Monday, June 23, 2014

Pandora’s Box or Panacea and/or Re:Sound’s Resounding Defeat? Canadians Still Can’t Get There from Here.

(F.S. Church - Wikimedia)
Just over a month ago, the Copyright Board issued a complex, lengthy, important but perfectly readable decision regarding a tariff with the daunting  title of “STATEMENT OF ROYALTIES TO BE COLLECTED FOR THE PERFORMANCE IN PUBLIC OR THE COMMUNICATION TO THE PUBLIC BY TELECOMMUNICATION, IN CANADA, OF PUBLISHED SOUND RECORDINGS EMBODYING MUSICAL WORKS AND PERFORMERS’ PERFORMANCES OF SUCH WORKS [Re:Sound No. Tariff 8 – Non-interactive and semi-interactive webcasts, 2009-2012]”.

Let’s keep it simple and call it the “Pandora” tariff, because Pandora is the high profile absentee music streaming service that does NOT offer service in Canada – presumably due to the confusing and expensive and hitherto (and perhaps still) apparently effectively dysfunctional copyright landscape, at least from its point of view. Pandora is really what this tariff is all about for the purposes of the Canadian public – and the Board makes it quite clear that this is the case. Michael Geist has also quite rightly focussed on the Pandora aspect in his prompt report on this decision.

If you try to log onto as of now and for a long time up till now, this is the message you will get:
We are deeply, deeply sorry to say that due to licensing constraints, we can no longer allow access to Pandora for listeners located outside of the U.S., Australia and New Zealand. We will continue to work diligently to realize the vision of a truly global Pandora, but for the time being we are required to restrict its use. We are very sad to have to do this, but there is no other alternative.

Here’s the Board’s Fact Sheet about its decision, which singles out Pandora by name. Apparently, the final result is “close” to what Pandora asked for. And apparently it’s a small fraction – about 10% or less – of what Re:Sound sought. I’ve repeatedly in various fora including Fordham mentioned Pandora as a prominent “no show” in Canada – apparently due to copyright issues. In the USA, Pandora has about 150 million users – almost half the US population. In Canada, it has none. Unless, perhaps, Canadians can circumvent Pandora’s geoblocking by using VPN, but I wouldn’t know about such things.

According to the Board’s New Release:
The tariff rate for commercial webcasters is set at 10.2 cents per 1,000 plays. While Re:Sound was asking for a rate of between $1 and $2.30 per 1,000 plays, the rate set by the Board is close to what the users participating in the hearing (including Pandora)were suggesting.
          (highlight added)

The Copyright Board has put out a Fact Sheet with some numbers that seem to look quite good, from Pandora’s viewpoint – but which appear to be largely speculative on the part of the Board.  Based upon the Board’s own apparently speculative numbers, at least in terms of Pandora’s potential revenues, the certified tariff will result in a $306,000 liability divided by $5,800,0000 in revenues, or about a 5.3% cost, which still appears to be more than twice the rate that Pandora proposed to pay, namely 2.1% with no minimum fee for the non-interactive service and a rate between 1.5% and 2.65 % for the semi-interactive service with a minimum fee of $100 per year per “channel”.  Eventually, the Board decided to drop the concept of “channel” from the tariff. Nobody seemed to understand what it meant in this context. Whatever it meant, it certainly was not the same as a TV, radio or even satellite or cable “channel”.

But it’s even murkier than that. Pandora fought hard for a rate based upon percentage of revenues, as has been the case for radio and TV in Canada for decades. Instead, the Tariff is based a rate based upon “plays”. Under such a regime, which Pandora resisted, a service can end up paying more in tariff fees than it earns in revenues, which has reportedly happened in the USA. That’s a prescription for insolvency and not for innovation.

The acid test will be if Pandora now starts to operate in Canada. If so, the Copyright Board may have struck an “equilibrium price ratio” that is not simply splitting the difference in the form of “(A+B)/2 = ~Tariff as Certified” result – which has sometimes seemed to have been the result and which has contributed to much criticism of the Board over the years, since such outcomes are too often so expensive, so slow and so frequently unsatisfactory. Even the possibility of “splitting the difference” becomes impossible, if a collective overreaches by a quantum amount.

As for the CBC, according to the Board “CBC will pay annual royalties of about $36,000 for all of its webcasting operations, English and French.”

As for the overall impact, the Board states: 
[208] Our estimate of the total quantum of the Re:Sound 8 tariff is about $500,000, taking into account other semi-interactive webcasters that have launched or may launch in Canada, as well as non-interactive webcasters. This estimate is arrived at knowing that the music streaming market share of Pandora in the U.S is about 70 per cent, and that its Canadian market share could be lower, given that some other firms have already been operating in Canada.

If that is right, it may take Re:Sound some time to recoup its legal costs from this proceeding – something which it and certain other major collectives may not be too happy about, to put it mildly. Indeed, this could then prove to be something of a tipping point for collectives. Certain collectives have relied upon a business model that involves spending millions on an inaugural tariff using a large law firm and expensive experts based upon the nearly certain and even bankable prediction that the costs will be quickly repaid by the users once the tariff is in effect. Usually, that has worked out predictably and on cue. The one notable exception has been the ERCC.

