Phonographic Performance Company of Australia Limited under s 154 of the Copyright Act 1968 (Cth)
[2015] ACopyT 3
•28 August 2015
COPYRIGHT TRIBUNAL OF AUSTRALIA
Phonographic Performance Company of Australia Limited under s 154 of the Copyright Act 1968 (Cth) [2015] ACopyT 3
Citation: Phonographic Performance Company of Australia Limited under s 154 of the Copyright Act 1968 (Cth) [2015] ACopyT 3 Parties: REFERENCE BY PHONOGRAPHIC PERFORMANCE COMPANY OF AUSTRALIA LIMITED (ACN 000 680 704) UNDER SECTION 154(1) OF THE COPYRIGHT ACT 1968 (CTH) File number: CT3 of 2013 The Tribunal: JAGOT J (DEPUTY PRESIDENT)
DR RHONDA SMITH (MEMBER)
Date of judgment: 28 August 2015 Catchwords: COPYRIGHT – licences – proposed licensing schemes referred to Tribunal under s 154(1) of the Copyright Act 1968 (Cth) – licences for use of sound recordings in radio simulcasts – manner of calculation of licensing fees – whether licensing fees should be calculated on a per stream basis or a percentage of revenue basis
COPYRIGHT – licences – whether Tribunal should confirm or vary the referred schemes under s 154(4) of the Copyright Act 1968 (Cth) – whether schemes considered reasonable in the circumstances of a notional bargain between the parties – neither scheme considered reasonable in the circumstances
Legislation: Acts Interpretation Act 1901 (Cth) s 23
Broadcasting Services Act 1992 (Cth)
Copyright Act 1968 (Cth) ss 109, 136(1), 152, 154Cases cited: Australasian Performing Right Association Ltd v Federation of Australian Radio Broadcasters Ltd [1999] ACopyT 4; (1999) 46 IPR 20
British Phonographic Industry Limited and Ors v Mechanical-Copyright Protection Society Limited and Ors, CT84-90/05, 19 July 2007
Phonographic Performance Company of Australia Ltd v Commercial Radio Australia Ltd [2013] FCAFC 11; (2013) 209 FCR 331
Phonographic Performances (NZ) Limited (PPNZ) v Radioworks Limited and The Radio Network of New Zealand Ltd (Radioworks) [2010] NZCOP 2
Reference by Australasian Performing Right Association Ltd under s 154 of the Copyright Act 1968 (1992) 25 IPR 257
Reference by Australasian Performing Right Association Ltd; Re Australian Broadcasting Corporation (1985) 5 IPR 449
Reference by Phonographic Performance Company of Australia Limited under s 154(1) of the Copyright Act 1968 [2007] ACopyT 1; (2007) 73 IPR 162
Reference by Phonographic Performance Company of Australia Ltd under section 154(1) of the Copyright Act 1968 [2010] ACopyT 1; (2010) 87 IPR 148
WEA Records Pty Ltd v Stereo FM Pty Ltd (1983) 1 IPR 6Dates of hearing: 23-27, 30-31 March, 1-3, 9-12 June 2015 Place: Sydney Category: Catchwords Number of paragraphs: 333 Counsel for Phonographic Performance Company of Australia Limited: Mr R Cobden SC, Mr C Dimitriadis SC and Ms L Thomas Solicitor for Phonographic Performance Company of Australia Limited: Gilbert + Tobin Lawyers Counsel for Commercial Radio Australia Limited: Mr JM Hennessy SC and Ms JM Beaumont Solicitor for Commercial Radio Australia Limited: Ashurst Australia
COMMONWEALTH OF AUSTRALIA Copyright Act 1968
IN THE COPYRIGHT TRIBUNAL OF AUSTRALIA
CT 3 of 2013
REFERENCE BY: PHONOGRAPHIC PERFORMANCE COMPANY OF AUSTRALIA LIMITED (ACN 000 680 704) UNDER SECTION 154(1) OF THE COPYRIGHT ACT 1968 (CTH)
THE TRIBUNAL:
JAGOT J (DEPUTY PRESIDENT)
DR RHONDA SMITH (MEMBER)DATE OF ORDER:
28 AUGUST 2015
WHERE MADE:
SYDNEY
THE TRIBUNAL DIRECTS THAT:
1.The parties confer and file, within 21 days, agreed or competing directions for the further conduct of the matter.
2.The matter be listed for directions on a date to be determined in consultation with the parties within 14 days thereafter.
3.Pending further or other order, neither party is to file any document (including any affidavit) before the directions hearing, without leave of the Tribunal.
COMMONWEALTH OF AUSTRALIA Copyright Act 1968
IN THE COPYRIGHT TRIBUNAL OF AUSTRALIA
CT 3 of 2013
REFERENCE BY: PHONOGRAPHIC PERFORMANCE COMPANY OF AUSTRALIA LIMITED (ACN 000 680 704) UNDER SECTION 154(1) OF THE COPYRIGHT ACT 1968 (CTH)
THE TRIBUNAL:
JAGOT J (DEPUTY PRESIDENT)
DR RHONDA SMITH (MEMBER)DATE:
28 AUGUST 2015
PLACE:
SYDNEY
TABLE OF CONTENTS
1 THE TRIBUNAL’S TASK
[1]
1.1 Some agreed background matters
[1]
1.2 The significant disagreed matters
[26]
1.3 Consequences of the approach of the parties
[40]
2 OVERVIEW OF THE EVIDENCE
[52]
3 THE STRUCTURE OF THE RATE
[82]
3.1 Overview
[82]
3.2 The technical and practical issues
[91]
3.3 A per stream approach – the advantages
[105]
4 RATE SETTING – GENERAL
[129]
4.1 The simulcast right
[129]
4.2 Value of the simulcast right to radio stations
[139]
4.3 The simulcast right – its value to copyright owners
[157]
4.4 Using commercial benchmarks
[169]
5 RATE SETTING
[171]
5.1 Overview of PPCA’s case
[171]
5.2 Overview of CRA’s case
[177]
5.3 The PPCA-CRA Broadcast Agreement
[185]
5.4 The APRA-CRA Agreement
[213]
5.4.1 General matters
[213]
5.4.2 Mr Samuel’s alternative calculation
[227]
5.5 Canada, New Zealand and the UK
[239]
5.5.1 Canada
[240]
5.5.2 New Zealand
[242]
5.5.3 The UK
[245]
5.5.4 Observations
[247]
5.6 Using the APRA-CRA Agreement for percentage of revenue rate setting
[250]
5.7 The NAB-SX Agreement
[265]
5.8 Webcasting agreements
[285]
5.9 The PPCA webcasting agreements
[303]
5.10 Using the various agreements for per stream rate setting
[307]
5.11 Minimum fees
[322]
5.12 PPCA’s concession
[325]
5.13 Record keeping requirements
[327]
5.14 The form of the licence
[329]
6 INTERIM CONCLUSIONS
[331]
REASONS FOR DETERMINATION
1. THE TRIBUNAL’S TASK
1.1 Some agreed background matters
The Tribunal’s task is vested in it by ss 154(1) and (4) of the Copyright Act 1968 (Cth) (the Copyright Act) which provide that:
(1)Where a licensor proposes to bring a licence scheme into operation, he or she may refer the scheme to the Tribunal.
…
(4)The Tribunal shall consider a scheme referred under this section and, after giving to the parties to the reference an opportunity of presenting their cases, shall make such order, confirming or varying the scheme or substituting for the scheme another scheme proposed by one of the parties, as the Tribunal considers reasonable in the circumstances.
Phonographic Performance Company of Australia Limited (PPCA), a collecting society representing the interests of record companies and recording artists, is a licensor as defined in s 136(1) of the Copyright Act. PPCA referred a scheme to the Tribunal under s 154(1). Pursuant to that scheme PPCA, as the holder of a non-exclusive licence in respect of sound recordings from record companies and recording artists, would grant to commercial radio broadcasters a licence to use sound recordings in simulcasts. A simulcast involves the transmission of the radio broadcast, including the sound recordings used in that broadcast, to listeners using the internet.
Commercial Radio Australia Limited (CRA), an industry body representing the interests of around 259 commercial radio stations in both metropolitan and regional areas, became a party to the reference as contemplated by ss 154(2)(b) and (3) of the Copyright Act which enable the Tribunal to make an organisation or person with a substantial interest in the operation of the scheme a party to the reference. CRA proposed different schemes from that of PPCA relating to the licensing of the same rights, namely, to enable commercial radio broadcasters to use sound recordings in the simulcast of their broadcasts.
