Michael Geist’s attack on artists over Tariff 8 

August 13th, 2014 by Barry Sookman Leave a reply »

On May 16, 2014 the Copyright Board released its decision certifying Re: Sound Tariff 8 setting royalty rates for webcasting services in Canada. Re:Sound promptly filed an application for judicial review of the decision, calling it a “significant outlier in the world” that “greatly disadvantages the Canadian music industry in the globalized market place.” Re:Sound’s application was met with a blizzard of support when 70 music organizations released a joint statement publically denouncing the Copyright Board decision. They called it “a serious setback for the music community in Canada” and “for artists and the music companies who invest in their careers”.

The core criticisms, and the basis for Re:Sound’s application for juridical review, were the Board’s decision to discard freely negotiated market-based agreements between digital music service providers already operating in Canada and the music industry; to set rates for web streaming services that are less than 10% of the rates that the same services pay in the U.S and in other countries internationally for the same rights; and to base those rates on the Commercial Radio Tariff in spite of key differences between webcasting and terrestrial radio.

In response, Michael Geist published several articles attacking their assertions. He did not dispute, and what is indisputable, is that the rates that the Copyright Board certified are 90% lower than the rates the music industry had negotiated through arms’ length agreements with digital services already operating in Canada.

Geist’s postings are riddled with inaccuracies. They have been widely disseminated including by the Toronto Star, in his blog, and in other syndicated publications. I am taking the opportunity to highlight some of the many problems with his attacks on the views expressed by artists and music labels.

Geist’s first assertion about the music industry criticisms of Tariff 8 is that “Internet streaming services pay rights holders several different fees reflecting various copyrights”. He claims that the recording industry “is seemingly loath to mention that Tariff 8 is only a part of the payments that are made by Internet music streaming companies to rights holders, including performers, songwriters, composers, music publishers, and record labels”.

Geist appears to argue that the fact that the royalties the Copyright Board just set are a mere fraction of those paid in other countries is justifiable because different Canadian rights holders are paid through different tariffs. This claim is misleading in so far as it suggests that Tariff 8 is not really lower than fees paid to artists and labels in other countries, as it ignores the fact that music publishers and songwriters are paid separately through different royalties in other countries as well.

One needs to compare apples to apples, something Geist does not do. The Board in its Fact Sheet released along with the decision notes that “In the United States, for 2012, the rate that webcasters must pay for the same rights when their sole business is webcasting [i.e. Pureplay webcasters] is $1.10 per thousand plays” (emphasis added). The rate certified by the Board for commercial webcasters is only 10% of this, 10.2¢ per thousand plays – and it doesn’t require them to pay a guaranteed 25% of revenue as the US Pureplay license does. In the decision, the Board noted that the per play rate Re:Sound had negotiated in its agreements for 2012 and which Re:Sound proposed to certify, 0.096¢ per play, “is 48 per cent of the approved American rate (0.20¢) for that same year.” The rate certified by the Board for commercial webcasters is only 5% of the American rate the Board cites (which applies to commercial webcasters other than Pureplay webcasters).

His insistence that the recording industry is hiding other sources of income that somehow make up for not receiving the fair market value for the public performance of sound recordings by webcasters displays a lack of understanding of the different roles played by songwriters, artists, and music labels in the creation and dissemination of music and what revenue streams they are entitled to. For any piece of music, the songwriter, artist or performer, and record label will often be different persons, although the songwriter and artist might also happen to be the same, and the revenues received relate to different activities. The only revenues the songwriter is entitled to for the public performance of a song when a recording is webcast are the royalties collected by the songwriters’ collectives. The artist/performer and record label do not share in these royalties. The only revenues the record labels are entitled to collect for the communication to the public of sound recordings in a webcast is the equitable remuneration fixed by the Copyright Board. This revenue is shared on a 50/50 basis with the performer, divided at the source by Re:Sound. Unless the performer also happens to be the songwriter, the revenues from Tariff 8 are also the only revenues the performer is entitled to for the performances disseminated by the webcaster.

