars to purchase our

own dedicated transmission satellites and launch them into orbit, and we must

repeat that investment to replace them on an ongoing basis after a relatively few

years. We created and designed the XM transmission and receiving technology.

In total, we have invested more than 3 billion dollars to create the satellite radio

(continued...)

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create such “rate parity,” S. 2644 would first change the standard

that is used by the Copyright Royalty Board in determining the

royalty rate, from one that reflects the “fees that would have been

negotiated in the marketplace between a willing buyer and a willing

seller” to a standard that uses “the fair market value” of the right to

transmit digital audio.38 Second, the bill adds a new consideration

that the Copyright Royalty Judges must base their rate setting

decision upon,39 to include “the degree to which reasonable

recording affects the potential market for sound recordings, and the

additional fees that are required to be paid by services for

compensation.”

A companion bill, H.R. 5361, was introduced on May 11, 2006, by

Representative Howard Berman and referred to the House Committee on the

Judiciary. H.R. 5361 is substantially similar to S. 2644 in many respects. One

difference is that the provision of H.R. 5361 that amends § 114(f)40 qualifies the term

“transmissions” with “eligible,”41 and then provides a definition of “eligible

transmission,” as it is to be used in § 114(f)(1) as redesignated by the bill, to mean

the following: subscription transmissions by preexisting subscription services,

subscription transmissions by preexisting satellite digital audio radio services,

(...continued)

business, and expect to invest billions more on an ongoing basis.

Parity, Platforms, and Protection: The Future of the Music Industry in the Digital Radio

Revolution: Hearing Before the Senate Comm. on the Judiciary, 109th Cong., 2nd Sess.

(2006) (statement of Gary Parsons, Chairman of XM Satellite Radio), available on July 12,

2006 at [http://judiciary.senate.gov/testimony.cfm?id=1853&wit_id=5268].

However, S. 2644 fails to provide a definition of what constitutes “fair market value.”

One of the sponsors of the bill acknowledges this omission and suggests that a definition

might be included in future versions of the bill if one could be developed based on “what

the courts have held, what the copyright office has used, what a real competitive market

would entail, as well as other factors that may not have been considered.” 152 CONG. REC.

S3510 (daily ed. Apr. 25, 2006) (statement of Sen. Feinstein).

Under the current provision, 17 U.S.C. § 114(f)(2)(B), the Copyright Royalty Judges, in

setting the reasonable rates and terms of a § 114 compulsory license, are required to base

such decision on the following two factors: (1) whether use of the digital music service may

substitute for or may promote the sales of sound recordings or otherwise may interfere with

or may enhance the sound recording copyright owner’s other streams of revenue from its

sound recordings and (2) 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.

17 U.S.C. § 114(f) describes the procedures that the Copyright Royalty Judges must

follow in determining reasonable rates and terms of royalty payments for digital

transmissions of sound recordings.

H.R. 5361, § 2(b)(3) (bill as introduced). Thus, as amended by this provision of H.R.

5361, § 114(f)(1)(A) would read: “Proceedings under chapter 8 shall determine reasonable

rates and terms of royalty payments for eligible transmissions during the 5-year period

beginning on January 1 of the second year following the year in which the proceedings are

to be commenced....”

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eligible nonsubscription transmissions, and transmissions by new subscription

services. Throughout the comparable section of S. 2644 that amends § 114(f), S.

2644 does not qualify “transmissions” with the term “eligible.” Therefore, S. 2644

offers no definition for “eligible transmission” because such term is not used under

the Senate version of the bill. Without such qualification, it would appear that S.

2644 potentially would apply to a broader range of transmissions, whereas H. 5361

narrows the type of sound recording transmissions subject to the § 114(d)(2)

compulsory license to only those that fall within one of the four eligible categories.

In addition, concerning the additional eligibility precondition for a § 114(d)(2)

compulsory license that both versions of the PERFORM Act create (that the

transmitting entity take no affirmative steps to authorize, enable, cause, or induce the

making of a copy or phonorecord by or for the transmission recipient), H.R. 5361

adds at the end of 17 U.S.C. § 114(d)(2) the following:

the mere offering of a transmission and accompanying metadata does not in itself

enable the making of a copy or phonorecord.

S. 2644, by comparison, adds at the end of § 114(d)(2), the following language

(additions noted through italics):

the mere offering of a transmission and accompanying metadata does not in itself

authorize, enable, cause, or induce the making of a phonorecord.

Under the House version of the bill, it is not as clear as the Senate bill whether the

“mere offering” of a transmission (and accompanying metadata, such as text showing

song title and artist information) constitutes authorizing, causing, or inducing the

making of a phonorecord.

H.R. 5553, the Section 115 Reform Act of 2006 (SIRA). Introduced by

Representatives Lamar Smith and Howard Berman on June 8, 2006, H.R. 5553, the

Section 115 Reform Act of 2006 (SIRA), if enacted, would amend the mechanical

license provision of § 115 by creating a new statutory license specifically for digital

delivery of musical works. Unlike the PERFORM Act, SIRA crafts a novel, separate

“blanket licensing” regime for digital music deliveries and applies to holders of

music providers (such as Apple’s iTunes) obtain permission from music publishers

and songwriters to reproduce and distribute their musical works. SIRA’s

applicability to satellite radio companies, however, depends on whether the actions

and activities engaged in by those entities come within the scope of the definition of

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a “digital phonorecord delivery” (DPD)42 or a “hybrid offering.”43 A brief summary

of the major provisions of SIRA appears below.