The referral of these schemes reflects the decision in Phonographic Performance Company of Australia Ltd v Commercial Radio Australia Ltd [2013] FCAFC 11; (2013) 209 FCR 331 in which the Full Court of the Federal Court of Australia decided that simulcasting was not within the scope of an existing agreement between PPCA and CRA under the Broadcasting Services Act 1992 (Cth) (the Broadcasting Services Act). As the Full Court explained, referring to the agreement between PPCA and CRA as the Industry Agreement (but mostly identified in the reasons below as the PPCA-CRA Broadcast Agreement):
[2] The Industry Agreement relates to the grant, by PPCA to CRA members, of licences in relation to certain sound recordings (the Sound Recordings). PPCA is the collecting society in respect of the Sound Recordings for the purposes of the Copyright Act 1968 (Cth) (the Copyright Act). Members of CRA are the holders of commercial radio broadcasting licences granted under the Broadcasting Act. Under the Industry Agreement, the licences are granted in accordance with, and subject to the terms of, the form of an agreement set out in a schedule to the Industry Agreement (the Member Agreement).
[3] Under the Member Agreement, PPCA grants to the CRA member a non-exclusive licence of the Broadcasting Right, as defined in the Member Agreement. The Broadcasting Right is defined in the Member Agreement as the right, from time to time, to broadcast the Sound Recordings in Australia…
[4] Under s 6(1) of the Broadcasting Act, broadcasting service means, relevantly, a service that delivers radio programs to persons having equipment appropriate for receiving that service, but does not include, relevantly, a service that the Minister determines not to fall within the definition. On 12 September 2000, the Minister made a determination under that provision (the Ministerial Determination) that a class of services described in the Ministerial Determination does not fall within the definition.
[5] The effect of the definition, as affected by the Ministerial Determination, is that broadcasting service means, relevantly, a service that delivers radio programs to persons having the equipment appropriate for receiving that service, where the delivery uses the radiofrequency spectrum, cable, optical fibre, satellite or any other means or a combination of those means, but does not include a service that makes available radio programs using the internet, other than a service that delivers radio programs using the broadcasting services bands…
[6] From 2001, at the latest, some CRA members have, simultaneously with transmission using the broadcasting services bands, streamed radio programs on the internet that include the Sound Recordings. The content of the radio program made available using the internet is identical to the content of the radio program delivered using the broadcasting services bands…The question in the appeal is whether the making available of radio programs using the internet in those circumstances is within the licence granted by PPCA under the Member Agreement. PPCA contends that it is not. CRA, on behalf of its members, contends that it is.
The Full Court resolved this dispute at [66] by concluding that:
A broadcasting service is not a service that makes radio programs available using the internet (due to the exclusion in the Ministerial Determination), unless it is a service that delivers radio programs using the broadcasting services bands (due to the exception to the exclusion in the Ministerial Determination): thus, only some services that make radio programs available using the internet are excepted from the exclusion in the definition, namely, services that deliver radio programs using that part of the radiofrequency spectrum that consists of the broadcasting services bands.
There is no dispute between the parties that the schemes referred to the Tribunal in the present case relate to the use of the sound recordings forming part of commercial radio broadcasts by simulcast of the radio program over the internet, being a use which does not involve the broadcasting services bands. In other words, such a use does not form part of the broadcasting service licensed pursuant to the PPCA-CRA Broadcast Agreement.
We record below some further uncontroversial background material which sets the context for the Tribunal’s task. This background material is taken from the written submissions of the parties, with some adaptations where appropriate.
Radio stations commenced operating in Australia in the 1920s and 1930s. Their primary activity is the delivery of radio programs to the public. The Australian Communications and Media Authority (ACMA) regulates the grant of and compliance with radio broadcast licences.
The 259 radio stations which CRA represents consist of approximately:
(a)39 in metropolitan areas (major cities);
(b)12 in regional (smaller) cities; and
(c)208 in country areas,
of which, there are approximately 157 FM radio stations and 102 AM stations.
Radio stations use music in their programs to greater or lesser extents depending on the type of program.
For copyright purposes, each piece of music is comprised of a sound recording (the use of which is licensed to the radio station by PPCA) and an underlying musical work (licensed by APRA/AMCOS, the Australasian Performing Rights Association and the Australasian Mechanical Copyright Owners Society).
A radio program is an audio stream. Before digital technology the only way for a radio program to be distributed was by transmission over the radio frequency spectrum (that is, by broadcast) to FM transmitters, AM transmitters and DAB+ transmitters. Digital technology enables the radio audio stream to be distributed over the internet. From 2001 many radio stations began to use the internet to deliver to listeners by that means the radio program being broadcast. This is radio simulcasting. Simulcasts of radio programs may be received wherever the internet is available – either through a “listen live” link, often located on a station’s website accessed on a computer, or a mobile app accessed on a smartphone or tablet.
The basic business model of radio stations is that the programs are provided free of charge to the audience, the radio stations being “ad funded”. Advertisers pay the stations to insert advertisements into their radio programs in order to reach their desired audience. Generally speaking, at present, advertising is priced and sold based on audience size and reach. Radio stations in Australia do not currently offer different advertising on broadcasts and simulcasts to advertisers. Advertisements in radio programs account for between about 95% and 97% of Australian radio stations’ revenue at present.
Radio stations do not charge listeners for receiving the radio program via either the broadcast or the internet. The simulcast of radio is not subscription based. Radio is freely available to listeners including by simulcast if they have internet access. This contrasts with the circumstances before the Tribunal in two other matters discussed below (referred to as the Nightclubs case and the Gyms case).
For metropolitan and large regional stations ratings (which determine the audience share of each station) are a key determinant of what advertisers are willing to pay for advertising time. Radio Ratings Surveys are conducted by GfK Retail and Technology Australia Pty Ltd (GfK) eight times per year in large metropolitan centres and three times a year in other metropolitan/large regional centres.
Some 156 radio stations were simulcasting before this matter commenced. Many regional radio stations, however, ceased simulcasting when the interim scheme was made. The interim scheme is a scheme adopted by the Tribunal on 16 December 2013 for the period pending the resolution of this matter. Subsequently, a few regional radio stations re-commenced simulcasting.
The appropriate approach of the Tribunal to its task was not in material dispute.
As CRA submitted, there is no presumption in favour of PPCA’s scheme because it is a licensor and referred its scheme first so as to enliven the Tribunal’s jurisdiction. As CRA put it, and we accept:
[the] schemes must be considered on their merits according to the statutory test of reasonableness in the circumstances. The preference of copyright owners is no more relevant than the preference of licensees. While there is no Australian authority on point, the Copyright Tribunal in the United Kingdom has confirmed that no such presumption exists and the principle has been applied in New Zealand where the corresponding provision in the Copyright Act is in similar terms to s.154 [British Phonographic Industry Limited and Ors v Mechanical Copyright Protection Society Limited and Ors, CT84-90/05, 19 July 2007 at [44]-[46], especially [46]; British Phonographic Industry Limited v Mechanical Copyright Protection Society Limited (no 2) [1993] EMLR 86 applied in Phonographic Performances (N.Z.) Ltd v Radioworks Ltd and anor [2010] NZCOP 1 at [42]].
As CRA also observed, the history of previous negotiations and dealings is an important consideration in determining what is reasonable in the circumstances (Reference by Australasian Performing Right Association Ltd; Re Australian Broadcasting Corporation (1985) 5 IPR 449 at 466).
Further, as PPCA submitted, there has not been any authoritative exposition of the meaning of “reasonable in the circumstances” by the Federal Court. Despite this, previous decisions of the Tribunal are instructive. In Reference by Phonographic Performance Company of Australia Limited under s 154(1) of the Copyright Act 1968 [2007] ACopyT 1; (2007) 73 IPR 162 (the Nightclubs case), the Full Tribunal said:
[10] In each reference under s 154, the tribunal must make a value judgment as to what it considers reasonable in the circumstances. It is not usually possible to calculate mathematically the correct licence fee in any particular case: Australasian Performing Right Association Ltd v Federation of Australian Radio Broadcasters Ltd (1999) 46 IPR 20; [1999] ACopyT 4 at [11] and [19] (APRA v AFRB). Where approval of a scheme would lead to a substantial increase in fees, the increases can be phased in over a period of years rather than being introduced immediately. In the present case, the society proposes that there be a phasing in of the increase claimed by it.
