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The FCC has released its Public Notice announcing the procedures for submitting Annual Regulatory Fees.  These annual fees are paid by broadcasters and other entities that are regulated by the FCC, essentially for the privilege of being regulated.  We detailed the amount of the fees for broadcasters in our post, here.  Regulatory Fees can already be submitted to the FCC through its on-line filing system or on paper, and some broadcasters have already done so as the Commission's alerts about the specific fees that each station owes were mailed to broadcasters in the last two weeks (minus the information as to the final filing date).  If your station has not received such a notice, check the mailing address that the FCC has on file for your station, as it may not be accurate.  Today's Public Notice sets the deadline date for the filing of regulatory fees as September 25.

The payment of regulatory fees is very important, as the failure to pay on time can cause the FCC to impose a "red light" on a licensee - blocking the processing of any application by the licensee.  In fact, in the last few weeks, the FCC has been sending out delinquency notices to licensees claiming that past regulatory fees have not been paid.  We are finding a significant number of these notices are being sent in error, so watch you mailbox carefully and, if you receive a notice that you failed to pay your regulatory fees for past years, and you did in fact do so, get that discrepancy corrected as quickly as possible to avoid the perceived failure from blocking any application that your station may want to file at anytime in the future. And don't forget to get this year's fees on file by September 25 to avoid late-fees and potential red-light issues.

The Digital Television conversion has allowed the FCC to reclaim significant portions of the TV spectrum for wireless and public safety uses - television channels above 51 will no longer be used for broadcast TV at the end of the analog to digital transition.  But, as part of the FCC's Diversity proceeding (see our post here), a proposal dealing with the other end of the TV spectrum is being considered - whether to remove Channels 5 and 6 from the television band and instead use these channels for FM radio.  These channels are adjacent to the lower end of the FM band.  Because of this adjacency, the existence of TV Channel 6 in a market can limit the use of the lowest end of the FM band (used for Noncommercial Educational stations) to avoid interference to the TV station.  Similarly, Channel 6's audio can be heard on many FM radio receivers, a fact that has recently been used by some LPTV operators to use their stations to deliver an audio service that can be received by FM radios (see our post on this subject).  In comments filed in the Diversity proceeding, parties have taken positions all across the spectrum - from television operators who have opposed using the channel for anything but television, to those suggesting that the channels be entirely cleared of television users and turned into a digital radio service.  Proposals also suggest using the band for LPFM operations, and even for clearing the AM band by assigning AM operators to this band to commence new digital operations.

In comments that our firm submitted on behalf of a group of noncommercial FM radio licensees who also rebroadcast their signals on a number of FM translator stations, we suggested that Channel 6 could provide a home for LPFM operations, instead of trying to squeeze those stations into the existing FM band.  There are currently proposals to squeeze more LPFM stations into the FM band by supplanting some FM translators (see our summary of some of those proposals here).  In these comments in the Diversity proceeding, we pointed out that, as there are currently radios on the market that receive 87.9, 87.7 and even 87.5, using these three channels for LPFM service would provide an immediate home to these stations, and far more opportunity for than LPFM would have in the already congested FM band.  These opportunities would exist even in most of the largest radio markets in the country, except in the handful of markets where a Channel 6 television station will continue to operate after the digital transition.  By adopting this proposal, the service that would be provided by FM translators would not be threatened. 

Another set of comments submitted by a group which includes a number of consulting engineers went even further, suggesting that all of Channels 5 and 6 be turned over to a radio service, that the service be operated in a digital mode, and that AM stations and LPFMs all be moved to these new channels.  The proposal is quite detailed, submitting a table of allotments for the relocation of the AM stations.  The proposal also sets out alternative channels for all current full-power television stations on Channels 5 and 6 where they could be moved to clear these two channels for radio operations.

On the other hand, a number of groups have opposed use of these channels for radio.  The opposition includes those stations who already are operating their digital stations on these channels, and organizations including the NAB and MSTV who represent broadcast television stations.  These groups argue that these two channels need to be retained as television channels not only for use by the television stations that have digital operations there, but also for new stations that can be allotted after the end of the digital transition, as well as for LPTV stations that are already operating there and ones that could be built in the future. 

Thus, the Commission will be faced with a choice between using these channels for more radio or more television.  So far, no party has argued that there is no need for this additional service given the multiple services that each TV and FM radio station can provide when operating digitally, nor have questions been raised as to what the addition of new channels (either radio or TV) will do for revenues of existing stations already facing unprecedented competition from other forms of new media.  Of course, the competition will come digitally in any event through other means of wireless delivery, so more competition is inevitable whether or not these channels are used for new broadcast services.  The use of these channels for more broadcasting will only hasten the inevitable increase in competition that broadcasters will face.   At the same time, the addition of all these channels will show, once again, that the incredible competition that exists to broadcasters and demonstrate that government regulation is not necessary to ensure that local service will be provided as, if the marketplace demands it, it will be provided (see our post here). 

Reply Comments on these important issues are due on August 29.

The American Issues Project has recently started running a controversial new television ad attacking Barrack Obama for his connections to former Weather Underground figure William Ayers.  The text of the ad is reported here.  While reportedly some cable outlets (including Fox News) have refused to air the ad, numerous broadcast stations are also wondering what the legal implications of running the ad may be.  We have already seen many other attack ads being run by third-party groups - including political parties, long-standing activist groups like Move On.org, as well as from new organizations like American Issues Project which have seemingly been formed recently.  As the use of such ads will no doubt increase as we get closer to the November election, it is important that broadcasters understand the issues that may arise in connection with such ads under various laws dealing with political broadcasting.  Legal issues that must be considered arise not only under FCC rules, but also potentially in civil courts for liability that may arise from the content of the ad.  Broadcast stations are under no obligation to run ads by third party groups, and stations have a full right to reject those ads based on their content.  This is in contrast to ads by Federal candidates, who have a right of reasonable access to all broadcast stations, and whose ads cannot be censored by the stations.  As a candidate's ad cannot be censored, the station has no liability for its contents.  In contrast, as the station has the full discretion as to whether or not it will run a third-party ad, it could have liability for defamation or other liabilities that might arise from the content of such ads that it decides to accept and put on the air.  

