SoundExchange Counsel Faces Royalty Skirmishes

Michael Huppe shows up at concerts, festivals and panel discussions everywhere. The energetic lawyer has been seen at the South by Southwest festival in Texas. He's at an R&B festival in Philadelphia that's raising money for struggling musicians. He mingles with celebrities at the Grammy Awards in Los Angeles and chats with politicians at a concert on Capitol Hill.

Huppe isn't a record company executive. He's general counsel for SoundExchange, the nonprofit organization designated by the U.S. Copyright Office to collect and distribute performance royalties when music is broadcast digitally. He goes to the events with one mission: to tell musicians they might be owed money.

In his conservative business jacket and button-down shirt, the 40-year-old attorney may not look like he represents the future of the music industry. SoundExchange originated as a division of the Recording Industry Association of America (RIAA) and was spun off as a separate group in 2000 to collect and distribute digital performance royalties. It's the only agency authorized to do so. Today, it represents more than 3,500 record companies and more than 6,000 labels and their artists.

Royalties on Internet Radio

Huppe says music labels and artists will increasingly depend on the performance royalties SoundExchange distributes to survive. Internet radio is booming. About 60 million listeners tune in to an Internet station every month, according to a report by JPMorgan North American Equity Research. That's up from about 15 million listeners just three years earlier. One of the most popular Internet music sites and iPhone software applications, Pandora, creates personalized stations for listeners and is expected to bring in $25 million this year.

“We're an exploding part of the music industry and one of the few growth sectors,” Huppe says.

Huppe spends much of his time defending SoundExchange because some Webcasters say the performance royalties that Internet radio stations must pay to broadcast music are so high that they're being forced out of business.

“It's really put a damper on the entire industry,” says Kurt Hanson, owner of AccuRadio, an Internet radio station with 320 streams of music, ranging from Chinese pop to West Coast jazz. “Advertisers are hesitant to embrace [Internet radio] fully. Web- casters find it nearly impossible to get any investment funding. It's difficult in some cases to hire employees. It's been bad news all around.”

SoundExchange has negotiated deals so that some Webcasters can pay lower rates temporarily. And negotiations continue with the Digital Media Association (DMA), a trade association that negotiates royalties for its members. But ultimately, Huppe says, it will be up to Internet broadcasters themselves to find business models that turn a profit ' and he believes eventually many will.

Bringing Artists
And Labels Together

It's Huppe's job to oversee all of SoundExchange's legal, regulatory and legislative issues. He does so under the direction of an 18-member board made up of small and large record labels, artists' representatives and industry officials. Their business interests often diverge, and Huppe spends a lot of time talking to the board about issues and helping them work together.

Much of what Huppe and the board can do is dictated by a long, often mind-numbing list of federal statutes and regulations, many of which Huppe can recite from memory. To begin with, SoundExchange doesn't actually set the performance royalties it collects. It makes recommendations to three judges who sit on the Copyright Royalty Board (CRB), which was created by Congress in 2004 to set royalty rates and terms for statutory licenses. The Librarian of Congress appoints the judges.

And the judges have been doing something relatively new. Few people realize that in the United States, musicians and singers don't get paid when traditional radio stations broadcast their songs ' only songwriters and publishers do. That changed in 1995, when Congress passed the Digital Millennium Copyright Act, which provided a limited performance right for cable and satellite radio. In a controversial move, it was expanded in 1998 to cover Internet transmissions.

Paying Royalties

When Huppe isn't traveling to music events telling musicians about SoundExchange, which he does several times a month, he's lobbying politicians on Capitol Hill to support the nonprofit. His primary responsibility, though, is implementing all the regulations that apply to SoundExchange, and that includes making sure royalties are collected and distributed efficiently and accurately. By the end of 2007, the group had collected royalties of more than $248 million, half of which goes to record companies, and the other half to performers. SoundExchange has distributed more than $150 million total to artists so far. Getting money out the door isn't as easy as it may sound, he says. It can take about six months; or longer when playlists are sent incorrectly. Sometimes, musicians they've contacted never collect the money they're owed.

Huppe has a small staff to help with that process. For example, it's the job of Colin Rushing, senior counsel for SoundExchange, to make sure radio stations report data accurately and to work with them when they don't. No station has been taken to court yet for noncompliance, but that's always a possibility. “More often than not, they're willing to work with us,” Rushing says.