[11] In determining whether a proposed scheme, and the licence fee payable under it, are reasonable, a number of approaches might be adopted. The approaches include the following, which may overlap to a certain extent:
Ÿ Market rate: the rate actually being charged for the same licence in the same market in similar circumstances.
Ÿ Notional bargain rate: the rate on which the tribunal considers the parties would agree in a hypothetical negotiation, between a willing but not anxious licensor and a willing but not anxious licensee.
Ÿ Comparable bargains: bargains not in the same market but sufficiently similar to such a notional bargain as to provide guidance to the tribunal.
Ÿ Judicial estimation: the rate determined by the tribunal after taking into account a range of matters such as:
Ÿprevious agreements or negotiations between the parties;
Ÿcomparison with other jurisdictions;
Ÿcomparison with rates set by other licensors, capacity to pay, value of the copyright material, the general public interest and the interests of consumers; and
Ÿadministrative costs of a licensing body: see Audio-Visual Copyright Society Ltd v Foxtel Management Pty Ltd (No 4) (2006) 68 IPR 367 at [131] and [142].
The Full Tribunal also noted at [13] that:
Section 157(2) of the Copyright Act allows a person to apply to the tribunal if that person claims that the grant of a licence would be subject to charges or conditions that are not reasonable in the circumstances of the particular case. If the tribunal is satisfied that such a claim is well founded, the tribunal may make an order specifying the charges and conditions that it considers reasonable in the particular circumstances. Thus, the tribunal is empowered to address the unreasonable application of a scheme in a particular case.
At [200] the Full Tribunal said this:
If it be the fact that the right to play recorded music has the value claimed by the society, the fact that many nightclubs presently operating cannot afford to pay for that privilege is not a reason for them to be subsidised by those whom the society represents. Ultimately, market forces will operate. That is to say, one of the consequences of the introduction of the proposed licence fee may be to reduce significantly the number of nightclub operators who are prepared to pay the fee for the privilege of playing recorded music at their venues. Inefficient operators who are required to pay a market price for all of the services they require in order to conduct their businesses may be forced out of business. That is the nature of a competitive market.
If a scheme involves the provision of a forced subsidy by a licensor to a licensee then it may be accepted that, in the ordinary course, such a scheme fails the test of being reasonable in the circumstances. It is difficult to conceive of circumstances which would make such a forced subsidy reasonable. Equally, however, if no prospective licensee can afford to pay the value claimed by the licensor so that an otherwise apparently useful activity cannot be carried out at all, it tends to suggest that the rate claimed does not reflect a notional bargain into which the parties rationally could have entered.
The concept of a notional bargain was considered by the Full Tribunal in WEA Records Pty Ltd v Stereo FM Pty Ltd (1983) 1 IPR 6 (the 2MMM case) in which the issue was the amount that should be payable by a broadcaster (in that case, the FM commercial radio broadcaster, 2MMM) for the broadcast of sound recordings. The Full Tribunal focused on the value to 2MMM of the rights to be licensed, albeit recognising that those rights were confined to what is known as protected sound recordings only. The notional bargain approach, as the Full Tribunal decided, was to be applied to:
a collective bargain by the broadcaster on the one hand and all identifiable copyright owners on the other, each exercising their actual bargaining power. The only assumption which is made is that they are each willing to negotiate and conclude an agreement.
In other words, insofar as possible, the notional bargain must reflect the actual position of the parties, not (as in a compulsory acquisition case) the position that would be reached between a hypothetical licensor and a hypothetical licensee with notionally equal bargaining power.
1.2 The significant disagreed matters
Virtually every other issue between the parties was in dispute.
Indeed, the nature and extent of the disputes in this matter indicate that, but for statutory necessity, the required assumption of a willingness to negotiate and conclude an agreement could not be made.
The disputes extended to the most peripheral of issues (such as the extent of FM chips in mobile phones to enable people to listen to radio on that device by the broadcast rather than the simulcast transmission), as well as other issues incapable of rational resolution by mere assertion and counter assertion (such as the extent of benefit to record companies from radio stations playing songs). None of this prevented the parties from adducing swathes of evidence about the insignificant or imponderable. It should be understood that we have no intention of referring to all of the evidence with which we were burdened because we found so much of it unnecessary and unhelpful.
Focusing only on the most significant issues, the following matters became apparent through the course of the hearing:
As to the relevant parties to the scheme:
(1)PPCA would not grant a licence to CRA. PPCA’s scheme involves the grant of a licence by PPCA to each person who holds a commercial radio broadcasting licence under the Broadcasting Services Act.
In this regard, it should be noted that a “licence scheme” is defined in s 136(1) of the Copyright Act in these terms:
licence scheme means a scheme (including anything in the nature of a scheme, whether called a scheme or tariff or called by any other name) formulated by a licensor or licensors and setting out the classes of cases in which the licensor or each of the licensors is willing, or the persons on whose behalf the licensor or each of the licensors acts are willing, to grant licences and the charges (if any) subject to payment of which, and the conditions subject to which, licences would be granted in those classes of cases.
According to PPCA it could not be reasonable to require it to enter into an agreement with a party with which it did not wish to deal, being CRA, when the object of the legislative provisions was to enable the referral of a scheme, thus enlivening the Tribunal’s jurisdiction, in respect of “the classes of cases in which the licensor or each of the licensors is willing, or the persons on whose behalf the licensor or each of the licensors acts are willing, to grant licences”. CRA was not such a person, not just because PPCA was not willing to deal with CRA, but because CRA was not a person to which a licence would be granted in any event.
(2)CRA contended that the scheme (or schemes, that too being a point in dispute of no ultimate significance) it had referred to the Tribunal, which provided for a structure the same as the PPCA-CRA Broadcast Agreement (that is, a head agreement between PPCA and CRA, with licences granted to members of CRA under that head agreement) or the appointment of CRA as the agent for the licensee for the purpose of payments of fees to PPCA, would be reasonable in the circumstances.
As to the structure of the scheme:
(3)PPCA contended that it was reasonable in the circumstances that the charge to which commercial radio broadcasters would be subject for their simulcast of relevant sound recordings (being those the subject of PPCA’s power to licence) be calculated on a per stream basis. That is, the commercial radio broadcasters would pay a fixed amount each time such a sound recording was streamed via an internet connection.
(4)CRA contended that a scheme based on a per stream approach would be unreasonable for numerous reasons including that:
·simulcasting is the transmission of the same radio broadcast over the internet. Radio stations pay a fee to PPCA for the broadcast of the radio program on a percentage of revenue basis and have done so for many years, it not being possible for payment on a per stream basis to be imposed on the broadcast;
·radio stations have in place long-standing arrangements enabling them to pay to PPCA licence fees on a percentage of revenue basis for the broadcast rights, which arrangements will continue irrespective of the simulcast licence. As such, payment for the simulcast licence on a per stream basis would involve imposing a new payment assessment and collection system for an activity (simulcasting) dependent on and ancillary to another activity (broadcasting);
·whatever the future of simulcasting, it is presently not the dominant mode by which listeners listen to the radio, with the percentage of listeners listening via the internet presently being somewhat over 10%;
·the imposition of a new payment assessment and collection system on a per stream basis for simulcasting is not readily able to be implemented by all radio stations and each station, some to a small extent but others to a much greater extent, will have to invest time, money and resources into the development of new systems to enable such a system to operate, with some being incapable of so doing other than by contracting out the function to third party providers which do not currently operate in Australia; and
·the percentage of revenue approach reflects the fact that radio stations make nearly all of their money out of advertising. Listeners do not pay to listen to the radio. Advertisers pay to place advertisements within the radio program. Advertisement spots are priced by reference to audience numbers which are assessed for metropolitan and some regional stations by ratings. These spots are priced by reference to the total audience share of the radio station and not the proportion listening to the broadcast as opposed to the simulcast. Moreover, the percentage of revenue paid under the PPCA-CRA Broadcast Agreement is based on gross revenues, not revenues derived only from the broadcast, there being no such distinction drawn by radio stations and advertisers.