The standards for proving defamation (libel and slander) of a public figure are high, but if the ad does contain some clearly false statements, the standard could in fact be met.   Basically, to have liability, the station needs to run an ad containing a false statement either knowing that the ad is untrue or with "reckless disregard" for the truthfulness of the statements made.  This is referred to as the "malice standard."  Essentially, once a station is put on notice that the ad may be untrue (usually by a letter from the candidate being attacked, or from their lawyers),  the station needs to do their own fact checking to satisfy themselves that there is a basis for the claims made or, theoretically, the station could itself be subject to liability for defamation if the claims prove to be untrue.  A few years ago, some TV stations in Texas ended up having to pay a candidate because they ran an ad by an attack group that was shown to contain false statements, and the ad was run even after the candidate complained that the statements were untrue.  These determinations are often difficult to make as the ad's creators usually have hundreds of pages of documentation that they say supports their claims, while the person being attacked usually has documentation to refute the claims.  Thus, the determination as to whether or not to run the ad is a decision that each station needs to make after consultation with their lawyers, and after careful review of the spot and the backing documentation.

1) The name of the group sponsoring the ad

2) Its principal officers or its directors

3) Whether the request to buy time was accepted or rejected

4) If the schedule was accepted, the date and approximate time the spots will run

5) The class of time purchased

6) The rate charged

7) The name of the candidate to which the ad refers

8) After the spots have run, the exact time the spots ran

More information about these rules and the other laws dealing with political broadcasting issues for broadcast stations can be found in our Political Broadcasting Guide. 

The FCC has begun the process of resolving the groups of mutually exclusive noncommercial FM radio applications. In an Order released today, the FCC decided 12 groups of mutually exclusive applications ("MX Groups") by analyzing only one decisional factor - the question of "fair distribution" of noncommercial service.  As we wrote when we set out the criteria for FCC decision making , when the FCC chooses between mutually exclusive groups of applications for new Noncommercial Educational ("NCE") stations, the initial level of analysis is a consideration of whether the application serves extensive areas where there is little other noncommercial radio service.  If a station covers any area that currently has fewer than 2 noncommercial radio services, and that area exceeds 10% of the proposed service area of the applicant covering more than 2000 people, a conclusive preference will be awarded over another applicant who does not meet that threshold.   All of today's decisions were made based on this criteria.

One interesting aspect of the decisions was how many cases were essentially won by default - as a number of applicants did not bother to compute the areas and the populations that they served.  Where that information was not provided in the initial application as submitted by the applicant, the Commission gave the applicant no credit for any service. So even if an applicant submitted an application that would in reality serve underserved areas, if they did not claim that service in their initial application, they got no credit for the service.  The FCC did not fill in any blanks in the applications.  So, if you are planning to claim credit for anything in an application - be sure to do it up front when the application is filed, or you'll get no credit.

These are not final decisions, as petitions can be filed within 30 days against any of the selected applicants challenging any of their qualifications.  In fact, as the FCC decisions seem to be based on coverage analysis as submitted by the applicants themselves, some may challenge those computations.  But, where no challenge is filed, these applicants will be granted, and the applicants can build new noncommercial educational FM stations. 

The Washington Post today ran an article on the continuing Internet radio royalty battle - highlighting the service Pandora and the fact that it will likely go out of business if the current dispute about royalties is not resolved.  We wrote (here and here) about many of these same issues in our coverage of the recent Senate Judiciary Committee hearings.  What is notable about the article is its mention of settlement discussions that are being conducted under the supervision of Congressman Berman of the House Judiciary Committee.  But the article also makes clear that the disconnect continues between the perception of the recording industry and of the Internet radio industry on the revenue potential of Internet radio.  The differing perception continues to make settlement difficult, as the recording industry keeps complaining that the industry has not done enough to monetize their operations - and the Internet radio companies express frustration at that attitude.  If there was some way of making more money from Internet radio operations, doesn't the recording industry think that the webcasters would take advantage of those practices?  Why would they leave money on the table if they could figure out a way to make it?  If they could make money, they would - though the recording industry seems not to believe it.

The other issue that the article overlooks is that the settlement discussions that are going on are apparently the same settlement discussions referenced at the Senate Judiciary Committee hearing - those between the recording industry and the large webcasters.  But there are many other groups involved in webcasting - the small commercial webcasters that I have worked with in the Copyright Royalty Board proceeding, the broadcasters who also stream their programs, and noncommercial webcasters (including NPR affiliates, religious broadcasters and other noncommercial entities).  There is no discussion in the article of any talks with them and, as set out in the written testimony at the Judiciary Committee of Kurt Hanson of Accuradio, the small commercial webcasters have heard nothing from SoundExchange in months.  A resolution by the large webcasters, unless it is all encompassing and on terms that all parties can live with (which seems unlikely given the diverse interests involved), will not resolve the dispute over the CRB decision.  So the battle continues.

We've written extensively about the FCC's proposals to turn back the hands of time, and return to the regulatory scheme that existed prior to the early 1980s by mandating that broadcasters serve their local communities - in a manner dictated by the FCC.  In the 1980s, the FCC decided that it did not need to micromanage the programming of broadcasters, as marketplace forces would ensure that stations met the public interest.  If they did not provide the services that people wanted, the FCC reasoned in the 1980s, the people would stop listening or watching - hurting the broadcaster who was not serving its community in the pocketbook.  While the FCC is now looking to retreat from this position - apparently believing that the market is no longer capable of insuring that broadcasters serve their communities, evidence that the marketplace will provide localism is now available on that most unregulated of media - the Internet.  Tomorrow, the Huffington Post, a website that had heretofore concentrated on national stories, will be launching a version of its product targeted to Chicago and, according to a story on American Public Media's Marketplace, it will be expanding by providing local service in many other markets in the next 18 months.