However, if the Board’s figures are right here, that may be far from the case in this instance. It could take Re:Sound a long time (several years) to recoup its legal costs and disbursements in this instance. And if Pandora or a similarly successful player doesn’t decide to do business in Canada, even the $500,000 per annum figure may prove to be unobtainable.

If the decision proves to be “user friendly”, which is not yet clear, could it be that the Board itself is finally responding to “market forces”, namely the prospect of Government imposed regulations on how it conducts its hearing (which I have suggested)  and even legislative reform to deal with a process that all too often has been extremely slow, extremely expensive, extremely retroactive and often prone to significant judicial reversal? And which Michael Geist refers to as “broken”?

Just for the record, the timeline here was as follows:
-      Tariff filed March 28, 2008
-      Oral hearing held over the course of ten days in September and October of 2012
-      The decision was rendered on May 16, 2014 – approximately 19 months after the hearing was over.
-      That’s more than six years to get to a decision that will face judicial review (see below), which will add at least another year or more to the timeline.

While this was a very complex matter with many parties and copious evidence, it is still difficult to understand such a delay and such a long timeline. To make matters worse, the tariff is only valid until the end of 2012.  It is now 2014.

Moreover, before anyone uncorks the champagne, the Board itself notes in para. 186 that the provision of Canada’s new 2012 legislation, when they come into effect, will affect the “eligible repertoire” issues. The new  legislation, when it is fully in force, will means that Canada has to give "national treatment" to other WIPO Performance and Phonograms Treaty (“WPPT”) members – unless those countries don’t provide similar rights to those provided by Canada and the Minister so declares. Under the previous legislation, users did not have to pay for performances of "non-eligible" (e.g. non-Canadian, i.e. American and European, to oversimplify) sound recordings or performers. That cut the rates that would have otherwise been imposed effectively by more than 60% in this case.

So, the Board is saying that the tariff only goes as far as the end of 2012 and the effect of the new “national treatment” provisions is not something that it needs to rule on at this time. But generally, as the Board says at para. 186, the entry into force of these provisions“will vastly expand the repertoire of sound recordings that is eligible to receive equitable remuneration”. (emphasis added).

We now know the date that the new regime will take effect – which will be August 13, 2014.

As for the Statement Limiting the Right to Equitable Remuneration of Certain Rome Convention or WPPT Countries, see here.

Since the tariff only goes to the end of 2012 and we are now into 2014, it’s not clear what this will mean to Pandora, which is still not operating. It may be that the current tariff will continue on as an expired “previous tariff”, as contemplated by the Act and that Pandora will operate, if it wishes, under these tariff provisions – for a while, anyway.

This kind of retroactive certification of tariffs and uncertainty as to the present and future has always been problematic at the Copyright Board – but is especially so given in the current rapid cycles of evolution of technology and business models. The irony in this instance is that, at the end of a very long process, the Board chose to reject a lot of the very elaborate and expensive evidence that was filed – especially by Re:Sound itself, along with some odd arguments, such as that of Re:Sound to the apparent effect that online streaming services “cannibalize” CD and online sales and that Re:Sound should therefore be compensated for this loss. As if the music industry is entitled to a guaranteed annual income? That sounds almost like car and gasoline companies asking for compensation when cities put bike lanes in place. Or horse and buggy makers asking for an earmarked tax on the automobiles that put many of them out of business. 

Such a long period of time – more than six years to date and now still counting with judicial review is an eternity in the world of the internet and innovation. In 2008, when this tariff was filed, the first generation of iPhone smartphones was barely on the market and the first iPad tablets were still two years down the line. So, maybe by 2016 or so we will have a final certified tariff to the end of 2012 that was already obsolete when it was filed in 2008.

Meanwhile, the world moves on with Google’s music service, VPN, and in other ways in which Canadian internet users can adapt. Unfortunately, some may even turn to illegal means, which become more appealing when legal means are too expensive or too difficult to find in Canada.

Not surprisingly, Re:Sound has filed a sweeping notice of application for judicial review. It is very sparse but very sweeping. The Board has been very careful, as it usually does, to try to “bullet proof” its decision as one mainly of fact finding – which could make such review rather difficult. But perhaps Re:Sound may do better here than it has done of its last couple of judicial review efforts. In one of these, it argued that the word “excludes” means “includes” when it comes to the definition of “sound recording”. To the surprise of many, the Supreme Court of Canada actually heard this case as part of the “pentalogy”. Spoiler alert – just like the Board and the Federal Court of Appeal below, the Supreme Court did not agree with Re:Sound.

For better or worse, we do live in interesting times. Will Pandora now enter the Canadian market? There are other competitors and substitutes now in place and high Canadian internet costs and bandwidth caps and other deterrents. Will we eventually find out if the Copyright Board opened Pandora’s Box or provided Pandora’s panacea? Has Canada’s music industry once again proven itself to be remarkably out of tune with new technology and new business models? Will Canada’s music industry price itself out of the market and ignore the technological tide? Will Re:Sound succeed in reversing an apparently resounding defeat at the Board with a victory  in the Federal Court of Appeal, and possibly the Supreme Court of Canada – if the case gets that far, which is not very likely? The one thing that we can be quite certain about is that the interested parties and the Canadian taxpayers have spent millions of dollars to date to get to this monumental moment of indecision and uncertainty. And we  still cannot get there from here when in it comes to Pandora in Canada.


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