Licenses Created.

A “blanket” compulsory license shall be available for all DPDs and

“hybrid offerings” for the following functions: (1) the making and

distribution of general and incidental DPDs in the form of full

downloads,44 limited downloads,45 interactive streams,46 and any

other form constituting a DPD or hybrid offering and (2) all

reproductions and distribution rights necessary to engage in these

activities, including cached, network, and RAM buffer

reproductions.

A royalty-free license shall be made available for the making of

server and incidental reproductions to facilitate the noninteractive

streaming of music; however, this royalty-free license is not

available for digital music services that take affirmative steps to

authorize, enable, cause, or induce the making of reproductions of

musical works by or for the end users that are accessible by those

end users for future listening.

The Copyright Act currently defines a DPD as: “each individual delivery of a phonorecord

by digital transmission of a sound recording which results in a specifically identifiable

reproduction by or for any transmission recipient of a phonorecord of that sound recording,

regardless of whether the digital transmission is also a public performance of the sound

recording or any nondramatic musical work embodied therein. A digital phonorecord

delivery does not result from a real-time, non-interactive subscription transmission of a

sound recording where no reproduction of the sound recording or the musical work

embodied therein is made from the inception of the transmission through to its receipt by

the transmission recipient in order to make the sound recording audible.” 17 U.S.C. §

115(d).

H.R. 5553 defines a “hybrid offering” to mean a reproduction or distribution of a

phonorecord where a digital transmission of data is required to render the sound recording

embodied on the phonorecord audible to the listener.

H.R. 5553 defines a “full download” to mean a DPD of a sound recording of a musical

work that is not limited in availability for listening by the end user either to a period of time

or a number of times the sound recording can be played.

H.R. 5553 defines a “limited download” to mean a DPD of a sound recording of a musical

work that is only available for listening for (1) a definite period of time (including a period

of time defined by ongoing subscription payments made by an end user) or (2) a specified

number of times.

H.R. 5553 defines an “interactive stream” to mean (1) a stream of a sound recording of

a musical work that does not qualify for a statutory license under § 114(d)(2) with respect

to the sound recording embodied therein and (2) a stream of a particular sound recording of

a musical work that an end user has selected, and is transmitted to such end user, to listen

to at or substantially at the time of making such selection or at some future time, whether

or not as a part of a program specially created for the end user.

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Eligibility.

Only digital music providers are eligible for this blanket license.

Designated Agents.

The Register of Copyrights is to designate, by August 1, 2007, a

mechanical licensing and collection agency representing music

publishers that represent the greatest share of the music publishing

market; such agency shall establish and operate a General

Designated Agent (GDA). The GDA is empowered to do the

following: grant and administer all licenses for musical works

licensed under this regime; collect and distribute the royalties;

engage on the behalf of music publishers and songwriters in industry

negotiations, rate setting proceedings, litigation, and legislative

efforts.

The Register of Copyrights is to certify additional designated agents

(ADAs) to represent copyright owners for purposes of these licenses,

who represent music publishers representing at least a 15% share of

the music publishing market. The ADAs represent any musical

work copyright owner who voluntarily elects to have them represent

them.

Each designated agent is responsible for distributing royalties

collected from these blanket licenses to any copyright owner whom

the agent represents.

Each copyright owner may be represented by only one designated

agent during any calendar year; by default, it is the GDA, or by an

ADA on the election of the owner.

The GDA and ADAs are to maintain and make available free of

charge to digital music providers a searchable electronic database

from which the providers can determine which musical works are

available for licensing through that designated agent.

The designated agents may, upon written notice, conduct a “royalty

compliance examination” of any licensee.

Duties Imposed on Digital Music Provider.

A digital music provider that receives a blanket license, for the

making and distribution of limited downloads or the making or

distribution of interactive streams, may report to the designated

agent that the provider had engaged in such activity during the

period from January 1, 2001, to January 1, 2008, and pay the

designated agent retroactive royalties applicable to that activity. A

provider that reports this activity and makes such payments shall not

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be subject to an action for copyright infringement for these

activities.47

An entity that avails itself of this blanket license shall, on a quarterly

basis, report (in electronic format) its usage of musical works under

the license and make royalty payments accordingly to the applicable

designated agent.

If a digital music provider fails to provide the quarterly report or

fails to make all quarterly royalty payments, the designated agent

may issue a warning in writing to the licensee stating that if the

default is not remedied within 30 days of notice, the license will

automatically terminate at the expiration of that 30-day period. If

such license is terminated, the digital music provider will be subject

to copyright infringement liability under 17 U.S.C. § 115(c)(6),

which could include an injunction and an award of actual or

statutory damages.

Miscellanea.

By no later than December 1, 2007, the Copyright Royalty Judges

are responsible for determining the reasonable rates and terms for

the blanket license applicable to the DPDs and hybrid offerings. All

designated agents are entitled to participate in these rate setting

proceedings.

voluntary license agreements to cover any of these digital music

delivery activities, which shall apply in lieu of the blanket license

created by SIRA.

The blanket license regime created by SIRA does not limit or affect

any right of public performance of a musical work.

However, it is unclear whether a digital music provider could be held liable for alleged

infringing activity that occurred prior to 2003. The statute of limitations provision of the

are commenced within three years after the claim accrued.

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