This is not the only evidence that the Internet is going local.  Local news sites are springing up in many communities. quite often with no ties to "established" media.  Micro-targeting of on-line ad sales shows that marketers know that, if they offer a local product, they need to reach local people to buy that product, and the Net more and more can provide that targeting.  Many websites, from registration information, IP address or other identifying information, greet users of a site with localized information - weather, TV listings or event information for the particular user's hometown.  Thus, while the FCC seems to believe that that marketplace is incapable of guaranteeing local content to serve local communities, the actions of companies on the Internet demonstrate that, if there is a need for a local service, it will be provided - more efficiently and in a way more likely to provide the public with the service that it demands - if it is left to the market to provide.  The Internet does not seem to need the government to dictate how that local service is provided - nor should the broadcaster.  Particularly now, with the broadcast industry hurting economically and facing more competition than ever before, the FCC's actions to seek mandated localism seems to be the wrong solution to a nonexistent problem - and one that will hopefully fade away in the coming months. 

The FCC today released its schedule for Regulatory Fees that will be paid in September of this year.  The Order set the fees to be paid by entities regulated by the FCC, increasing those fees as required by Congress by approximately 7.5% over the fees paid last year. The fees to be paid by broadcasters are set forth below.  Fees for all other services can be found in the appendix to the FCC's Order setting the fees.  The exact window for paying the fees has not yet been set, but should be announced later this month, in a public notice that will also provide more details on the filing process.  The Order also contains a Further Notice of Proposed Rulemaking, asking if the FCC should change the allocation of fees between the services regulated by the FCC.  As to broadcasters specifically, the FCC asks if it should adopt fees for Digital Television, as the current FCC fees apply only to analog television.  Comments on these issues will be due 30 days after this Order is published in the Federal Register.

In reaching its decision as to the fees for 2008, the FCC decided not to impose a fee on AM expanded band stations for the current fee cycle - but it will decide whether to do so after the FCC decides the issue raised in the pending Diversity proceeding as to whether to allow licensees to retain those AM stations if they are held by a small business entity.

Fees are paid based on the status of the station as of October 1, 2007 (so, for instance, if a station had received an upgrade in the interim, it pays based on its old facilities).  However, the licensee who owns the station as of the date that fees are due is responsible for paying those fees, even if it did not own the station as of October 1, 2007.  Fees for radio are set by a combination of the predicted population served by the station and the class of the station, while TV station's fees are paid based on TV market size.  Parties holding construction permits for new stations pay flat fees regardless of the area served by the proposed station, and there are also flat fees for broadcast auxiliaries, television stations that are authorized as satellites of other stations, and secondary broadcast stations (e.g. translators).  Noncommercial operators are exempt from the fees.  The fees for broadcasters can be seen by clicking on the "Continue Reading" link below. 

AM Radio Construction Permits

415

FM Radio Construction Permits

600

TV - VHF Commercial

                Markets 1-10        

71,050

                Markets 11-25

53,525

                Markets 26-50

33,525

                Markets 51-100    

21,025

                Remaining Markets

5,600

                Construction Permits

5,600

TV - UHF Commercial

                Markets 1-10

21,225

                Markets 11-25

19,475

                Markets 26-50

11,900

                Markets 51-100

6,800

                Remaining Markets

1,800

                Construction Permits          

1,800

Satellite Television Stations (All Markets)  

1,175

Construction Permits – Satellite Television Stations

595

Low Power TV, Class A TV, TV/FM Translators & Boosters

365

Broadcast Auxiliaries           

10

RADIO STATION REGULATORY FEES

Population

Served

AM Class A

AM Class B

AM Class C

AM Class D

FM Classes

A, B1 & C3

FM Classes

B, C, C0, C1 & C2

<=25,000

$650

$500

$450

$525

$600

$775

25,001 – 75,000

$1,325

$1,025

$650

$775

$1,225

$1,375

75,001 – 150,000

$1,975

$1,275

$875

$1,300

$1,675

$2,550

150,001 – 500,000

$2,975

$2,175

$1,325

$1,550

$2,600

$3,325

500,001 – 1,200,000

$4,300

$3,325

$2,200

$2,575

$4,125

$4,900

1,200,001 – 3,000,00

$6,600

$5,100

$3,300

$4,125

$6,700

$7,850

>3,000,000

$7,925

$6,125

$4,175

$5,150

$8,550

$10,200

The Federal Election Commission ruled recently that it would not grant a waiver of the requirements for a verbal sponsorship identification on ads by an interest group, the Club for Growth, which wanted to run 10 and 15 second commercials opposing Federal candidates for Congress. Because of the abbreviated length of the commercials, the organization wanted the FEC to waive the requirement that there be a verbal identification of the sponsor as the commercial was too short to be able to fit such a message while still conveying their principle message.  The Club promised to have the required written disclosures on the ads, but the FEC said that this was insufficient as Federal law does not make any exception to the requirement for the verbal announcements on television commercials.  Thus, television stations should expect that third party ads dealing with Federal elections should contain both a written and verbal sponsorship identification.

The verbal identification need only identify the sponsor of the ad and state the sponsor's responsibility for the ad.  Thus, a verbal statement that "The Club for Growth PAC is responsible for the content of this advertisement" is sufficient to meet the requirements of the rule, while the written statement needs to be more detailed - containing not only the verbal identification, but also an address or website for the sponsor and the fact that the ad was not authorized by any candidate.  The written material must be at least 4 percent of screen height and must last at least 4 seconds.  These are the FEC rules regulating the advertiser, which are very similar to the FCC rules for political advertisements.  For details on the FCC's sponsorship identification requirements and other political broadcasting rules and laws applicable to broadcast stations, see our Political Broadcasting Guide. 

The Copyright Office today issued an Order extending the dates for comments on the Notice of Proposed Rulemaking to determine if, in addition to royalties to ASCAP, BMI and SESAC for the public performance of a musical composition, a royalty is also be due for reproductions of the composition made by real-time webcasting such as Internet radio.  Comments are now due on Thursday, August 28, and Replies on Monday, September 15.  This proceeding, about which we wrote here, is to determine if the statutory royalty of Section 115, dealing with the creation of Digital Phonographic Deliveries ("DPD") is implicated by the RAM and buffer copies made by real-time streaming.  The Order also announces that the Copyright Office will hold a hearing on the issue on September 19.

