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Perry J. Narancic BY FACSIMILE July 8, 2003 |
Steven M. Marks, Esq.
Vice President, Business and Legal Affairs
Recording Industry Association of America
1330 Connecticut Avenue NW
Suite 300
Washington, D.C. 20036
Re: Antitrust Concerns regarding the Voice of Webcasters Agreement dated December
13, 2002 (“VOW Agreement”)
Dear Mr. Marks:
I represent Webcaster Alliance, Inc. (the “Alliance”), the leading association
of small webcasters in the United States. I am writing to you to express certain
concerns that the Alliance has concerning certain actions of the RIAA, and other
parties, that appear to have had the intent and effect of eliminating competition
in the market for distribution of music sound recordings over the Internet.
In summary, the Alliance’s concern is that the VOW Agreement, which was purportedly
entered into for the benefit of small webcasters under the authority of the
Small Webcasters Settlement Act of 2002 (“SWSA”), in fact eliminates the commercial
viability of most small commercial webcasters operating today (including Alliance
members) by imposing unreasonably high minimum fees for copyrighted material
controlled by the RIAA and its members.
I. Background
A. The Webcasting Market
The Alliance believes that the Webcasting market is comprised of approximately
25,000 operations in the United States, of which approximately 10,000 are “small
commercial webcasters”. A small commercial webcaster, for these purposes, is
any entity that has at least 50 concurrent listeners and is operated with the
primary purpose of making a profit, but excludes any operation with more than
$1 million in annual revenue derived from webcsting. The Alliance believes that
the small commercial webcasting market is not only a viable commercial market,
but that it also is an essential distribution channel for independent music
(“Independent Material”), which competes with the mainstream music controlled
by RIAA and its members (“Mainstream Material”). In this way, the small commercial
webcasting market promotes consumer choice by providing a convenient, easy-to-use
distribution channel for Independent Material.
From a technological point of view, entry into the small webcasting market is
relatively easy. Capital start-up costs are relatively low, and regulatory barriers
are manageable. For this reason, the Alliance believes that small commercial
webcasting is a vital form of publishing that gives technological life to the
First Amendment and adds vigor to the marketplace of ideas.
However, to be commercially viable, the Alliance believes that small webcasters
need a mix of Mainstream Material and Independent Material. The Alliance is
concerned that recent developments in the market for Mainstream Material have
seriously jeopardized the commercial viability of its members by eliminating
the ability to stream a commercially significant amount of Mainstream Material.
B. Statutory and Voluntary Licenses
In July 2002, the Librarian of Congress issued the Final Rule relating to the
Determination of Reasonable Rates and Terms for the Digital Performance of Sound
Recordings and Ephemeral Recordings (the “Determination”). Under the Determination,
the Librarian found that a fair and reasonable annual minimum fee for the statutory
licenses at issue was $500. As you may know, this minimum fee is to be applied
to royalties that may be owing under the rate structure approved in the Determination.
The approved rate structure includes a royalty rate of $0.0007 per performance.
For small commercial webacasters, however, the per performance rate is problematic
because their revenues are typically much smaller on a per performance basis
than those of large webcasting entities. This problem persist because advertisers
are typically unwilling to pay attractive advertising fees in small markets,
which Independent Material is by definition. In other words, for example, while
large webcasters may be able to generate 2 cents in revenue per performance,
small commercial webcasters who feature a significant portion of Independent
Material are typically unable to generate even the .07 cents per performance
of Mainstream Material established in the Determination.
The Small Webcaster Settlement Act of 2002 was intended to address the special
needs of small webcasters. But for the reasons set forth below, the VOW Agreement
actually harms the class it purports to benefit and has the effect of lessening
competition in numerous markets.
C. Effects of the VOW Agreement on Alliance members
By way of real-life example, one Alliance member (“X”) has approximately 200
concurrent listeners and plays 20 items of Mainstream Material per day (or about
10% of the X’s total content). X has total webcasting revenues of approximately
$25,000/a. Under the per performance rates established under the Determination,
X would incur royalties of approximately $1000/a for the years 1999-2002 (assuming
the same number of performances) - for a total of $4000 in back royalties. Even
this amount is not reasonable given the Fact that X, and most Alliance members,
do not generate profit - even before paying sound recording licensing fees.
It was for this reason that special relief was contemplated under SWSA.
But under the VOW Agreement, X would pay minimum fees for the period 1999-2002
in the amount of $8000 - a 100% increase over the rates established in the Determination!