Geist’s assertion about other rights filling a compensation gap essentially boils down to a flawed distributive justice principle that as long as some groups of persons in an industry are being compensated for their investments or creative efforts, it does not matter if others are not paid their just desserts. By analogy to his reasoning, one could argue that if an author of a book is paid a royalty to write a book, the book publisher would have no ground to complain if Parliament passed a law limiting its right to sell the book at 10% of its actual market price. Of course no policy maker would adopt such a policy. It would be contrary to the most basic common sense principles of economics and distributive justice, would adversely affect publishers’ investments in authors, and ultimately hurt consumers who benefit when new works are created and disseminated. However, Geist appears to believe this principle is appropriate when it comes to music industry participants.

Geist also asserts that “there are Canadian fees that are not paid at all in the U.S.” and gives as an example payments for the reproduction of musical works which he says U.S. webcasters do not pay. He is wrong on this also. Where the service is licensed directly by the record labels in the U.S., the right to make copies is licensed and paid for under license agreements. Where webcasters rely on the statutory license under the DMCA, they also obtain a statutory license to make ephemeral copies under s112 of the U.S. Copyright Act and the royalties that are paid under the statutory license make up a small percentage of the royalties.

Geist then shifts his attack on the music industry criticisms of Tariff 8, arguing that the royalty rates set by the Board are reasonable. He supports this first by claiming that a comparison with U.S. rates “makes little sense” because due “to international copyright obligations, the Canadian repertoire during the period of the tariff was about half as large as the U.S. one. That means that even a simple comparison would result in cutting the U.S. rate in half”. Geist’s arguments on this point are based on a misunderstanding of Canada’s international treaty obligations and bad math.

First, there are no “international copyright obligations” that require Canada not to provide equitable remuneration to repertoire from countries such as the U.S. For strictly policy reasons, Canada has only provided equitable remuneration for Canadian sound recordings and those of other producers who were members of the Rome Convention. The U.S. is not a member of the Rome Convention, and Canada, as a matter of choice not legal obligation, decided not to provide any protection for such recordings. In fact, Canada chose to discriminate against US nationals and to allow users to commercially exploit artists’ sound recordings by communicating them to the public in Canada without payments, despite the fact that the U.S. provides Canadian artists and labels with national treatment under its digital audio-transmission right in sound recordings. This changed today when the WPPT amendments in the Copyright Modernization Act come into effect.

Second, Geist is also wrong when he asserts that “even a simple comparison would result in cutting the U.S. rate in half”.  Even halving the US rates – as Michael Geist suggests – still leaves them between 80 – 90% higher than the Canadian rates, with no guaranteed percentage of revenue as exists in the U.S.

Geist’s claim that Re:Sound is now willing to accept a percentage of revenues rather than a rate based on the number of plays appears to be based on his misreading of Re:Sound’s Proposed Tariff 8 for 2015 which he cites for that assertion. That tariff proposes a royalty which is the greater of the percentage of revenues or an amount per play, subject to a minimum fee. His assertion is simply wrong, as a simple review of Re:Sound’s proposed tariffs filed for 2013, 2014 and 2015 clearly indicates.

Geist also argues that the Tariff 8 rates are reasonable because they were derived using the commercial radio rates as their barometer. He says these rates seem

appropriate given the similarities between an Internet streaming service that does not allow users to select specific songs and a commercial radio station that plays a regular music rotation. Indeed, Pandora describes itself as an Internet radio service that adapts playlists to user feedback and offers advertising opportunities to local and national businesses.

Geist’s assertion that the commercial radio tariff is a good barometer for the performance rights of sound recordings used by webcasters misses fundamental differences between the uses and the media. Over-the-air radio and webcasting services (particularly semi-interactive services) use music and have market impacts that are much different. As he himself points out, webcasters can “adapt playlists to user feedback”:  semi-interactive services deliver a highly customizable listening experience, with stations tailored to the individual’s musical preferences, and users are presented with an ability to pause, skip, rewind & fast-forward streams. Users can select from wide variety of genres and subgenres of music not available on terrestrial radio. Streaming also has the advantage of portability and availability on multiple mobile devices.

Moreover, it is hard to understand why the Board chose to discard arms-length negotiated agreements for the very rights at issue and instead set the rates based on the SOCAN Commercial Radio Tariff that applies in terrestrial broadcasting. Marketplace-set rates are the best barometer of fair and reasonable rates. They are after all rates that willing music services were willing to pay to a willing licensor for the right to webcast music in Canada.