The Order states that the principal reason for the extension was the very recent decision of the US Court of Appeals for the Second Circuit in the case Cartoon Network v. CSC Holdings, finding that Cablevision's proposal for a "remote DVR," providing the same services as a DVR but located at the cable headend, did not infringe on the program producers' copyrights.  That decision addressed many of the same issues raised by the Copyright Office in its NPRM as to whether "copies" are made, for purposes of Copyright Laws, by RAM and buffer copies.  The Second Circuit essentially determined that no copies are made as there is no "fixation" of copies in the RAM and buffers, essentially the opposite conclusion reached by the Copyright Office in its NPRM in this proceeding.  If fixed copies are made, then a Copyright holder has the right to receive royalties for the reproduction of its copyrighted work.  The seemingly contradictory conclusions of the Second Circuit and the Copyright Office demonstrate the complexity of issues in Copyright law, and we will no doubt see many further proceedings before this issue is finally resolved.

The FCC this week issued fines to two broadcasters for issues in connection with the ownership of their stations - in one case the fine was issued simply because the broadcaster did timely not file three consecutive FCC Form 323 Biennial Ownership Reports .  In the second case, the fine was for not requesting FCC approval for a transfer of control of the licensee of the broadcast station.  These cases serve as a reminder that broadcast ownership is closely regulated by the FCC, that broadcasters need to report that ownership once every two years as required by the rules, and to seek approval before any change in control of any company that holds an FCC license.

The station that failed to file the three ownership reports was fined $6000.  As disclosed on the licensee's license renewal application, the licensee had not filed 2001 and 2003 ownership reports at all, and filed the 2005 report late and did not put it in the station's public inspection file.  Biennial Ownership Reports on FCC Form 323 must be filed by the licensees of AM, FM and TV station licensees once every two years, on the anniversary date of the filing of their license renewal applications by all licensees except where the licensee is an individual or a general partnership of natural persons (as opposed to a partnership that contains corporations or other business entities as partners).  We regularly send reminders to our clients about the filing of ownership reports.  For more details on the requirements for the biennial filing, see our advisory for reports that were due on August 1 here, and see our schedule of broadcast filing dates for the remainder of 2008 to see if your station has a biennial filing deadline this year). 

In the second case, the FCC entered into a consent decree with a licensee which had sold stock resulting in a transfer of control of the licensee company without seeking and receiving prior FCC approval.  The consent decree required that the licensee pay $5000 to the government, and adopt a compliance policy, reviewing its compliance status every 6 months using the Broadcast Self-Inspection Checklist put out by the FCC so that broadcasters can assess their own compliance with FCC rules, and report to the FCC on the results of those self-inspections every year for three years.

Transfers of control (to the FCC, a "transfer of control is a change in control where the licensee remains the same, such as a sale of stock in a licensee corporation, while a sale of a station from one company to another is referred to as an "assignment of license") can be "pro forma," meaning that they result in no real change in control of the licensee.  For instance, if a licensee corporation is owned by an individual, and the individual decides for tax or estate planning purposes to put his stock into a trust he controls or into another corporation that he controls, the individual still controls the licensee but in a different manner.  As only the form of control has been changed, approval for this transaction can be sought on an FCC Form 316 application, which can be approved very quickly - sometimes in a matter of days from its receipt by the FCC's processors.  Pro-forma assignment of licenses (e.g. from one corporation to another corporation owned by the same parties) are also approved through the filing of Form 316.

A transfer of control where actual control changes must be sought on FCC Form 315, e.g. where a majority of the stock of a licensee is sold from one person to another.  Notice of the filing of that form must be released on an FCC public notice, and the public has 30 days from the release of that public notice to comment on the application before the application can be granted.  All in all, FCC approval of such an application usually takes at least 45 days, and sometimes longer.  An assignment of license from one company to an unrelated company is filed on FCC Form 314, and processed in the same way as a Form 315.

As these cases remind you, remember to follow the ownership rules and file the required FCC forms to stay out of trouble with the FCC.

On Monday, the President signed into law a bill adjusting the reimbursement dates of the Low Power Television grant program by which LPTV and TV translator stations can seek a $1,000 grant in order to ensure that they are able to continue to receive and rebroadcast the signals of primary full-power television stations once the full-power stations complete the transition to digital television.   In late 2007, the government announced the start of the LPTV Digital-to-Analog grant program designed to help translators and low power television stations continue their analog broadcasts after the February 17, 2009 conversion of full-power television stations to DTV.  Specifically, the LPTV Digital-to-Analog Conversion grant program will provide funds to eligible translators and LPTV stations that need to purchase a digital-to-analog converter box in order to convert the incoming signal of a full-power DTV station to analog format for retransmission on the analog LPTV station.  The program has been funded with a total of $8 million, which is available in $1,000 grants to eligible LPTV stations.  As a result of the recent change, funds granted through the LPTV Digital-to-Analog grant program will available beginning in fiscal year 2009 (Oct. 1, 2008 – Sept. 30, 2009), rather than in fiscal year 2011.  In addition, the recent bill also extends the availability of funding through fiscal year 2012.

Any low-power television broadcast station, Class A television station, television translator station, or television booster station that meets the following three criteria may apply for the grant to defray the cost of the digital-to-analog converter box:

1. It is itself broadcasting exclusively in analog format;
2. It has not purchased a digital-to-analog conversion device prior to February 8, 2006; and
3. It is (or will be) re-transmitting the off-air digital signal of a full-power DTV station.

Applications for this grant program are being accepted until February 17, 2009.  Priority compensation will be given to eligible LPTV stations licensed to 501(c) non-profit entities or LPTV stations serving a rural area of fewer than 10,000 viewers.  Thus, priority is given to stations owned by translator associations and others that might not otherwise be able to afford the costs of converting the signals that they receive from analog to digital, and which might, without the grants, go off the air.  More information on how to apply for such grants is available on the NTIA’s website here.   

We have previously written about the unique concerns about the DTV transition for LPTV and TV translators.  In particular, many have expressed concerns that non-profit translator associations and other community groups that are the licensees of rural translators which bring over-the-air television service to isolated communities - particularly those in the West - may not be ready for the DTV transition.  Many of these associations, funded either by local governments or voluntary contributions, are strapped for funds to even pay the electricity bills to keep the translators in operation.  Having these funds from the NTIA available to buy the equipment necessary to down-convert the DTV signal of a full-power station may be crucial to continuing television operations in these communities.  Full-power television operators whose signals are retransmitted by these rural translators should take the initiative to alert these rural organizations about the availability of these grants, so that they are not otherwise overlooked by the persons responsible for the translators - people who very well may not be reading the trade press or other sources of publicity about the availability of these funds.