Huppe never imagined becoming a player in the music business when he graduated from Harvard Law School in 1995. Intellectual property law first piqued his interest while he clerked for federal district court judge Leonie Brinkema in the Eastern District of Virginia. Then he spent a few years honing his litigation skills at Akin Gump Strauss Hauer & Feld in Washington, DC. Those skills led him in 2000 to the RIAA as its deputy general counsel. He handled digital copyright lawsuits and started working with the legal department at SoundExchange. In 2007, when the nonprofit needed a general counsel with strong litigation experience to replace Gary Greenstein, who had joined Wilson Sonsini Goodrich & Rosati's office in Washington DC, SoundExchange hired Huppe.

Days later, on March 2, the CRB issued its first rate decision for Webcasters, after 18 months of negotiations and testimony involving 40 different parties. Using a “willing buyer, willing seller” standard, the judges set the new royalty rates at $.0008 per performance per listener, effective retroactively to 2006. The rates would gradually increase to $.0019 per performance per listener in 2010. A minimum fee of $500 per station or channel was also set.

Webcasters immediately balked, saying some stations would have to pay 70% or more of their revenue as royalties. This wasn't the first time that Webcasters and the industry clashed. In 2002, the Copyright Office set the first digital performance royalty at a much higher rate of $.07 cents per song per listener. Internet radio stations banded together and convinced Congress to suspend the fees altogether. A new deal was worked out that instead calculated royalties based on revenues or expenses. So for example, a station that brought in less than $1.2 million a year would pay 7% of its expenses, or 10% of revenues, whichever was higher. The plan stayed in effect until 2005.

Working with Webcasters

But online media companies wanted more than lower rates. They also wanted reforms to make negotiating future rates easier and less expensive. So in 2004, Congress created the CRB to set performance royalties. The board's first ruling, though, was a huge disappointment for Webcasters, and they quickly began a campaign to overturn the rates.

The Digital Music Association (DiMA), which represents AOL Radio, Napster, and Yahoo! Music, spent nearly $700,000 last year, mostly to fuel opposition to the Web radio royalty increase that was set to take effect in mid-2007. Bills were introduced in the House and Senate to overturn the new rates. Webcasters held a day of silence, shutting down their broadcasts on June 26, 2007, to support the legislation.

This past July, Joe Kennedy, president and CEO of Pandora, told a Senate Judiciary Committee that more than 70% of his company's $25 million anticipated revenue in 2008 would go toward paying royalties. That could shut his service down for good, he said: “This is simply a crushing amount.” A spokesperson for Senator Ron Wyden (D-OR), who co-sponsored a bill to overturn the new rates, said they will “strangle new and better ways for Americans to receive audio content and would have the long-term effect of limiting, rather than increasing, royalties that creative artists would receive.”

National Public Radio (NPR) also jumped in, joining with the DiMA to file motions for rehearing with the CRB. NPR argued that the minimum fee of $500 per station would be a substantial financial burden because it has so many member stations. NPR had been exempt from royalties under a special deal that had expired.

The CRB denied all the motions. Then the DiMA and others led an appeal before the U.S. Court of Appeals for the District of Columbia. Webcasters also led an emergency motion to keep the new rates from going into effect on July 15, 2007. But a three-judge panel of the DC Circuit denied that motion, too.

In August 2007, SoundExchange worked out a deal with small commercial Webcasters earning less than $1.25 million a year that let them pay royalties of 10%-12% of their revenue through 2010. Huppe says he's continuing to negotiate with the DiMA. The Webcaster Settlement Act of 2008 gave Internet radio stations more time to negotiate for lower rates.

During negotiations, Webcasters have shared their financial information and business models with SoundExchange, says Lisa Namerow, general manager of AOL Radio. And they have had frank discussions about how to generate more revenue.

SoundExchange's job got harder when the CRB set lower royalties for satellite radio of between 6% and 8% of revenues in December 2007. Web-
casters became even more irate. “Internet radio is paying a rate by a standard that no other broadcaster is asked to meet,” says Jake Ward, spokesperson for SaveNetRadio, a coalition of Webcasters, Internet radio listeners and artists.

And to make Huppe's job even more difficult, critics have accused SoundExchange of not distributing payments to artists as they should. In September, Greg Scholl, president of The Orchard, a content aggregator that administers royalties for independent labels, wrote a letter to Billboard magazine stating that his clients still hadn't been paid correctly. “A very public and very detailed accounting of SoundExchange's books and business practices is in order,” he wrote. SoundExchange executive director John Simson responded in a letter to Billboard that The Orchard hadn't provided the proper tax documents so payments could be sent to the record labels it represents.