As to the amount of any charge for a per stream scheme:
(5)PPCA formulated proposed charges based on the current arrangements in the United States (the US), in particular, an agreement between SoundExchange or SX (the US equivalent of PPCA) and the National Association of Broadcasters (NAB) (the US equivalent of CRA) dated March 2009, which applies to all internet audio transmissions by commercial radio broadcasters (including simulcasting) (the NAB-SX Agreement). PPCA’s proposed charges, which were set below the US rates, are as follows:
Year Per stream 2013 - 2014 $0.0018 [0.18 cents] 2014 - 2015 $0.0020 [0.20 cents] 2015 - 2016 $0.0021 [0.21 cents] PPCA also proposed an alternative arrangement for any regional radio station with a licence area of 2% or less of the Australian population by which such a station could pay a flat fee of $5000 per year provided the station capped its number of concurrent users of the station’s simulcast at 100. In any such case, the reporting and audit requirements necessary to be implemented to enable a per stream scheme to operate would not apply to that station.
This approach was supported as reasonable by two economists called by PPCA, Dr Eisenach and Mr Massarsky.
(6)CRA also called an economist, Dr Epstein, and a valuer, Mr Samuel, who challenged the rates proposed by PPCA as too high and the range of agreements relied on by PPCA as lacking comparability. Ultimately, however, neither expert nor CRA itself proposed any alternative per stream rates. Instead, CRA’s position was that any attempt to determine a reasonable per stream rate is doomed because there is no proper evidentiary foundation to determine such a rate.
As to the amount of any charge for a percentage of revenue scheme:
(7)Dr Epstein and Mr Samuel proposed calculations of the appropriate percentage of revenue for simulcasting radio programs based on the average percentage of revenue of 0.4% paid by radio stations (via CRA) to PPCA under the PPCA-CRA Broadcast Agreement.
On this basis Dr Epstein’s approach resulted in charges calculated as follows:
Gross Licence Fee means, for a Financial Year:
(a)0.341% x Simulcast Audience Percentage x Members Gross Revenue; and
(b)0.741% x Members Simulcast Revenue.
Where:
Members Gross Revenue means the gross earnings during that Financial Year of all commercial radio broadcasters licensed pursuant to the provisions of the Broadcasting Services Act 1992 which were Members during that Financial Year.
Members Simulcast Revenue means any revenue earned during a Financial Year by Members which is directly attributable to the Simulcast (such as pre-roll advertising) and is not already included in Members Gross Revenue.
Simulcast Audience Percentage means the proportion of total listeners to Radio Stations who listen via the Simulcast (as opposed to the Broadcast) in the five capital cities (Sydney, Melbourne, Brisbane, Adelaide and Perth) for Surveys 1-8 in the calendar year immediately preceding each Financial Year, as determined by CRA's official audience measurement provider, which at the commencement of this Agreement is GfK Retail and Technology Australia Pty Ltd.
Mr Samuel’s approach resulted in charges calculated as follows:
Gross Licence Fee means:
(a)in the 2015/16 Financial Year, 0.047% of Members Gross Revenue; and
(b)for each subsequent Financial Year, the Applicable Rate applied to Members Gross Revenue.
Where:
Applicable Rate means, for each Financial Year, the rate applied in the previous Financial Year plus or minus 0.0034% for each 1% shift in the Simulcast Audience Percentage.
Members Gross Revenue means the gross earnings during that Financial Year of all commercial radio broadcasters licensed pursuant to the provisions of the Broadcasting Services Act 1992 which were Members during that Financial Year.
Simulcast Audience Percentage means the proportion of total listeners to Radio Stations who listen via the Simulcast (as opposed to the Broadcast) in in the five capital cities (Sydney, Melbourne, Brisbane, Adelaide and Perth) for Surveys 1-8 in the calendar year immediately preceding each Financial Year, as determined by CRA's official audience measurement provider, which at the commencement of this Agreement is GfK Retail and Technology Australia Pty Ltd.
It will not be obvious but these formulae result in a fee range for the simulcast right of between 0.0341% and 0.065% of gross revenue, using the current internet listening audience average of 10.7%.
(8)PPCA, Dr Eisenach and Mr Massarsky contended that the percentage of revenue rate set in the PPCA-CRA Broadcast Agreement is not only out of date but is also artificially constrained by s 152(8) of the Copyright Act which provides that:
(8)The Tribunal must not make an order that would require a broadcaster who is:
(a)the holder of a licence allocated by the Australian Communications and Media Authority under the Broadcasting Services Act 1992 that authorises the holder to broadcast radio programs; or
(b)a person authorised by a class licence determined by that Authority under that Act to broadcast radio programs;
to pay, in respect of the broadcasting of published sound recordings during the period covered by the order, an amount exceeding 1% of the amount determined by the Tribunal to be the gross earnings of the broadcaster during the period equal to the period covered by the order that ended on the last 30 June that occurred before the period covered by the order.
(9)PPCA, Dr Eisenach and Mr Massarsky did not propose any alternative calculation of a rate based on a percentage of revenue. Instead, PPCA’s position was that any attempt to determine a reasonable percentage of revenue rate is doomed because there is no proper evidentiary foundation to determine such a rate.
As a result of their entrenched positions about these fundamental matters the parties did not engage meaningfully with the opposing case. PPCA did not propose any variation to the CRA scheme (or schemes). CRA did not propose any variations to the PPCA scheme. The experts called by PPCA, as noted, provided no alternative approach to the calculation of an appropriate percentage of revenue rate. The experts called by CRA provided no alternative approach to the calculation of an appropriate per stream rate. Instead both parties maintained that there was no proper foundation for the calculation of any rate on the basis for which the other side contended.
After the first part of the hearing was completed in April 2015, we expressed our concern about the lack of engagement of each party with the other party’s case. We requested that the experts consider alternative approaches on the assumption we did not accept their principal approach. We also raised for the consideration of the parties a hybrid scheme, which incorporated options for payment, one being a percentage of revenue approach and one being a per stream approach. We sought the assistance of the parties as to how such a hybrid scheme might work. We provided the parties with a list of questions for the experts which included the following:
For per stream basis:
1.What is the consequence if we do not accept that the US per stream rates are relevant/comparable for Australia?
2.What other bases are available to determine an appropriate per stream rate if US rate is found to not be relevant/comparable (e.g. Universal Music rates for streaming or not and why)?
…
For percentage revenue basis:
1.What is the consequence if 0.4% rate in PPCA-CRA broadcast agreement is found to be a non-market rate due to the 1% cap?
2.What is the consequence if PPCA-CRA broadcast agreement is found to be non-comparable due to protected/unprotected difference?
…
4.If the PPCA-CRA broadcast agreement is found to be not comparable, what other bases are available to determine a percentage gross revenue which reflects the value of the simulcast right?
5.What are the current percentage gross revenue bases under the APRA-CRA agreement? Do you know how they were derived? Are there any other comparable agreements in this regard?
Other:
…
2.Is a “mixed” scheme possible – e.g. (a) the greater or lesser of a per stream/percentage revenue approach; or (b) a percentage revenue approach unless a station elects to adopt a per stream approach; or (c) a per stream approach unless a station elects to adopt a percentage revenue approach?
Despite these requests, the entrenched position of each party remained. Neither party made any attempt to identify how a scheme embodying alternative options for payment might operate. Nor did they propose alternative rates which they considered might be reasonable if their primary approach was rejected by the Tribunal. Mr Samuel alone provided a further alternative approach but his further alternative did not engage with the possibility that a per stream payment might be appropriate. Instead, Mr Samuel proposed an additional method by which a percentage of revenue approach could be adopted, albeit not using the 0.4% rate fixed in the PPCA-CRA Broadcast Agreement as his starting point.
What the parties refused to recognise is that their positions are self-defeating. If CRA is right, then the Tribunal cannot properly determine any per stream rate. If PPCA is right, then the Tribunal cannot properly determine any percentage of revenue rate. Accordingly, if both are right, then the Tribunal is precluded from doing anything other than rejecting all of the schemes as unreasonable. The parties would be left with no resolution, the present matter having been an exercise in futility involving enormous wasted time, effort and costs.
The Tribunal has been left in an unsatisfactory position. In particular, it does not have the benefit of PPCA’s position if a percentage of revenue rate is considered appropriate. It also does not have the benefit of CRA’s position if a per stream rate is considered appropriate. It has been confronted with two separate cases and, despite its requests, has been left with the arguments for one side only for each case. Given that proceedings before the Tribunal are meant to be administrative rather than adversarial in nature (see s 164 of the Copyright Act), the intransigence of the parties is difficult to understand. It suggests the development of a forensic culture unsuited to the Tribunal’s function which should be required to change.