In addition, wholly apart from the grant program discussed above, which merely ensures that analog LPTV stations will be able to continue to receive and convert the digital signal of a DTV primary station, the government also has plans for assisting LPTV stations to themselves convert to digital operations.  Under this program, grants will be provided to assist LPTV stations and translators to buy the equipment to themselves convert to digital operations.  As these stations do not need to convert to digital by the February 2009 deadline that applies to full-power stations, the delay in rolling out these funds may not be crucial, especially to rural translators outside the service area of full-power stations.  In these isolated areas, as viewers will not need to have digital receivers to watch local full-power stations, so they can continue with their current analog televisions until the local translators are converted.  In larger markets, where full-power stations exist, viewers who buy over-the-air digital receivers may lose the ability to watch LPTV stations or TV translators who do not operate in digital after the February 2009 deadline, so these conversion funds may come only after-the-fact.  Details about that program will be forthcoming from NTIA, hopefully later this year. 

Last week, we wrote about one issue that was addressed at last week's Senate Judiciary Committee hearing on music royalties - the standards used to derive the royalties, and expressed hope that there was at least some interest in compromise on behalf of the Senators and industry representatives.  However, another issue which came out of those hearings suggests that compromise may not be so easy if the parties really believe what they say - as there is a fundamental distinction in both how the parties view the health of the Internet radio business, and how they view the relationship between royalties and the music business generally.  One can only hope that the gulf that was evident was just due to public posturing as, if it was not, there may well be an insurmountable differences between the parties that cannot be bridged in any settlement negotiations over the royalties that Internet radio pays for the use of sound recordings.

The gap became evident from the opening statements of the first panel - comprised of two Senators interested in the issue- Senator Wyden on behalf of the Internet Radio Equality Act stating that it was necessary to avoid having the high royalties decided by the Copyright Royalty Board destroy a fledgling technology, while Senator Corker of Tennessee talked about the importance of music to radio and the exhaustive process that the CRB had gone through in arriving at the royalties that it approved.  But in the day's principal panel, the issues became crystal clear, as John Simson of SoundExchange talked about the "vibrant" business of Internet radio, citing an analyst's report that Internet radio would be a $20 billion advertising market by 2020, and the statement of an employee of CBS that Internet radio was a great business and that CBS was going to "own it."  Speaking next, Joe Kennedy, CEO of Internet radio company Pandora had a dramatically different perspective - talking about an industry analyst who stated that the royalties that would result from the CRB royalties would exceed the revenue of the Internet Radio industry, and that, for Pandora, the failure to find a compromise solution to the CRB-imposed royalties would mean that his service would "die."  He pointed to Pandora's position as the largest of the Internet radio companies in terms of listenership, the $25 million in revenue that it expects to make this year, and how $18,000,000 of that would go just to the SoundExchange royalties - 75% of its revenue to this one expense. 

The disconnect over Internet radio was evident not only in the discussions of the revenues, but in the discussion of the meaning of Internet radio to artists.  Simpson started his testimony talking about three heirs of deceased musicians who were thrilled by their SoundExchange royalty checks as the musician they represented had not made any money during their lifetimes from their recording and touring careers.  He used this introduction to launch into a discussion of the need for this compensation to reward artists for their  performances as the world moves from a culture of possessing music to one where music is not owned but merely listened to through various platforms.  As musicians will no longer be compensated through the sale of the their records, they need to make up the revenue from lost sales through performance licensees such as those reflected by the CRB-imposed royalties.  Musician John Ondrasik of Five for Fighting echoed Simpson's points, contending that compensation through royalties puts food on the table of musicians, and was necessary to avoid discouraging new artists, thereby hurting the country's economic and cultural life.  Ondrasik stated that he had received about $9,000 in royalties from SoundExchange the prior year which, while it might not seem like much, had made a difference.

In counterpoint to these witnesses, musician Matt Nathanson stated that, while he does not mind getting money from royalties, the promotional effects of Internet radio was so great that he would prefer to give up some royalties to insure that Internet radio can become profitable and grow.  He stated that Internet digital delivery of music had changed the economics of the music industry, leveling the playing field for artists.  No longer are musicians required to be dependent on the record companies for their livelihoods.  Nathanson made the following points:

• Blogs, email, viral marketing, and on-line listening have allowed musicians to keep in touch with their fans, without the need for a record label promotions department
• The digital delivery of music ends the fight for shelf space in record stores, allows musicians to audition their music directly to the consumer (on their websites, MySpace pages or through Internet radio) so that they can build an audience on-line
• In this new system, promotion is the key way to make an audience to grow, and Internet radio is an important component of that promotion given its diverse programming
• Digital delivery makes sales and promotions opportunities more equal - by getting rid of scarcity you don't give limited power to a handful of broadcasters, nor are there necessarily a handful of major artists who get all the promotion through airplay
• The new system favors new artists and, if the growth of Internet radio is limited because of royalties, it will most hurt the small and developing artists who are promoted through the multiple channels of Internet radio

Kennedy of Pandora made the point that Internet radio democratizes radio, suggesting that if lower royalties are not agreed to, only broadcasters who can subsidize their operations through their broadcast operations would be left on the Internet.  Diversity would be lost.  Nathanson stated that such consolidation would be a "huge step back" for artists.  Senators on the panel remarked that Nathanson's view was a different perspective that they had not heard before (they obviously don't read this blog, as we remarked on some of these same points in posts including one here - mentioning that points made by one of SoundExchange's own witnesses at the hearings before the CRB talked about how new artists would probably benefit from promotion when more established artists might be more hurt by any substitutional effects of Internet radio).  After his testimony, there was much discussion of the real debate being between the new and old ways of doing things. 