Michael Huppe shows up at concerts, festivals and panel discussions everywhere. The energetic lawyer has been seen at the South by Southwest festival in Texas. He's at an R&B festival in Philadelphia that's raising money for struggling musicians. He mingles with celebrities at the Grammy Awards in Los Angeles and chats with politicians at a concert on Capitol Hill.

Huppe isn't a record company executive. He's general counsel for SoundExchange, the nonprofit organization designated by the U.S. Copyright Office to collect and distribute performance royalties when music is broadcast digitally. He goes to the events with one mission: to tell musicians they might be owed money.

In his conservative business jacket and button-down shirt, the 40-year-old attorney may not look like he represents the future of the music industry. SoundExchange originated as a division of the Recording Industry Association of America (RIAA) and was spun off as a separate group in 2000 to collect and distribute digital performance royalties. It's the only agency authorized to do so. Today, it represents more than 3,500 record companies and more than 6,000 labels and their artists.

Royalties on Internet Radio

Huppe says music labels and artists will increasingly depend on the performance royalties SoundExchange distributes to survive. Internet radio is booming. About 60 million listeners tune in to an Internet station every month, according to a report by JPMorgan North American Equity Research. That's up from about 15 million listeners just three years earlier. One of the most popular Internet music sites and iPhone software applications, Pandora, creates personalized stations for listeners and is expected to bring in $25 million this year.

“We're an exploding part of the music industry and one of the few growth sectors,” Huppe says.

Huppe spends much of his time defending SoundExchange because some Webcasters say the performance royalties that Internet radio stations must pay to broadcast music are so high that they're being forced out of business.

“It's really put a damper on the entire industry,” says Kurt Hanson, owner of AccuRadio, an Internet radio station with 320 streams of music, ranging from Chinese pop to West Coast jazz. “Advertisers are hesitant to embrace [Internet radio] fully. Web- casters find it nearly impossible to get any investment funding. It's difficult in some cases to hire employees. It's been bad news all around.”

SoundExchange has negotiated deals so that some Webcasters can pay lower rates temporarily. And negotiations continue with the Digital Media Association (DMA), a trade association that negotiates royalties for its members. But ultimately, Huppe says, it will be up to Internet broadcasters themselves to find business models that turn a profit ' and he believes eventually many will.

Bringing Artists
And Labels Together

It's Huppe's job to oversee all of SoundExchange's legal, regulatory and legislative issues. He does so under the direction of an 18-member board made up of small and large record labels, artists' representatives and industry officials. Their business interests often diverge, and Huppe spends a lot of time talking to the board about issues and helping them work together.

Much of what Huppe and the board can do is dictated by a long, often mind-numbing list of federal statutes and regulations, many of which Huppe can recite from memory. To begin with, SoundExchange doesn't actually set the performance royalties it collects. It makes recommendations to three judges who sit on the Copyright Royalty Board (CRB), which was created by Congress in 2004 to set royalty rates and terms for statutory licenses. The Librarian of Congress appoints the judges.

And the judges have been doing something relatively new. Few people realize that in the United States, musicians and singers don't get paid when traditional radio stations broadcast their songs ' only songwriters and publishers do. That changed in 1995, when Congress passed the Digital Millennium Copyright Act, which provided a limited performance right for cable and satellite radio. In a controversial move, it was expanded in 1998 to cover Internet transmissions.

Paying Royalties

When Huppe isn't traveling to music events telling musicians about SoundExchange, which he does several times a month, he's lobbying politicians on Capitol Hill to support the nonprofit. His primary responsibility, though, is implementing all the regulations that apply to SoundExchange, and that includes making sure royalties are collected and distributed efficiently and accurately. By the end of 2007, the group had collected royalties of more than $248 million, half of which goes to record companies, and the other half to performers. SoundExchange has distributed more than $150 million total to artists so far. Getting money out the door isn't as easy as it may sound, he says. It can take about six months; or longer when playlists are sent incorrectly. Sometimes, musicians they've contacted never collect the money they're owed.

Huppe has a small staff to help with that process. For example, it's the job of Colin Rushing, senior counsel for SoundExchange, to make sure radio stations report data accurately and to work with them when they don't. No station has been taken to court yet for noncompliance, but that's always a possibility. “More often than not, they're willing to work with us,” Rushing says.