The extent of the Tribunal’s power to vary a scheme was raised during the hearing. It will be recalled that s 154(4) refers to the Tribunal “confirming or varying the scheme or substituting for the scheme another scheme proposed by one of the parties”. The Tribunal is not given by this section the power to determine a scheme it considers would be reasonable in the circumstances having regard to the schemes referred to it by the parties, which is regrettable. Provided that the requirements of procedural fairness are satisfied, we can see no reason why the Tribunal should be confined to confirming or varying a scheme referred to it by the parties, as opposed to a power to determine a scheme which it considers reasonable in the circumstances. Such an amendment would also better reflect the administrative nature of proceedings before the Tribunal. We, however, are bound by the existing legislation.
In the Nightclubs case the Full Tribunal said:
Section 154(4) permits the making of variations, in the sense of amendments and alterations to a proposed scheme, but does not empower the Tribunal to substitute a scheme of an entirely different kind (Australasian Performing Rights Association Ltd; Re, ABC (1985) 5 IPR 449 at 458–9).
In Reference by Phonographic Performance Company of Australia Ltd under section 154(1) of the Copyright Act 1968 [2010] ACopyT 1; (2010) 87 IPR 148 (the Gyms case) the Tribunal said:
[285]…The Tribunal has considered its jurisdiction under s 154(4) of the Copyright Act on several occasions, including in the ABC case (Copyright Agency Ltd v Dept of Education (NSW) (1985) 5 IPR 449). In that case, the Tribunal considered whether s 154(4) enabled it to substitute a new scheme for one proposed that it considered to be totally unreasonable. The Tribunal referred to the contrast between the language used in ss 148–151 on the one hand, where the Tribunal’s task is to determine “equitable remuneration” and the reference to variation of the scheme in s 154 on the other hand. The Tribunal concluded that the word “variation” was not to be construed so widely that it would empower the Tribunal to substitute for the scheme, which is referred under the section, a scheme of an entirely different kind in cases where the Tribunal concluded that the referred scheme was wholly unreasonable. The Tribunal considered that in such a case the only course was to make no order on the application. The Tribunal held, however, that it could vary the percentage of expenditure upon which the proposed formula was based or vary the base upon which the calculation was to be made.
[286] The 2006 amendments addressed the problem identified in the ABC case. The Tribunal does not consider that it was Parliament’s intention to confine the Tribunal’s powers to adopting unchanged such an alternative scheme. It would be an odd result if the Tribunal could vary a scheme proposed by PPCA in its reference but could not vary a scheme proposed by Fitness Australia as an alternative. At the very least, the Tribunal has the power to fix the appropriate rate for the use of copyright material and is not bound to accept a rate proposed by one or other of the parties in a proposed licence scheme.
PPCA initially submitted that a hybrid scheme would be beyond the scope of the Tribunal’s power of variation in s 154(4). PPCA, however, withdrew this submission and relied instead on a submission that there was no proper foundation in the material to determine a reasonable percentage of revenue rate. CRA did not submit that the implementation of a hybrid scheme, incorporating both a percentage of revenue rate as CRA had proposed and a per stream rate as PPCA had proposed, would be beyond power, but it maintained that there was no proper foundation in the material to determine a reasonable per stream rate. As we have noted, if both are right in this regard, then the inevitable result is that all the schemes referred to the Tribunal must be rejected as unreasonable.
Certain factors suggest that a hybrid scheme would be within the Tribunal’s power. Where used in statute the singular includes the plural and the plural includes the singular (s 23 of the Acts Interpretation Act 1901 (Cth)). Accordingly, the Tribunal may have referred to it in the one reference under s 154(4) any number of schemes and is bound to consider each such scheme. The Tribunal can confirm or vary “the scheme” which must mean any one or more of the schemes which has been referred to it. The Tribunal can thus confirm or vary multiple schemes but, no doubt, in so doing must clarify how they are to work together. If we are wrong about this then the spectre of rejection of all of the schemes arises. Standing alone, we have concluded that no scheme referred to us is reasonable in the circumstances. Because, as will become apparent, there are other issues which arise about the Tribunal’s power to vary a scheme or schemes in this matter, as well as issues about procedural fairness, we propose to invite the parties to consider their positions once they have had an opportunity to review these reasons.
1.3 Consequences of the approach of the parties
The unhelpful approach of the parties has had a number of practical consequences.
The first consequence is that, as might be expected in a case involving such deep divisions between the parties, we found the case of each party unpersuasive in significant respects, the cases reflecting the extreme position of each propounding party, resolute in an apparent effort not to contemplate the possibility of a different perspective.
The second consequence is that because of the lack of any proposed alternatives by both parties should their primary cases be found not to be reasonable, judicial estimation has a greater role than might otherwise be the case.
Third, there are consequences for the notional bargain that the Tribunal is capable of conceiving could be struck between these parties.
This third point, about the notional bargain, requires further explanation. It will be recalled that the only assumption that is made for this purpose is that the parties are willing to negotiate and conclude a bargain. Otherwise, the parties are taken as they are, with whatever strengths and weaknesses in their bargaining power the available material discloses they possess.
One piece of evidence, insignificant on its own but important when considering the notional bargaining construct, was that of Anthony Clark, the former director of Phonographic Performance Limited (PPL) in the United Kingdom (the UK). PPL is the equivalent to PPCA. The CRCA, referred to in Mr Clark’s evidence, is the UK equivalent to CRA. He gave evidence in the following exchange:
So far as you’re aware, is it the case in the United Kingdom that each time PPL has sought to negotiate or have reviewed the radio station’s use of the broadcast right, that review or negotiation has always been conducted on the basis that the percentage of revenue is the appropriate structure for the use of the sound recordings?---No. That is not the case. Certainly, the documentation I reviewed relating to the negotiations between PPL and the CRCA as it then was were looking to apply a different formula. In particular, a consumption-based formula, generally referred to as a rate-protracted stream, and they were unsuccessful in that. And I myself, when I – subsequent to my arrival at PPL, and when I also undertook negotiations with the commercial radio industry in respect of the online rights, we were – did seek to apply a consumption-based formula, but the radio industry was unwilling to contemplate that formula, so we were unsuccessful in those negotiations as appears from my look at the records of – that my predecessors at PPL were similarly unsuccessful.
Mr Clark expanded on what had happened in these statements:
Ÿ And it was apparent, from my looking at those, that PPL sought to licence internet simulcast on a different basis but all its attempts to do so basically – a consumption basis or a rate per track – per stream formula. But all those attempts were resisted by the radio industry and, as at that time, it’s apparent that the extent of simulcasting – its significance was relatively minimal – a decision was taken by PPL and/or its stakeholders not to – to basically concede the position taken by the radio broadcasters on this issue.
Ÿ As I say, it was before I got to PPL but I have looked at the papers before giving my affidavits and it was apparent that it was not the beginning of negotiations, which I think go back to 1999 when they first started talking about the basis on which internet simulcast could be licensed. And the original position adopted by PPL in these discussions was not a share of revenue. But they – as happens in negotiations, they lost that point.
Ÿ … they were concerned that failure on the part of PPL and the radio industry to reach an agreement on this point would result in a – in the issue, along with a range of other issues going back to the Copyright Tribunal for determination, which was not something that PPL or its stakeholders found appealing at that point. So there was a whole range of issues which led to them conceding the position of the radio industry, which the – which was that the share of revenue formula which had emerged from the 1993 tribunal decision should be extended to apply to internet simulcasts.
ŸThose negotiations were conducted by myself on behalf of PPL, so I am familiar with that process. It’s correct to say that from the very outset commercial radio were unwilling to enter – even enter any kind of dialogue with PPL which involved a change in the share of revenue formula. So at a relatively early stage in that dialogue, in the interests of making some progress, and at least reaching agreement on some other aspects of licensing, which I took the view along with my colleagues and my stakeholders at PPL, that if we were to make any progress with at least modernising and bringing up to date some aspects of the licence, reopening the issue of the underlying payment formula – the share of revenue which were those rates going back to 1993 – we were going to get nowhere, and the only place to go if we wanted to take that issue up was back to the tribunal. There was no appetite for that on behalf of the stakeholders. There were probably more pressing and more significant issues to address at that time, and therefore that series of negotiations which led to the 2006 negotiations did not reopen or change the share of revenue formula, because the other side were unwilling to contemplate that.
