Pass the Tests, Join the Webcasting Tribe

Pandora has actually been around for a long time.  It launched in 2005.  It bills itself as “internet radio,” but that’s not quite right.  There are no disc jockeys making song selections.  Instead, it uses its famed Music Genome algorithm to choose songs that Pandora thinks you’ll like.  You probably know how it works:  you enter the title of a song or the name of an artist, and Pandora provides you with a stream of music that is musically like that song or artist, automatically.*  The alternative was to place genres into increasingly narrow genres and sub-genres.  This requires a lot of hard work by taste-makers, who must be constantly updating their genres and sub-genres in light of new music.  (Anyone remember the old  Some truly great artists were very difficult to classify.  Some songs were like WALL•E’s spork, neither fork nor spoon.

You can also choose music by genre, but that seems to defeat the point.

This idea, by the way, had been kicking around since 2000 as the Music Genome Project.  It’s always been a little difficult to describe in abstract terms the kind of music you like.  Even under the best of circumstances, generic categories are limited because everyone is at least a bit eclectic.  Drill down too far, and it gets boring.  Pull back too far, and you include stuff you don’t like (or you don’t want your friends knowing that you like).  Besides, what does alternative mean, anyway?  Pandora solved the problem by using the song or artist as a kind of nucleus around which a playlist was built, which is then further refined by the user’s ratings of songs as they are played.

You’ll notice that, if you enter a song (as opposed to an artist or genre), you *never* listen to that song, at least not right away.  It might (or might not) come up later.  You also never know what song is coming next, or what songs are coming up.  You can skip a song, but you can’t repeat a song.  You can never request a song.  So, it’s not quite radio.  It’s in some ways much better.

But why all these un-radio-like limitations?  It has to do with the way that Pandora is licensed to play all that music.  Owing to the quirky way copyright law evolved, radio stations have to pay licenses to songwriters but not to artists for the songs they broadcast.*  This is because songs are considered to be two different copyrighted works.  There is the underlying song, written by songwriters.  Then, there is the sound recording of the song, performed by artists.  Most people who publicly play a sound recording have to pay both the songwriter and the artist.  But radio stations only have to pay the songwriter.

This is massively controversial.  Massively.  Don’t bring this subject up in polite company.  In a nutshell:  The radio stations say that they provide plenty of value to artists in the form of promotion, and no one doubts that.  The artists, of course, would like to get paid, and feel that the market should determine the promotion value of radio airplay.

Pandora is a webcaster, so doesn’t have this radio-only exemption.  It has to pay royalties to both songwriters and artists.  The prospect of negotiating with hundreds or thousands of artists must be a little daunting, especially when, for every artist that embraces webcasting, there’s probably at least one who distrusts it completely.  Under those circumstances, webcasting would be limited to playing music by just a brave (or desperate) few artists, forever relegated to the fringes of the music industry.

Fortunately for webcasters, Congress made it “easy” for webcasters to become licensed to play any artists’ songs.  In the late 1990’s, Congress created a scheme for statutory licensing of “digital audio transmissions.”  Under this scheme, a webcaster is considered licensed to stream any sound recording, if (1) it complies with a complex set of regulations, and (2) it pays a royalty set by a federal panel of “Copyright Royalty Judges.”

If you are a typical webcaster*, you must comply with at least twelve regulations.  I’ll set them down briefly here, but these are gross oversimplifications.  In most cases, there is at least one important exception or qualification to the requirement, usually more than one:

*  I.e., you aren’t a radio station that simulcasts its programming over an internet stream, or a subscription service that’s been in business since at least July 31, 1998.  In those cases, you’re not off the hook: different sets of regulations apply to you.

  1. You are not an “interactive service”;
  2.  You don’t switch programming channels on your listeners;
  3. You also transmit song-title, artist name and “related information” if provided by the rights holder and if technologically feasible;
  4. You don’t exceed the “sound recording performance complement,” which basically means not playing more than three songs in a row by the same artist, or more than four songs within three hours by the same artist or two songs from the same album in a row.*
  5. You don’t tell the listeners ahead of time what songs are coming up.
  6. A requirement about archived and “continuous” programs that cannot be summarized.
  7. You don’t make listeners think there’s any affiliation, sponsorship or other business relationship between you and the artist or other rights holder.
  8. You “cooperate” (with whom?) to prevent listeners from looking for and selecting individual songs (if it’s not too hard for you to do);
  9. You don’t assist or encourage listeners to copy your streams, and in some cases, you take steps to prevent such copying;
  10. The songs that you’re streaming were properly obtained (e.g., you purchased them on CD);
  11. You don’t interfere with digital rights management (i.e., anti-copying measures) included by the rights holders in the digital files;
  12. You identify the song and artist to the user, but not until the song begins to play.

