Open Letter: Webcaster Alliance Letter to RIAA

Perry J. Narancic
Tel: 650.814.7688
Fax: 650.618.2700
perry@lexanalytica.com

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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