In response, Simson of SoundExchange, trying to refute Nathanson's position, said that the benefits that he suggests were not available to the estates of artists who had died.  But Nathanson, in perhaps the most telling line of the hearing, said that the it wasn't Internet radio that put the artists in that position - it was the record companies and their contracts with the artists.  Nathanson concluded that Simson was proposing to right the wrongs of the past by crushing a new industry that had nothing to do with creating those wrongs in the first place.

Obviously, these differing perspectives - even among artists themselves - do not make settlement easy.  And there were other issues that were discussed at the hearing - stream-ripping, the broadcast performance royalty and the fear of "subsidizing" technologies that will be discussed in the third part of summary, to be posted in a few days. 

Last week, an article in the Wall Street Journal focused on the enforcement of the trademark that the United States Olympic Committee has in the word "Olympics."  Thus, anyone who wants to call some sort of competition an "Olympic" contest, or anyone who uses any derivation of that word, is asking for potential issues should the USOC get word of that use.  What the article did not address was the issue that this raises for broadcasters and advertisers.  Just as the trademarked term "Super Bowl" can cause problems for companies that use it in advertisements without permission of the NFL, advertisers should refrain from the use of the term Olympics in connection with promoting their products.   Companies have paid huge rights fees to get the exclusive rights to use the Olympics in their advertising campaigns, usually getting exclusive rights in a particular product category.  These companies and the Olympic committee do not like to see local advertisers appropriating the use of the Olympics name (or the interlocking circles that comprise their symbol) in someone else's ad.  So, just as electronic stores promote the sale of their big screen TVs before the Super Bowl by talking about the "Big Game" rather than using the trademarked phrase, advertisers must use care and avoid any trademark infringement by trying to tie their products to the Olympics during this upcoming event. 

The Federal Communications Commission voted 3-2 on to issue an order imposing regulatory controls on the Internet. The ruling concerns a network management technique used by Comcast for its high-speed Internet service that had the effect of giving slightly lower priority to some peer-to-peer (P2P) upload sessions so that the latency-sensitive applications of the vast majority of its Internet customers would remain uninterrupted. The Commission ruled that the practice—which Comcast previously announced would be phased out this year—violated the Commission’s “network neutrality” policy guidelines and amounted to discriminatory “blocking” and “monitoring” of Internet content, as well as “interference” with consumers’ “right to access” lawful Internet content. While not fining Comcast, the Commission instead orders Comcast to report on the technique, submit a compliance plan for terminating it by year-end, and describe to the FCC and the public the specifics of what new management techniques will be implemented. Noncompliance, warns the Commission, will be subject to future injunctive relief and additional enforcement actions.   Additional details of the FCC's announcement, and specific concerns about this ruling, can be found in our firm's advisory bulletin about this decision.  The Press Release on the FCC action can be found here.

While the full text of this decision is not yet available, the New York Times ran a story summarizing its effects.  The statements of the Commissioners on this decision are also available.  The dissents approach the issues from somewhat different perspectives.  Both express the hope that these kinds of objections could have been resolved by industry organizations - Commissioner McDowell's statement going into great detail about the lack of notice and precedent for the decision, and the potential impact that the decision will have on network management practices and voluntary decisions of Internet management organizations.  Commissioner Tate raises questions of what the decision will do to attempts to design technological systems that can sniff out adult content for purposes of protecting children from such content.  It's interesting that the FCC's own proposed rules for portions of the 700 mhz band include such requirements for the monitoring of adult content.

Slowly, inextricably, the FCC seems to be being dragged into Internet regulation.  We've written about the recent proposals in Congress to extend FCC closed captioning rules to the Internet.  We've also written about the proposals to involve the FCC in Internet radio rate setting.  As Internet delivery of content becomes more and more prevalent, will the Internet become, like the rest of the Communications world, subject to a pervasive scheme of regulation?  With each passing decision, that seems to become more likely.

Tuesday, the Senate Judiciary Committee held a hearing on the sound recording performance royalty, titling the hearing  "Music and Radio in the 21st Century: Assuring Fair Rates and Rules Across Platforms" (a webcast of which can be accessed here).  While the hearing was ostensibly to search for a way to come up with a uniform system of determining music royalties across various digital media platforms (though the broadcast analog performance royalty snuck into the discussion from time to time), in reality it appeared to be two things - a search for compromise and a demonstration of the dramatically different perspectives from which the recording industry and the digital radio industry approach the topic.  While one might assume that the dramatically different approaches would mean that no compromise was possible, there were a few areas of commonality that perhaps reflect the potential that, at some point, common ground can be found.  We will review the hearing's discussions in multiple parts - today dealing with the issue of the standard to be used in assessing royalties for the public performance of sound recordings and, in a subsequent post, we will summarize the differing world views of the participants and why the dramatically different ways that they see the business make for difficulty in compromise.

But first, a summary of the issues that were to be discussed at the hearing. Essentially, the hearing was to discuss two bills addressing different aspects of the royalty issues.  Senator Feinstein of California, who chaired the hearing, was looking for any common ground that might exist that would allow for movement on the Perform Act that she has introduced.  That act would attempt to do two things - (1) assure that a common standard was used to assess sound recording royalties in all digital media and (2) adopt standards that would require digital services to use some form of security or encryption that would make "stream ripping" more difficult.  The first goal of her bill, looking for a common standard, was an attempt to avoid some of the problems that have been evident in the royalty proceedings that have thus far been held before the Copyright Royalty Board which have resulted in dramatically different royalties - ranging from 6 to 8% of revenue for satellite radio companies and a similar royalty for digital cable music services (see our posts on those rates here and here) derived under an "801(b) standard" (after section 801b of the Copyright Act) , and the royalty for Internet radio that has been estimated to range between 75% and 300% of gross revenues of those services, derived from a "willing buyer, willing seller" royalty standard.  The Perform Act would subject all to a single standard - and it currently proposes a new standard - "fair market value."

The second bill that was being discussed was that of Senators Brownback and Wyden (who were both at the hearing, the former asking questions and the later as a witness) - the Internet Radio Equality Act (about which we have written here and here) which would lower Internet radio royalties to 7.5% of revenue and adopt the 801b standard for future proceedings.  As the bills propose different standards for music royalties, one area of disagreement was immediately evident.  Yet, as Senator Feinstein pushed the parties to find a compromise, a glimmer of hope actually appeared.  