Huppe never imagined becoming a player in the music business when he graduated from Harvard Law School in 1995. Intellectual property law first piqued his interest while he clerked for federal district court judge Leonie Brinkema in the Eastern District of Virginia. Then he spent a few years honing his litigation skills at Akin Gump Strauss Hauer & Feld in Washington, DC. Those skills led him in 2000 to the RIAA as its deputy general counsel. He handled digital copyright lawsuits and started working with the legal department at SoundExchange. In 2007, when the nonprofit needed a general counsel with strong litigation experience to replace Gary Greenstein, who had joined Wilson Sonsini Goodrich & Rosati's office in Washington DC, SoundExchange hired Huppe.

Days later, on March 2, the CRB issued its first rate decision for Webcasters, after 18 months of negotiations and testimony involving 40 different parties. Using a “willing buyer, willing seller” standard, the judges set the new royalty rates at $.0008 per performance per listener, effective retroactively to 2006. The rates would gradually increase to $.0019 per performance per listener in 2010. A minimum fee of $500 per station or channel was also set.

Webcasters immediately balked, saying some stations would have to pay 70% or more of their revenue as royalties. This wasn't the first time that Webcasters and the industry clashed. In 2002, the Copyright Office set the first digital performance royalty at a much higher rate of $.07 cents per song per listener. Internet radio stations banded together and convinced Congress to suspend the fees altogether. A new deal was worked out that instead calculated royalties based on revenues or expenses. So for example, a station that brought in less than $1.2 million a year would pay 7% of its expenses, or 10% of revenues, whichever was higher. The plan stayed in effect until 2005.

Working with Webcasters

But online media companies wanted more than lower rates. They also wanted reforms to make negotiating future rates easier and less expensive. So in 2004, Congress created the CRB to set performance royalties. The board's first ruling, though, was a huge disappointment for Webcasters, and they quickly began a campaign to overturn the rates.

The Digital Music Association (DiMA), which represents AOL Radio, Napster, and Yahoo! Music, spent nearly $700,000 last year, mostly to fuel opposition to the Web radio royalty increase that was set to take effect in mid-2007. Bills were introduced in the House and Senate to overturn the new rates. Webcasters held a day of silence, shutting down their broadcasts on June 26, 2007, to support the legislation.

This past July, Joe Kennedy, president and CEO of Pandora, told a Senate Judiciary Committee that more than 70% of his company's $25 million anticipated revenue in 2008 would go toward paying royalties. That could shut his service down for good, he said: “This is simply a crushing amount.” A spokesperson for Senator Ron Wyden (D-OR), who co-sponsored a bill to overturn the new rates, said they will “strangle new and better ways for Americans to receive audio content and would have the long-term effect of limiting, rather than increasing, royalties that creative artists would receive.”

National Public Radio (NPR) also jumped in, joining with the DiMA to file motions for rehearing with the CRB. NPR argued that the minimum fee of $500 per station would be a substantial financial burden because it has so many member stations. NPR had been exempt from royalties under a special deal that had expired.

The CRB denied all the motions. Then the DiMA and others led an appeal before the U.S. Court of Appeals for the District of Columbia. Webcasters also led an emergency motion to keep the new rates from going into effect on July 15, 2007. But a three-judge panel of the DC Circuit denied that motion, too.

In August 2007, SoundExchange worked out a deal with small commercial Webcasters earning less than $1.25 million a year that let them pay royalties of 10%-12% of their revenue through 2010. Huppe says he's continuing to negotiate with the DiMA. The Webcaster Settlement Act of 2008 gave Internet radio stations more time to negotiate for lower rates.

During negotiations, Webcasters have shared their financial information and business models with SoundExchange, says Lisa Namerow, general manager of AOL Radio. And they have had frank discussions about how to generate more revenue.

SoundExchange's job got harder when the CRB set lower royalties for satellite radio of between 6% and 8% of revenues in December 2007. Web-
casters became even more irate. “Internet radio is paying a rate by a standard that no other broadcaster is asked to meet,” says Jake Ward, spokesperson for SaveNetRadio, a coalition of Webcasters, Internet radio listeners and artists.

And to make Huppe's job even more difficult, critics have accused SoundExchange of not distributing payments to artists as they should. In September, Greg Scholl, president of The Orchard, a content aggregator that administers royalties for independent labels, wrote a letter to Billboard magazine stating that his clients still hadn't been paid correctly. “A very public and very detailed accounting of SoundExchange's books and business practices is in order,” he wrote. SoundExchange executive director John Simson responded in a letter to Billboard that The Orchard hadn't provided the proper tax documents so payments could be sent to the record labels it represents.