Ÿ There were – it was – it was one of a number of issues, but it was very apparent that we were going to – if we wanted to change the revenue formula or the revenue structure, or the rates, the only place we could do that would not be through negotiation but through a tribunal. That was made very clear on behalf of the radio industry, and I understood that. PPLs decision was there were areas which we wanted to progress, we wanted to try and resolve, and we progressed those, and accepted that we were not going to – unless we were prepared to go to a tribunal, we were not going to reopen the revenue share formula at that stage.
In other words, on more than one occasion, PPL had sought to negotiate payments based on a per stream approach but the UK equivalent to CRA refused to conduct negotiations on that basis.
In the present case the material made available indicates that in any actual negotiation between the parties (which is what the notional bargain is attempting to replicate) each side would consider certain matters to be fundamental. In summary, we consider it apparent from a broad overview of all of the material that:
(1)CRA would not negotiate an agreement with PPCA for stations to be licensed to simulcast by which the stations would be required to pay on a per stream rate. CRA considers that a requirement to pay on a per stream basis would be catastrophic for its members irrespective of the amount of the rate actually imposed.
Although we are satisfied that CRA’s belief that a per stream approach would be a catastrophe is irrational, in any negotiation CRA would have available to it other persuasive and rational arguments in favour of a percentage of revenue rate. In particular, history and circumstance weigh in favour of a percentage of revenue rate. CRA’s members have not to date been charged on any basis by PPCA (or any other collecting society including APRA) other than a percentage of revenue. CRA’s members have in place systems and procedures which enable them to pay licensing fees for the use of music on a percentage of revenue basis. A per stream scheme for the simulcast right would result in CRA’s members having to implement two systems relating to the transmission of the one radio program, the applicable payment system being dependent on the method of transmission (broadcast over the air or simulcast over the internet). Whatever the future potential for monetisation of simulcasting, Australian radio stations currently make the vast majority of their revenue from advertising which, presently at least, is based on total audience numbers irrespective of the mechanism by which those listeners are reached. Further, none of the problems with assessing revenue and gaming the system identified by PPCA have been thought sufficient to undermine the percentage of revenue approach to date.
All of these matters would place CRA in a relatively strong bargaining position with PPCA about the structure of the rate.
(2)PPCA would have available its own cogent and persuasive arguments that a per stream rate is an appropriate method of payment for the activity of simulcasting, providing significant advantages when compared to a percentage of revenue approach. Simulcasting, unlike broadcasting, enables a per stream approach to be adopted. A per stream approach means that stations pay for their actual music use. Stations can thus control the costs of this input by adjusting their music use. A per stream approach rightly recognises music as an input cost to the product of the radio stations. A per stream approach avoids difficulties of assessing revenue and gaming of the payment system. The spectre of technical impossibilities or difficulties and prohibitively expensive compliance costs which appear to inform CRA’s belief that the imposition of a per stream rate would be a catastrophe are not supported by any rational approach to the available material. That this is so is demonstrated by the fact that in the US the body equivalent to CRA is not seeking to abandon the per stream approach in the latest round of hearings. It is seeking only a substantial reduction of the rate per stream. If a per stream approach is truly impractical and unworkable, or extraordinarily onerous from a technical or compliance respective (as CRA would have it), then it could be expected that in the US CRA’s equivalent would not be seeking a rate reduction; it would be seeking a different payment system altogether.
All of these matters, except perhaps the gaming concern where CRA’s answer would be equally valid, would place PPCA in a relatively strong bargaining position with CRA about the structure of the rate.
(3)PPCA would not agree to a percentage of revenue rate which was based on the 0.4% rate in the PPCA-CRA Broadcast Agreement. It would not do so because (rightly, in our view) it would judge that rate to be largely the result of the operation of s 152(8) of the Copyright Act and the 1% cap it imposes, rather than a market rate. While CRA would make arguments to the contrary none of them (as we have found below) would be persuasive. PPCA would be in a strong position to maintain that the 0.4% from the PPCA-CRA Broadcast Agreement is an inappropriate starting point because it does not reflect a market rate for that right and, accordingly, cannot be a proper basis for a market rate for the simulcast right. CRA would not be in a strong position to support a percentage of revenue rate starting from the base of 0.4%. PPCA’s position that the 0.4% is not an appropriate staring point would be based on far better ground.
(4)CRA would not agree to a per stream rate based on the rates in the NAB-SX agreement or webcasting agreements (that is, agreements between record companies and music streaming services). CRA would be in a better position than PPCA on this issue because of certain incontrovertible facts. First, the US commercial radio market is far larger than that in Australia. Second, it is likely that cost structures in the US enjoy benefits of economies of scale that are not present in the Australian market to the same extent. As such, costs of implementation and ongoing compliance of a per stream scheme in Australia are likely to be greater than in the US. Third, there is no protection for use of sound recordings in radio broadcasts in the US so that the radio stations are paying only for simulcasting and not for broadcasting. The effects on the US market if they also had to pay for broadcasting rights are unknown. Fourth, the US is further advanced than Australia in terms of the monetisation of simulcasting. Fifth, the rate reduction being sought in the US to the rates set by the NAB-SX agreement is substantial, a reduction from $0.0025 per stream (or 0.25 cents) to $0.0005 per stream (or 0.05 cents).
Insofar as webcasting agreements to enable music streaming services are concerned, all provide a greater interactivity than the simulcasting of a radio program (even allowing for substitution of advertisements which PPCA will accept) and all provide a different experience from the radio stations which CRA represents. While there are some very high music use stations, other stations involve low music use (sports and talk back stations), and the majority provide music to listeners as part of an overall package of entertainment of which music forms one part (albeit, in the case of some stations, an important part). The same cannot be said of webcasters which simply stream music. The presence of advertisements in some webcasts does not make those services particularly like radio given the package entertainment nature of radio. Moreover, commercial radio in Australia has a long history, unlike webcasting, and throughout its history it has never been subscription based. It is funded by advertising revenue. The business models of webcasters are different, their bargaining position as against record companies is different as their business is wholly dependent on music, and they could be expected to pay more for that product than radio stations.
(5)Both parties would be aware of the fact that many contemporary agreements between record companies and webcasters provided for payment on a percentage of revenue or per stream basis whichever is the greater. Whether one or other calculation would never be used in practice because of the nature of the webcasting business as PPCA submitted (that is, that payments would always be made on the per stream basis because this will always be greater than the revenue earned given the nature of the webcasting business) is not to the point. The point is that it is commonplace for copyright owners and those who wish to use music to agree that payments should be made on both percentage of revenue and per stream bases. In this context, it is unlikely that in any notional bargain between PPCA and CRA consideration would not be given to a licence which provided alternative bases for payment.
(6)PPCA would not agree to a scheme which gave to CRA any greater role than practically necessary or, preferably, gave to CRA any role at all. On PPCA’s side in this regard would be the fact that membership of CRA is not compulsory. Further, PPCA is not granting a licence to CRA but to the radio stations which wish to simulcast. Rightly or wrongly, PPCA also perceives CRA to have been difficult to deal with in respect of the PPCA-CRA Broadcast Agreement. On CRA’s side would be the fact that it currently represents a large number of radio stations. It has a current role as the contact point with PPCA under the PPCA-CRA Broadcast Agreement. It is also likely that even if the scheme minimises CRA’s formal role, radio stations are likely to seek assistance from CRA in complying with their obligations in any event.
It seems likely that in any notional bargain a practical solution to this impasse would be able to be reached whereby CRA’s role was only so great as any particular radio station might allow provided that the obligations remained those of the radio station directly to PPCA, rather than the radio stations to CRA and CRA to PPCA.
We do not suggest that our conclusions about the likely actual bargaining position of the parties are conclusive of the Tribunal’s task. If that were so, then inferred bargaining positions based on unsubstantiated concerns, such as those of CRA about the practical difficulties of implementing a per stream approach or those of PPCA about the likelihood of gaming of a percentage of revenue approach being an insuperable problem, might carry undue weight. One of the advantages of the notional bargaining concept is that it can be assumed that, ultimately, arm’s length commercial negotiations are likely to yield an agreement which is based on genuine, rational, and well-founded positions. But in the context of the Tribunal’s task of confirming or varying a scheme or schemes as it considers reasonable in the circumstances, the position likely to be taken by the parties during the course of any actual negotiation is not irrelevant. It does not determine conclusions about the bargain that ultimately would have been reached, but it does inform the Tribunal’s assessment of what is reasonable in the circumstances.