In fact, the minimum fees established in the VOW Agreement multiplies by a factor
of 4 the minimum fees found to be reasonable in the Determination! Simply put
- small commercial webcasters are in an untenable no-win situation, with the
result that the vast majority of Alliance members are not in compliance with
either the Determination or the VOW Agreement.
This above real-life situation seems perverse because X, and many other Alliance
members, are actually worse off under an agreement that was supposed to provide
relief to small webcasters from the problems arising under the Determination.
II. Anticompetitive Concerns
A. Elimination of competition in the small webcasting market
The Alliance believes there is no good reason supporting the dramatic increase
in the minimum rates set forth in the VOW Agreement. Indeed, one person involved
in negotiating the VOW Agreement has indicated that the $2000 minimum royalty
was adopted by the RIAA and the VOW members with the intent of dramatically
reducing the number of small commercial webcasters.
The original VOW group was comprised of some 12 entities, although 4 of these
entities either abandoned VOW before conclusion of the VOW Agreement, or did
not elect under the VOW Agreement. The remaining eight VOW members ultimately
elected under the VOW Agreement (the “VOW Eight”).
One of the VOW Eight (referred to herein as “Y”), currently has approximately
12,000 concurrent listeners. Assuming that Y streamed 10% of its total content
from Mainstream Material (like X in the example in Section I.C.), Y would have
owed approximately $60,000/a in royalties under the Determination for the period
1999-2002. Because Y is privately held, the Alliance does not know Y’s annual
revenues. But assuming Y annual revenues of $100,000, Y would have back royalties
for Mainstream Material streamed between 1999-2002 reduced from $60,000/a (under
the Determination) to $8,000/a (under the VOW Agreement). To Y, and the other
members of the VOW Eight, the amount of the minimum fee was irrelevant because
their royalties would exceed the minimum in any event.
The VOW Eight apparently entered into an agreement among themselves, and with
the RIAA, in order to establish minimum rates that would raise the costs of
doing business to many small commercial webcasters - including many Alliance
members. By raising rivals’ costs, the VOW Eight were apparently intent on either
eliminating their competitors and/or raising barriers to entry in the market
for small commercial webcasting.
B. Elimination of competition in the sound recording market
The Alliance is concerned that the RIAA (and its members), control a monopoly
in the market for domestically copyrighted sound recordings. X has indicated
that the RIAA insisted on a $2000 minimum fee, knowing that such a fee would
be prohibitively high for a large number of small commercial webcasters. The
Alliance believes that, by eliminating the primary distribution channel for
the Independent Material, the RIAA and its members were attempting to eliminate
the competitive threat of Independent Material. Thus, the Alliance alleges that
the RIAA was attempting to manipulate the small commercial webcasting market
in order to unlawfully maintain its core monopoly.
III. Proposed Resolution
A. Restoring the $500 Minimum Annual Fee
The Alliance and its members want to establish a mutually beneficial working
relationship with the RIAA and its members to allow for the commercially reasonable
distribution of Maintstream Material and Independent Material over the Internet
- where consumer choice and demand will be the final arbiter of commercial value.
In that regard, the Alliance has repeatedly sought to negotiate with the RIAA
on behalf of its members for a modification to the VOW Agreement that would
include a restoration of the $500 minimum fee that was approved in the Determination.
Unfortunately, the RIAA has, to date, refused to enter into such negotiations
and we respectfully request a reconsideration of that decision.
B. A promise to refrain from pursuing Alliance members
Because of the RIAA’s refusal to negotiate with the Alliance with respect to
small commercial webcasters (and other categories of its membership), most Alliance
members are not currently in compliance with either the Determination or the
VOW Agreement, and they are in a position of threatened loss or injury as a
result of the concerns expressed herein. The Alliance requests that the RIAA
and its members refrain from taking legal action pending a resolution of the
minimum fee issue and other competition issues.
We believe that the Alliance’s requested remedies are eminently reasonable -
and the RIAA’s agreement with our proposals would go a considerable way in ameliorating
the anticompetitive concerns set forth above. However if the RIAA continues
to refuse to address the needs of Alliance members, the Alliance will have no
choice but to seek a legal remedy.
I would appreciate hearing from you, at least preliminarily, no later than Friday
July 18, 2003.
Sincerely,
Lex Analytica, P.C.
By: Perry J. Narancic
c: Ann Gabriel, President, Webcaster Alliance, Inc.
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