The record company representative on the panel, Jeffery Harleston of Geffen Records, held firm for the "fair market value standard," arguing that if artists and labels are forced to license their product through a compulsory license, it is only "fair" that they receive the value that their work would have brought had they been able to license it in the marketplace - so a "fair market value" rate was appropriate to provide that compensation.  While the issue was not raised in the hearing, one wonders why, if the record companies believe that this standard is the only "fair" one when a compulsory license is involved, they don't advocate a change in Section 115 of the Act - the compulsory license that record companies rely on to get rights to reproduce the composition of a song when making a recording of that song.  Record companies and artists do not need to negotiate with music publishers for the rights to use a composition, but instead they can get that right through a compulsory license - and the royalty to be paid by the record companies under that license is set using the 801b standard.  So if record companies and artists use 801b when it benefits them, shouldn't the same standard be used when their product is the one subject to the license?

On the other hand, Joe Kennedy of digital music service Pandora, testified that the 801b standard, as used for all other royalties under the Copyright Act, should also be applied to the performance royalty in a sound recording.  Kennedy argued that, given the difficulty of the application of the "willing buyer, willing seller" standard to Internet radio (stating that the royalty currently takes 75% of Pandora's gross revenues and, if not changed, will definitely force the company out of business as the royalty increases over the next two years), it seemed difficult to justify the adoption of yet another new standard - "fair market value" - which has never been used in the past.  What Kennedy did not specifically state, but which seems evident from the fact that the recording industry is supporting this new standard, is that this new standard is likely to be interpreted much like the "willing buyer, willing seller" standard which already purports to assess the economic value of  music in an arms-length negotiation in an open marketplace.  That would seemingly be the same thing as "fair market value" of the music.

One point that was lost in the discussion was the meaning of the 801b standard, with some of the Senators in attendance admitting that they did not understand that standard and how it was applied.  What is the 801b standard?  The standard looks at a number of factors in assessing what the proper royalty should be.  Those factors are:

(A) To maximize the availability of creative works to the public.

(B) To afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions.

(C) To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication.

(D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

As is evident, those factors not only look at the economic value of the use of the work, but also assess the public interest in the distribution of artistic and literary works and the impact that the royalty will have on the industry that has to pay it.  Just as the impact of the Section 115 royalty would have on the record companies must be assessed in looking at that royalty, the impact on the digital music businesses would have to be assessed in determining a rate decided under this standard.  In using the 801b factors in assessing the satellite radio royalties, for instance, the CRB reduced a willing buyer willing seller determination of 14% to a rate climbing from 6% to 8% of revenues over a 5 year period, justifying the reduction on the impact that the royalty would have on the business of the satellite radio companies if it were not so adjusted (see our previous post for more details). 

So - where was that glimmer of hope?  As Senator Feinstein pushed the parties on the panel to find a compromise standard so that the legislation could be moved this session, John Simson, the President of SoundExchange (the collective which collects the royalties and distributes them to artists and labels), actually broke ranks and stated that he did not rule out the use of the 801b standard.  However, he said that he thought that the standard would need to be tweaked to reflect current marketplace realities.  His specific example of where that tweaking could occur was in assessing the "substitution" issue - whether the use of the copyrighted work by the digital service would be a substitute for its purchase, thereby diminishing the income that the artist might receive from the use of the sound recording.  Of course, it would seem that the existing factors already take that into account in assessing the "risks" to various parties under consideration (C) above, the impact on the structure of the businesses that are involved in the proceeding under consideration (D), and the fair return under clause (B).

The purpose of the Copyright laws, under the Constitution, is "To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries."  Many commentators (see this article, for instance) state that the meaning of "science" at the time of the Constitution was much broader than it is today meaning, more generally, "knowledge and learning."  While creators are given limited exclusive rights, those rights are for purposes of promoting general knowledge within the community - not exclusively for the protection of the copyright holders.  If this interpretation is the correct one, then it seems like the Section 801b factors are exactly what is meant by the purpose of Copyright - insuring a fair return, but also allowing for the reasonable distribution of the copyrighted material so as to benefit the knowledge of the general population.  This, of course, leads into the discussion of the differing views of the purpose of the statute and of the state of the industry - issues both discussed in detail at the hearing - and to be covered in subsequent posts on this blog.

The FCC has released a Public Notice announcing its approval of the XM and Sirius satellite radio merger.  The public notice is only two pages long, with a four page appendix providing very brief summaries of the conditions imposed on the two companies which a majority of the Commissioners found sufficient to protect consumers from harm from the merged entity.  The full text of the decision, providing the full reasoning of the Commission on its approval, has not yet been released.  Until it is, the impact for broadcast ownership and the treatment of broadcast consolidation set by the precedent of this decision remains unclear.

The conditions placed on the merger and outlined by the decision include some surprising ones beneficial to broadcasters, including that the merged company not use its terrestrial repeaters to originate local broadcasts and that the company not enter into exclusive agreements precluding the broadcast of local sporting events by over-the-air broadcast stations.  The decision also imposed price caps on the service for three years, and set out conditions to open the manufacturing of satellite radio receivers to more companies and prohibiting any restriction on combining the radio receiver with other audio devices including digital radio receivers.  No condition requiring that satellite radio receivers be capable of picking up over-the-air digital radio ("HD Radio") was imposed, though the FCC promised to issue a Notice of Inquiry to review that issue.  Specific programming channels will be made available for noncommercial educational use and for leased access.  The FCC also made clear that satellite radio will be subject to the FCC's EEO rules.

Another interesting issue that apparently figured into the decision was a commitment of the companies not to use program tiers that they promise to create to reduce the music royalties that they pay to SoundExchange to compensate artists and labels for the use of their music.  This decision was apparently insisted on by Commissioner Tate, according to her statement released last Friday.  We wrote about the Copyright Royalty Board decision on satellite radio royalties here.  While that decision was based on a percentage of revenue of the service, specific exemptions were included in the decision for revenues specifically attributable to categories of programming that made only incidental uses of music.  Perhaps the record companies feared that the satellite companies would set up tiers that would exclude music programming.  But why that issue should be part of an FCC decision-making process is unclear, when there is another agency, the Copyright Royalty Board, to review such issues.