Furthermore, despite the Board’s finding, there are good reasons to believe that Internet streaming is a substitute for and displaces sales of on-demand downloads and CD sales as consumer preferences switch from ownership of music to renting music. Consumers only have limited time to allocate to leisure activities including music listening. Increasingly, the source of the music is online streaming. One would therefore expect a displacement of music purchases as a result of increased consumption of music through streaming services. This was acknowledged by Geist, who noted in a prior blog post on digital music sales growth that the music industry faced challenges “as Canadians find alternate streaming sources for their music and different places to spend their entertainment dollars.” Further, one would expect that as the price of listening to music by Internet streaming falls relative to the price of physical media and online downloads, people will also substitute to the relatively cheaper mode within the fixed budget of time they have for listening. That will also result in losses of physical and digital sales which will also reduce artists’ income.

Last, when assessing the reasonableness of the rates, one has to actually consider what the rates translate to in practice, especially if they operate as a substitute for the purchase of downloads or CDs. In this context, for example, isn’t there something wrong with a scenario where an artist would need his/her song played 12,647 times to substitute for one download on iTunes?

Geist claims that the Tariff 8 decision paves the way for new online music services to enter the Canadian market. If his point is that the delays in obtaining certification of the tariff made launching services more uncertain in Canada, he would be right. But, if he is suggesting that new services would not have entered the Canadian market if the royalty rate had been set at a higher level, he is wrong. The fact is that music services have already entered into the Canadian market, including Deezer, Rdio, Songza, Google Play Music, CBC Music, and Slacker. The uses of streaming music services in Canada doubled since 2012 according to a recent survey. Most services also operate outside of Canada and pay more than 10 times the Canadian rates for the public performance right in sound recordings. There is no credible reason to think that Canada must, through the Copyright Board, force artists and labels to license music at bargain basement discount rates to attract new music services to Canada. In fact, given the international criticisms that even the foreign rates leave artists with very little revenues from streaming services, there are good reasons to think that even rates higher than those need to be considered. See, Musicians Sing for a Cause That’s Their Own, Is Spotify Killing Music?.

Geist also tries to discredit the music industry’s opposition to Tariff 8 by referring to submissions made by the Canadian Recording Industry Association (CRIA) in a prior proceeding. He claims that “the recording industry has either opposed or dismissed” the royalties claimed by CSI and SOCAN, collectives which represent songwriters, composers, and music publishers.

Leaving aside the relevance of submissions made in a prior different proceeding about different issues involving different music uses, collectives and rights holders, his selective references to CRIA’s Statement of Case do not reflect the substance of its submissions.

CRIA’s main arguments were not that songwriters, composers, and music publishers were not to be fairly compensated. In fact, CRIA argued they were entitled to be paid “fair and equitable” royalties. Contrary to Geist’s implication, CRIA didn’t oppose paying music publisher collectives for downloads (which was primarily what was at issue) or streams in earlier proceedings. In fact, it proposed to pay them the same percentage of revenue that they had always received for music sales — and the Copyright Board agreed, stating in the initial Tariff 22.A decision that ”the appropriate proxy for the price to pay to use a musical work in a download is the price paid to reproduce a musical work onto a CD.”  CRIA’s point was simply that if you add in the subsequent CSI tariff, you would exceed the proxy the Board had set, and it didn’t make sense to award a supplement based on the irrelevant metric of record label profits.  All of which is ancient history and none of which is in any way relevant to the Board’s Tariff 8 decision. Further, consistent with the position being taken by the music industry today, CRIA’s submissions emphasized that the appropriate proxy should, among other factors, be “based upon comparable actual market sales” where the royalty “has been agreed to by the parties affected in other jurisdictions” and in accordance with “the rates of comparable licensing schemes in other jurisdictions”.

Geist also finds remarkable the fact that CRIA objected in that prior proceeding to payments for “non-compensable activities”. What is remarkable is that Geist digs back nearly half a decade to bring this long-settled and irrelevant issue up.

What is relevant is the fact that the Copyright Board has just set rates that are one-tenth of the rates freely negotiated by the music industry with online services presently operating in Canada, rates that are also are also 5-10% of what artists and labels receive in the U.S. None of Geist’s attacks on the music industry opposition to Tariff 8 changes these indisputable facts.

 

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