These considerations indicate that confirming any one scheme would not be reasonable. Rather, as we suggested to the parties after the first part of the hearing was completed, they indicate that a hybrid scheme adopting varied per stream rates and varied percentage of revenue rates is likely to be reasonable in the circumstances.
We explain our reasons for these conclusions and provide greater detail of our conclusions thus far in the following sections.
2. OVERVIEW OF THE EVIDENCE
We provide a brief overview only of the most important evidence at this stage because, as we have said, much was peripheral or dealt with imponderable matters which, if necessary to resolve at all, are ultimately to be resolved at a level of impression or estimation. This overview is based on summaries provided by the parties.
Joanna Dick is the head of Off-Screen Media Direction Pty Ltd (OMD) and in that role is responsible for booking all outdoor, radio and print advertising for OMD Australia’s clients. CRA called Ms Dick to address the buying and selling of advertising on radio from a media buyer’s perspective.
Deborah Hishon is the head of Client Service, Radio at GfK Retail and Technology Australia Pty Ltd, the official provider of radio ratings in Australia. CRA called Ms Hishon to address the methodology and process of radio ratings audience measurements and figures in Australia for the commercial radio industry.
Eve McGregor is the head of Legal and Regulatory Affairs for CRA. CRA called Ms McGregor to provide an overview of CRA, its regulatory structures, the licence fee agreements and reporting obligations.
Paul Bowd is responsible for agency sales for Macquarie Radio Network’s two metropolitan stations, 2GB and 2CH. CRA called Mr Bowd to provide an overview of the metropolitan business of Macquarie Radio Network.
Ronald Camplin is the executive chairman of Bathurst Broadcasters which owns the commercial radio stations 2BS AM and B-Rock FM. CRA called Mr Camplin to provide an overview of the business of Bathurst Broadcasters, being the operation of small regional stations.
Geraint Davies was the chief operating officer of Australian Radio Network (ARN) and is now the head of iHeartRadio. CRA called Mr Davies to provide an overview of the business of ARN as a large metropolitan radio network, including the introduction of iHeart Radio.
Catherine O’Connor is the CEO of Nova Entertainment Pty Ltd. CRA called Ms O’Connor to provide an overview of the business of Nova, a large metropolitan radio network.
Stephen Everett is the Managing Director of ACE Radio. CRA called Mr Everett to provide an overview of the business of ACE Radio, a regional network.
Kevin Blyton is the managing director and joint owner of Capital Radio Network, which operates a number of radio stations around the ACT and regional southern New South Wales, as well as Perth. CRA called Mr Blyton to provide an overview of this regional network.
Nick Morgan is the digital manager of West Coast Radio. CRA called Mr Morgan to discuss the reporting proposed by PPCA in the context of the business of this Western Australian regional network
Antony Samuel is a forensic accountant and valuation expert with Sapere Research Group. CRA called Mr Samuel to provide expert evidence as to an appropriate structure and rate for the simulcast scheme.
Roy Epstein is a consulting economist and Adjunct Professor of Finance at the Carroll Scheme of Management, Boston College. CRA called Dr Epstein to provide expert evidence as to an appropriate structure and rate for the simulcast scheme.
Matthew Payton is the director of external affairs at RadioCentre Ltd, UK. Mr Payton’s evidence, adduced by CRA, provided an overview of the commercial radio market, simulcasting and copyright fees paid in the UK.
Gabriel Van Loon is a partner in the law firm Van Loon Simmons Professional Corporation in Canada. Mr Van Loon’s evidence, adduced by CRA, provides an overview of Canadian commercial radio and webcasting markets, copyright and broadcasting law, the nature of simulcasting and collective administration.
David Innes is a broadcasting and marketing communications consultant in New Zealand. Mr Innes’ evidence, adduced by CRA, provides details of the Tribunal proceedings in New Zealand which gave rise to the current scheme in that country.
Mark Garnett is a forensic technology expert. Mr Garnett’s evidence, adduced by CRA, provides details of the IT requirements necessary to comply with PPCA’s proposed final scheme.
Lynne Small is the General Manager of PPCA. PPCA called Ms Small to provide evidence of PPCA’s membership, repertoire and distributions, the history of the litigation regarding the simulcast right and the 1% cap, and PPCA’s reasons for proposing the PPCA Scheme.
Karen Don is the General Manager, Legal and Business Affairs of Universal Music Australia (Universal). PPCA called Ms Don to explain the increasing significance of revenue generated through the online use of sound recording and how the internet has changed record companies’ business model and the importance of licensing revenue. Ms Don also gave evidence about and arranged for Universal to provide confidential information about its recent agreements with webcasters.
Michael Taylor is the Managing Director of Universal Music Australia. PPCA called Mr Taylor to give evidence of the record companies’ significant investment in the creation of sound recordings, via the “Artist and Repertoire” process, including scouting, developing, managing, supporting and promoting recording artists, and the high risks associated with that process.
Brent Coker is a Lecturer of Marketing at the University of Melbourne and the managing director of Deloosh, a technology company that specialises in the development of web applications (or apps). PPCA called Mr Coker to explain the opportunities for radio stations by simulcasting and monetisation strategies for online businesses.
Harry Emerson III is a co-founder, partner and senior executive of SurferNETWORK, an internet media streaming business in the United States. Mr Emerson’s evidence, adduced by PPCA, explained the royalty reporting services that SurferNETWORK offers to radio stations and the feasibility of royalty reporting for simulcasts in Australia.
James Kott is senior vice president of products and marketing at Abacast, a provider of streaming, live and on demand ad insertion and monetisation solutions for online radio in the United States. Mr Kott’s evidence, adduced by PPCA, explained the advantages of internet radio and strategies for effective monetisation of simulcasts.
Jeffrey Eisenach is senior vice president and co-chair of the communications, media and internet practice at NERA Economic Consulting. PPCA called Dr Eisenach to provide expert opinion evidence in support of PPCA’s scheme, including as to the structure and amount of the rate.
Barry Massarsky is an economist specialising in copyright issues in the music industry. PPCA called Mr Massarsky to explain the economic underpinnings of the per stream rate in the US.
Rodney McKemmish is a partner and the head of forensic technology at PPB Advisory, a firm offering accounting, forensic and reconstruction services. Mr McKemmish’s evidence, adduced by PPCA, describes options available to radio stations to provide per stream reporting information from a technical standpoint.
Anthony Clark was the director of licensing at PPL in the UK. PPCA called Mr Clark to provide evidence regarding how radio broadcasting and simulcasting is licensed in the UK, and the difficulties experienced with the implementation of a percentage revenue scheme in that jurisdiction.
Damien Vaughan is the CEO of Recorded Music NZ. Mr Vaughan’s evidence, adduced by PPCA, explains how radio broadcasting and simulcasting is licensed in New Zealand and describes the developments that have occurred since the most recent decision of the NZ Copyright Tribunal in relation to the licensing of radio simulcasts.
It is appropriate to say something here about the four main expert witnesses, Dr Eisenach, Mr Massarsky, Dr Epstein and Mr Samuel. Each party criticised the experts who expressed opinions contrary to the case the party wished to advance on the basis not only of the cogency of their opinions, but matters relevant to overall credibility. We did not find the criticisms relating to the overall credibility of these witnesses helpful. Each witness disclosed their experience and background and what they had done. We consider each was doing his best to ensure we understood the bases for the conclusions reached.
In addition, numerous volumes of documents and exhibits were tendered to support the competing propositions of the parties, in all, over 13,000 pages of material, mostly annexures and exhibits to affidavits, much of which was not ultimately referred to by the parties and added nothing to the weight of their respective cases.
3. THE STRUCTURE OF THE RATE
3.1 Overview
In its opening submissions PPCA made the following points in support of a per stream approach:
(a)The activity concerned is being conducted entirely over the internet.
(b)The internet is – uniquely, considered historically – adapted to yield, at no or very low cost, near-perfect census information about usage.