Apparently movements from classical pieces are each considered a separate song, so it’s impossible to play an entire symphony!  (You don’t need to pay Beethoven, of course, but you do need to pay the Nashville Symphony Orchestra.)

The rules governing webcasting are about as complex as you’ll ever see.  What’s more, it may not be immediately clear to you whether you’re an “interactive service.”  The statute helpfully defines interactive service as:

An “interactive service” is one that enables a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording, whether or not as part of a program, which is selected by or on behalf of the recipient. The ability of individuals to request that particular sound recordings be performed for reception by the public at large, or in the case of a subscription service, by all subscribers of the service, does not make a service interactive, if the programming on each channel of the service does not substantially consist of sound recordings that are performed within 1 hour of the request or at a time designated by either the transmitting entity or the individual making such request. If an entity offers both interactive and noninteractive services (either concurrently or at different times), the noninteractive component shall not be treated as part of an interactive service.

Got that?  We’ll have more to say about this later–or, more precisely, what it means for a program to be “specially created for the recipient.”

For all this detail, you can boil these regulations down to two key concepts.  First, don’t make it easy for users to capture (and copy) your stream.  Second, don’t even hint at what song’s coming next; the user simply can’t know.  The second concept supports the first, on the theory that users prefer to rip off songs they already know and like and aren’t likely to capture a lengthy segment of a stream just to cherry pick a few songs later.

Congress, as usual, was trying to balance the interests of consumers and rights holders.  Consumers already love radio, so they’ll like the internet equivalent.  But rights holders were afraid that streaming content will become just another way to avoid paying for music.  For a long time, rights holders had groused about consumers’ taping of radio programs, but everyone knew that such personal copies were of such poor quality that they didn’t really affect sales of the high-quality records.  Besides, it was really hard and time consuming.  With digital streaming, and the right tools, it was pretty easy to capture high-quality digital copies of songs.  After Congress set out these regulations in the late 1990’s, it was the webcasters’ turn to grouse a bit.  The rules really are difficult to understand and comply with (although after a dozen years, they’ve gotten pretty good at it).  But they sure beat the alternative.

All of this crossing of t’s and dotting of i’s gets the webcaster is the right to pay the statutory royalty to the artists.  Unlike some other statutory licenses, Congress didn’t actually set forth a royalty rate for digital audio transmissions.  It left that decision up to the Copyright Royalty Judges.  The judges are supposed to balance the need for fair compensation of artists with the need for webcasters to make a profit with the consumers’ desire for high-quality webcasting.  In other words, everyone is supposed to win.  This is harder than it sounds.  Who is to say whether a webcaster wouldn’t be profitable at a higher royalty rate if only it ran its business more efficiently, or whether the webcasters’ revenue stream is truly tapped out and there just isn’t any more money for the artists?

I’m going to gloss over the history of webcasting royalty rates because it (1) is very lengthy, (2) is highly complex, (3) I’m sure has been recounted elsewhere, and (4) is not actually germane to this discussion, which focuses on legality in the first instance.  There was a time when even Pandora appeared on the verge of going out of business because it had difficulty getting its revenue stream to cover the license fees.  Today, things appear to have calmed down, and Pandora spends about half its revenues on royalty payments.

Pandora, as you might imagine, is expert at following these regulations, paying the artists and otherwise staying in business.  Even so, when it was launched, it wasn’t clear whether its service was legal because it wasn’t clear whether Pandora was creating a program “specially … for the recipient.”  It wasn’t until 2009 that we finally knew that it was.  I’ll discuss that decision in the next post in this series.

Thanks for reading!

Rick Sanders

Rick is an intellectual-property litigator. He handles lawsuits, arbitrations, emergency injunctions and temporary restraining orders, opposition and cancellation proceedings, uniform dispute resolution proceedings (UDRPs), pre-litigation counseling, litigation avoidance, and other disputes, relating to copyrights, trademarks, trade secrets, domain names, technology and intellectual-property licenses, and various privacy rights. He has taught Copyright Law at Vanderbilt University Law School. He co-founded Aaron | Sanders with Tara Aaron-Stelluto in 2011.