File this post in the “Letter of the Law” file…
The newswires are all a flutter with rumors of Apple’s iRadio deals with both Universal and Warner music. Under the Warner deal, the rumored rate (according to Billboard) appears to be $0.0016 per stream plus some portion or variation of ad revenue (even though the $0.0016 would be paid, at least in part, out of ad revenue).
Billboard and other sources have positioned these iRadio rates against those per stream rates paid by “Pureplay” webcasters such as Pandora. Unfortunately, these sources have, by and large, underestimated the true obligations that an Apple iRadio would face if it were truly to pay royalties as a Pureplay webcaster.
Enter the letter of the Law.
First, and to be clear, if Apple wanted to license as a Pureplay webcaster, it would have had to declare such ambitions by January 31, 2013, in order to partake of the settlement rate. Perhaps Cupertino already declared such ambitions, and is now simply negotiating directly for a better deal. Who knows.
Second, the royalty rates (in the US) against which Apple’s iRadio should be compared are as follows (from the Sound Exchange website):
2013 RATE (Syndicated/Bundled/Subscription Services): $0.0022 per performance (per play, per listener; definition on page 88). (Rate Summary, 2011-2015: 2011: $0.0017 (per performance); 2012: $0.0020; 2013: $0.0022; 2014: $0.0023; 2015: $0.0025)
2013 RATE (Other Services): The greater of 25% of Gross Revenues or $0.00120 per performance. (Rate Summary, 2011: $0.00102 (per performance); 2012: $0.00110; 2013: $0.00120; 2014: $0.00130; 2015: $0.00140)
In simple english, if Apple would classify itself as a “Syndicate/Bundled/Subscription” service it would pay $0.0022 per performance, per listener, under the Law. As such, the $0.0016 rate being rumored in the press is a 27% discount from the established rate for this class (notwithstanding whatever the ad revenue kicker looks like).
If, however, Apple would classify itself as an “Other” service, akin to how Pandora or other Pureplay webcasters tend to be classified — the services against which most of the press is comparing iRadio — then Apple would face the obligation of paying the greater of (a) 25% of Gross Revenues or (b) $0.0012 per performance, per listener.
That “greater of” language is important.
Just so we are clear, “Gross Revenues” in this case really means Gross (as in All) Revenues (and then some). You may think I am kidding, but here is the language of the Law (page 34797 of the linked PDF at the Federal Register):
‘‘Gross Revenues’’ means all revenue of any kind earned by the Commercial Webcaster or its Affiliates from all its operations, in accordance with U.S. Generally Accepted Accounting Principles, and includes –
(A) all cash or cash equivalents;
(B) the fair market value of goods, services, or other non–cash consideration (including real, personal, tangible, and intangible property);
(C) in–kind and cash donations and other gifts (but not capital contributions made in exchange for an equity interest in the recipient); and
(D) amounts earned by such person or entity but paid to an Affiliate of such person or entity in lieu of payment to such person or entity.
For the avoidance of doubt, Gross Revenues includes revenue from activities other than making Eligible Transmissions, including revenue from transmissions of sound recordings licensed directly from the relevant copyright owners. Commercial Webcasters with substantial revenue from activities other than making Eligible Transmissions under the statutory licenses in Sections 112(e) and 114 may wish not to elect to be subject to these Rates and Terms.
In other words, and quite seriously, if Apple’s iRadio were to pay for its use of sound recordings as if it were a Pureplay webcaster in the same category as services such as Pandora, Cupertino would likely have to pay $42 billion, or 25% of gross revenue for their use of music in the service. That’s a really big number.
To be frank, however, this back-of-the-napkin estimate of $42 Billion — or 25% of Apple’s Gross Revenues in 2012 — might actually be an underestimate since it does not take into account the value of cash sitting on Apple’s balance sheet (outside the US) — a big topic in other press circles these days.
Or, alternatively, Apple could pay $0.0022 per performance per listener — a rate the total value of which (in terms of streaming obligations) I can’t calculate at this time.
And so, and to re-iterate, the rates against which Apple’s iRadio should truly be compared given the Letter of the Law would be:
(1) $0.0022 per performance per listener; or
(2) The greater of (a) 25% of Gross Revenue or (b) $0.0012 per performance per listener.
Under (2), Apple’s iRadio would owe $42 Billion for its use of music, not $0.0012 per stream.