In any event, the decision is out, and the larger impact of the decision will be seen when the full text is released. 

The New York Times ran an article about how certain African-American radio hosts were acting as cheerleaders for the Obama campaign, and contrasting that to past elections where talk radio hosts like Rush Limbaugh gave a boost to Republican candidates on their programs.  How is it that these programs can take political positions without triggering requirements that opposing candidates get equal time?  Under FCC rules, unless a candidate' recognizable voice or image is broadcast by a station, there is no right to equal opportunities.  In the past, until the FCC abolished the Fairness Doctrine by declaring it to be unconstitutional, even without a candidate appearance, the station would have had an obligation to give both sides of a controversial issue of public importance, such as an election, free time to respond to on-air statements by an announcer.  When the doctrine was abolished, stations were free to air pointed programs taking positions on issues, giving rise initially principally to the conservative commentators, and more recently to their more liberal counterparts such as those heard on Air America radio.

The abolition of the Fairness Doctrine also allowed broadcasters to editorialize, even endorsing candidates for political office without having to give the opponent of their favored candidate equal time, just like print media can do. Similarly, a station can take a position on a ballot issue, or on another controversial issue of public importance in their communities without having to provide time to those with opposing viewpoints - allowing stations to fully participate in their communities political life.  Under the Fairness Doctrine, stations even had to give time to those with viewpoints opposed to parties who bought time on a controversial issue if the opponents could not themselves afford to buy time.  The occasional discussion of reviving the Fairness Doctrine ignores these issues.

The one aspect of the Fairness Doctrine that has never been officially abolished is the Zapple Doctrine, a rule that required that supporters of a major-party candidate be able to get time to respond to broadcasts by supporters of the opponent, effectively "quasi-equal opportunities."  The doctrine was argued by supporters of John Kerry in their request for equal time when Sinclair Broadcasting threatened to run the Swift Boat "documentary" during the 2004 Presidential election.  Perhaps fearing that the Zapple Doctrine had continuing validity (or perhaps fearing bad publicity), the film was never run in its entirety, so no decision was released as to whether the Zapple Doctrine had continuing validity after the abolition of the Fairness Doctrine.   Presumably, this policy, even if still valid, would not be applied to talk shows, as the statements of talk show hosts, while certainly biased and pointed in one political direction or another, rarely state outright "go vote for candidate X."  Of course, any application of the Zapple Doctrine, or any reinstatement of the Fairness Doctrine, would no doubt bring about a constitutional challenge to the regulatory scheme.  Given the recent deference of Courts to the First Amendment rights of broadcasters, supporters of the reinstatement of the Fairness Doctrine should get the message. 

The FCC's Notice of Inquiry and Notice of Proposed Rulemaking on Sponsorship Identification issues (which we summarized in our firm's advisory and about which we wrote here), which deals with a host of issues including embedded advertising and product placement, was published in the Federal Register late last week, starting the clock on the filing of comments.  Comments on this wide-ranging proceeding are due on September 22, and replies on October 22.  With the broad range of issues that are discussed in this proceeding, from proposed rules on the size and length of textual sponsorship identifications in television advertising to sponsorship identification requirements for live-read radio commercials, there is something on which almost every broadcaster will want to comment.

A recent New York Times article helped bring the proceeding to the attention of the general public.  The article writes about television stations which are paid to have morning show hosts place coffee cups with identifiable logos (in this case cups of McDonalds coffee) on the desk of the news anchors of a morning news program.  Under some of the proposals identified in the Notice of Inquiry in this proceeding, some sort of identification (perhaps a crawl or superimposed message) of the sponsor for the placement of those cups would be required concurrently with the visual images of the cups on the screen.  The same would be true of the appearance of a product in any scripted comedy or drama, and perhaps even when feature films are run on TV in which the filmmaker was paid to include specific products in the movie.   Adoption of any of these suggestions could certainly change to face of broadcast television, particularly as it adapts its advertising practices to deal with Digital Video Recorders and other technological advances.  For broadcasters to retain their flexibility in such matters, they should file comments on or before the September 22 filing deadline. 

Congress years ago tried to regulate indecency on the Internet through the Child Online Protection Act, through regulation of content that was harmful to minors.  Because of the sweeping nature of the restrictions, the Courts have repeatedly invalidated the law.  We wrote in March 2007 about a Federal District Court decision invalidating the law (this post also details the provisions and prohibitions of the Act).  Now, the Third Circuit Court of Appeals has upheld the District Court ruling, finding that the law violated the First Amendment rights of website operators, as the government had not shown that the Act's restrictions were the least restrictive means of accomplishing the government's objectives - protecting children.  According to the Court's findings, voluntary filters would accomplish the same ends, and allow adults to view adult material which might be harmful to children under the Act's definition but which is not legally obscene and is therefore constitutionally protected .  Our law firm's  Advisory Bulletin on the Third Circuit's decision can be found here.  The Third Circuit decision is available here.

The Third Circuit Court of Appeals today released a decision overturning the FCC's fine of CBS Television for its Super Bowl broadcast of the notorious Janet Jackson halftime show and her "clothing malfunction."  The decision is available here.  Our partner Bob Corn-Revere argued the case.  Full details on the decision are contained in our firm's Advisory Bulletin which was just issued.  But essentially, the court found that the FCC had not sufficiently justified its departure from prior precedent that any "fleeting" content would not result in a fine by the FCC, nor had the FCC justified its decision finding that the conduct of CBS was "willful," as the Court questioned whether the independent actions of Janet Jackson and Justin TImberlake could be attributed to CBS.  The decision was remanded to the FCC with the instruction that it could not fine CBS but that any further decision could be only declaratory in nature - setting policy for the future. 

If the FCC decides to wade back into the indecency area, it will have to deal with two decisions finding its rulings arbitrary and capricious.  We wrote about the Second Circuit decision throwing out the "fleeting expletive" fines arsing from slips of the tongue during the Golden Globes, the Billboard Music Awards and other programs (see our last post on that case here).  Of course, the FCC has asked the Supreme Court for review of the Golden Globes case, so we'll all have to stay tuned for more information about what action that Court will take, and what the FCC will do with respect to these decisions.