Saturday, November 18, 2006

Sirius Denied Status as a Pre-Existing Subscription Service

When the Digital Millennium Copyright Act (DMCA) was enacted in 1998 to establish a market-based standard for setting royalty rates, pre-existing subscription services were exempted. Specifically, there were three such services exempted: DMX operated by TCI Music; Music Choice operated by Digital Cable Radio Associates, and the DiSH Network operated by Muzak.

Being designated as a pre-existing subscription service "means that licensees operating under the statutory license as preexisting subscription services have the right to operate under terms and rates that were first set by a Copyright Arbitration Royalty Panel (CARP)6 in May of 1998, and readjusted in July of 2003,7 in accordance with the § 801(b)(1) standard." Thus, it is advantageous to achieve this designation. It also means that they can offer their services in a new medium under the same conditions. The following citation describes the benefits:

Thus, it is clear why a service would seek to be classified as a preexisting subscription service for purposes of §114. A designation as a preexisting subscription service means that the service will pay royalty fees that are set according to a standard that may result in below market rates and it has the added benefit that the service can make its offerings of subscription transmissions in a new medium without losing the its status as a preexisting service. The legislative history construing the statutory framework that provides for these services also makes clear that these benefits are limited to only a handful of services that were in operation on July 31, 1998.10

The two pre-existing satellite services are also exempted, another benefit of XM and Sirius over potential competitors (there are two other entities eligible to hold a satellite radio license).

The issue rises from the bundling of satellite radio programming with cable and satellite TV packages. Sirius' argument is that they are providing their programming via the DiSH network in the same matter as Muzak; therefore, they should be considered pre-existing subscription service. They further argue that SoundExchange acquiesced by accepting royalty payments since 2004 under the conditions of a pre-existing service. Otherwise, since there is no fee structure for audio subscription services bundled with cable and satellite TV, they would not have been obliged to pay anything.

SoundExchange, the RIAA, more or less, disagreed with Sirius' position and on January 04, 2006, it filed a motion requesting the Copyright Royalty Board refer to the matter to the Register of Copyrights in order to establish the status of ancillary music services offered by both Sirius and XM. On September 2006, the Copyright Royalty Board acted on this request. On October 20, 2006, the Register issued a Memorandum Opinion to the Board. The opinion was recorded in the Federal Register on November 03, 2006.

The Conclusion is cited below:

Conclusion. The Copyright Royalty Board referred a novel question of law to the Register which asked: “Is the universe of preexisting subscription services, [as defined by §114(j)(11)], limited by law to only Muzak (provided over the DiSH Network), Music Choice, and DMX?” Before answering this question, the Office contemplated what Congress meant by the term “preexisting subscription service,” because there was a controversy over whether the term applied to the use of the sound recording, or the business entity that operated under the §114 statutory license. Ultimately, the Office discerned that the term is used in the statute in both manners. A preexisting subscription service is used in §114 sometimes to refer to the aggregate of the subscription transmissions that were made by the entities identified in the legislative history, and sometimes to identify the business entities operating under the statutory license on or before July 31, 1998, and that have the authority to negotiate rates and terms for use of the license. Whether Congress intended this outcome is unclear, but the Office’s interpretation offers a workable reading of the statute and the legislative intent.

Nevertheless, for purposes of the question posed by the Board, the determination that the term refers to the business entities in existence and making subscription transmissions on or before July 31,1998, appears to be the more appropriate reading of the term “preexisting subscription service” for purposes of determining whether an entity can operate under the statutory license as a preexisting subscription service and participate in the rate setting process. Moreover, in light of Congress’s decision to identify specific entities as being preexisting subscription services, it appears Congress meant to limit preexisting subscription service status to the three entities identified by the Board.

In reaching their conclusion, the Register stated the following:

Moreover, to allow Sirius to step into the shoes of Muzak and offer the same type of subscription transmissions is inconsistent with a narrow construction of the grandfather provision. As stated earlier, the purpose of the grandfather provision was to prevent the disruption of existing operations which, in this case, was the offering of music channels supplied by Muzak. Muzak was the pioneer music service that incurred both the benefits and risks that came with its investment, and one such benefit was its status as a preexisting subscription service so long as it provided its music offerings over the DiSH Network. Sirius, however, cannot assume the benefits of the preexisting subscription service designation when it did not offer a subscription service during the industry’s nascent years.

Score another one for the RIAA. The decision affects both Sirius and XM. It is difficult to disagree with the Register of Copyrights on this one.

What does it all mean? Is Sirius (and XM) liable for additional royalties for the satellite radio programming on cable and satellite TV? Will this mean that satellite radio programming will disappear from the DiSH network and DirecTV? Satellite Radio TechWorld can't answer those questions. The providers were recently denied the opportunity to provide their programming on satellite TV in Canada.

Followup (November 19, 2006):

Some of you may remember the Copyright Royalty Board (CRB) announcement for "Digital Performance Right in Sound Recordings and Ephemeral Recordings for a New Subscription Service" brought to light by Orbitcast on December 07, 2007 (first appearing on IP-Updates) in an article entitled
XM + DirecTV: Digital Performace License Proceedings. This announcement was in response to XM's Petition to establish royalty rates for a "new type of subscription service", filed on October 31, 2005. The CRB framed the background as follows:


On October 31, 2005, the Copyright Royalty Board (“Board”) from XM Satellite Radio, Inc. (“XM”), a Petition to Initiate and Schedule Proceeding for a New Type of Subscription Service pursuant to 17 U.S.C. 114(f)(2)(C). As characterized in the Petition, “This new type of subscription service performs sound recordings on digital audio channels programmed by the licensee for transmission by a satellite television distribution service to its residential customers, where the audio channels are bundled with television channels as part of a `basic' package of service and not for a separate fee.” XM Petition at 1. As explained in the Petition, commencing on or about November 15, 2005, DirecTV, Inc., (“DirecTV”), a provider of television service to residential consumers by satellite, would begin to include a number of music and non-music audio channels, supplied by XM in its program lineup. The XM channels will be “a part of the DirecTV basic package of service, without requiring payment of a separate subscription fee.” XM Petition at 2. This new service would utilize the statutory copyright licenses provided in 17 U.S.C. 114(d)(2) (for performance by means of subscription digital audio transmission) and 17 U.S.C. 112(e) (for ephemeral recordings solely for use in those transmissions). This Notice is issued, pursuant to 17 U.S.C. 804(b)(3)(C)(ii), to initiate the proceeding to determine the rates and terms for those licenses.

Wading through all of this, it seems to amount to the same thing that Sirius was trying to do--to have the royalty rates negotiated under the copyright arbitration royalty panel (Carp). Sirius tried to obtain the status and the associated benefits by claiming an exemption via the DiSH Network, essentially sliding in the shoes of Muzak. XM appears to be trying another route. It is unclear if the above option impacts the petition by XM. It would appear that the CRB has accepted XM's petition and has commenced the royalty rate negotiations. The above opinion appears to have stop short of SoundExchange's request to establish the status of the satellite radio ancillary music services. The opinion seemed to simply deny Sirius the status as a pre-existing subscription service. One would think that the rates negotiated under the XM petition would apply to both XM and Sirius.

Perhaps some of you legal scholars could explain this better.

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