(c)Census-based usage – i.e., per stream, per listener – is inherently fair both to the copyright owner (represented here by PPCA) and to the copyright user (the radio station) in that, once a price has been fixed for each stream, the amount payable rises or falls with the actual usage of the copyright subject-matter concerned, here, sound recordings.
(d)When compared to a percentage of revenue rate (as contended for by CRA), a census-based rate also ensures that royalties are apportioned fairly between users, as each station pays for its actual usage, rather than an arbitrary percentage of revenue that does not vary between stations that have a significant portion of their audience streaming and significant online revenue, and those that make very limited use of the simulcast right.
In its closing submissions PPCA said:
it cannot sensibly be disputed that – all other factors being equal – a rate that is closely tied to the actual extent of use of the copyright subject-matter in the activity in question will be more reasonable and equitable than one that is not.
We accept this submission for numerous reasons as set out below. What we do not accept, however, is that all other factors are equal. As discussed above, history and circumstance, which are important factors, weigh against the imposition on radio stations of a requirement that they be forced to implement a new system for payment of fees for use of sound recordings in simulcasts of their radio broadcasts given that they are already paying for the use of the sound recordings in their broadcasts on a percentage of revenue basis. We do not say this because of any concern about double counting. If there is double counting (discussed below), because radio stations pay on total gross revenue (which includes revenue derived from simulcasting), an adjustment could be made to address this issue. We say this because, unlike the position in the US, there is a long history in Australia of radio stations paying for use of protected sound recordings in radio broadcasts on a percentage of revenue basis and, irrespective of this matter, they will continue to do so for the foreseeable future.
CRA rightly made these points in its submissions. It referred to the Tribunal having adopted a percentage of revenue approach in the 2MMM case. It referred also to other contexts in which a percentage of revenue approach has been adopted including what the Tribunal said in Reference by Australasian Performing Right Association Ltd; Re Australian Broadcasting Corporation (1985) 5 IPR 449 at 479 as follows:
A percentage of revenue has a long history of acceptance as a measure of the worth of copyright. It is accepted in the area of literary works where the owners of copyright in books receive a percentage of retail sales. It also applies in the case of sales of sheet music where again percentages of sales are taken as a guide to what the copyright owner should receive. And it is accepted in the theatre and concert areas where copyright owners receive a percentage of the box office receipts. The philosophy underlying this approach… [is] that over the years the copyright owner has been perceived to have an interest in the success or otherwise of his work. If it is highly successful and substantial returns are yielded, he should receive more. If his work is a failure, he will receive little or nothing. This approach has particular application in commercial cases, that is where the licensee, in this area of copyright use, the broadcaster, is a commercial entity.
In Reference by Australasian Performing Right Association Ltd under s 154 of the Copyright Act 1968 (1992) 25 IPR 257 a similar approach was adopted, the Tribunal saying at 266 that:
The box office or gross revenue approach has therefore the solid basis of past experience in a variety of areas to commend it.
At 267 the Tribunal said:
In the end the ultimate matter the Tribunal has to consider is the reasonableness or otherwise of the amount. The method or base which is used to calculate it is important because the selection of a proper method is likely to yield the fairest result. But the result which is thus yielded must be considered against the background of the past, in particular the level of fees payable down to the present time. If the adoption of the amount achieved would suggest an extravagant outcome, the matter needs to be reconsidered.
We accept that, unlike the position in the US when per stream rates were adopted for the simulcasting of radio broadcasts, we do not have the freedom of a blank slate. In circumstances where radio has paid for the use of sound recordings in broadcasts on a percentage of revenue basis and will continue to do so for the foreseeable future, to impose a scheme which requires all radio stations to pay for the use of sound recordings on a per stream basis, in our view, would not be reasonable in the circumstances.
That said, if, as in the US, we were confronted with the need to determine a reasonable scheme for payment for the use of sound recordings in simulcasts where there was no arrangement already in place for payment for use of sound recordings in broadcasts, then the advantages of a per stream approach would be overwhelming and no consideration would need to be given to any role for a percentage of revenue approach.
We say this for the following reasons.
3.2 The technical and practical issues
We found the evidence adduced by the radio stations about the technical and practical difficulties with implementing a per stream approach, and the impacts it would have on their freedom of decision in respect of choice of play-out systems, technology upgrades and use of third parties for various parts of the process, unpersuasive. This evidence failed to recognise a few basic facts.
First, not only have radio stations managed to operate under such a system in the US for years, but also having been given the opportunity to present a case about the system in the US (as is the case in the present Webcasting IV proceedings in the US concerning the rates and terms that should be imposed for the period 2016 to 2020) the radio stations are not suggesting that a different approach should be implemented. Their case is that the current rates they are required to pay are too high and the reporting requirements should be amended. If any of the technical or practical difficulties presented in the large amount of evidence adduced by the radio stations in this matter were incapable of resolution at a reasonable cost and in a reasonable manner, then it is difficult to understand why US radio stations, which have actual experience of the system, would not be advocating for the per stream approach to be abandoned. The fact that they are not doing so effectively answers all of the evidence which CRA adduced about these issues.
Second, the technical and practical feasibility of a per stream approach is also supported by the fact that it is the dominant method for payment in respect of all webcasting agreements which found their way into evidence. We accept that the webcasting business is not the same as the commercial radio business. But that is not the point. The point is that none of the webcasters around the world appear to have had any difficulty in negotiating an agreement under which they pay for their use of sound recordings on a per stream basis. The obvious inference from this fact is that such a payment scheme is technically feasible and practically able to be implemented. If webcasters believed that such a payment system would involve intolerable burdens of cost and time, or an unreasonable restraint on their commercial decision-making, then it could be expected that they would not have agreed to make payments on this basis. Yet such agreements appear to be common-place.
Third, it is apparent that when a new need arises the market responds to fulfil that need. As PPCA noted, there was no history of per stream reporting by the US radio industry when the US Copyright Royalty Board ordered it in the Webcasting I decision in 2002. Yet when payments were required to be made on a per stream basis the companies which provided streaming services to radio stations expanded their business to enable compliance with the requirements for payments on a per stream basis. Whatever the complaints which might have been made about that system and the burdens it imposes the fact remains that now, more than a decade later, the radio stations are not suggesting in the Webcasting IV proceedings that the system is unworkable or should be changed to one providing for payment on some other basis. If the US experience had been the calamity that CRA would have it then this fact is inexplicable.
Further, while it might be expected that Mr Emerson, a founding partner of the streaming provider SurferNETWORK, would present his business in the best possible light, the other inescapable fact is that SurferNETWORK is a functioning business which provides the necessary services in the US to enable radio stations to comply with their obligations to make payment on a per stream basis. We have no doubt that such services would become available in Australia at a cost which might be greater than that in the US due to the different size of the industry but would nevertheless be commercially acceptable to any radio station which is commercially viable.
Equally, we have no doubt that the kinds of problems CRA and the witnesses it called emphasised have all been experienced and satisfactorily resolved in the US. By satisfactorily resolved we do not mean that the system is perfect or beyond complaint. This was another fallacy in CRA’s approach to the issue of a scheme on a per stream basis. While inexactitudes and inaccuracies inherent in payments on a percentage of revenue basis were seen as acceptable by CRA, it focused what can only be described as extraordinary energy on identifying and dissecting every possible inexactitude and inaccuracy inherent in a per stream basis payment system. The reality is neither system will be perfect. If, however, ensuring that an individual station pays what it should and not more or less is a valid objective (and we think it is), then a per stream payment system is better adapted than a percentage of revenue payment system to achieve that end. None of the potential problems which were identified are insoluble (as the arrangements in the US disclose) and none were shown to have any potential impact on the accuracy of the system which would be greater than the uncertainties and estimations necessarily involved in a percentage of revenue payment system.
For these reasons the US rates in the NAB-SX Agreement, insofar as they are representative of the current position in the US having regard to the uncertainties resulting from the Webcaster IV proceedings, are not directly applicable to Australia. They are likely to represent a substantial over-valuation of the simulcast right in Australia. The NAB-SX Agreement is useful, however, because it shows rates that we consider to be too high to be reasonable in an Australian context for the reasons we have given.
5.8 Webcasting agreements
PPCA also relied on recent webcasting agreements entered into by record companies. PPCA said that these recent webcasting agreements, which use rates similar to those in the NAB-SX Agreement, are a powerful indicator that the NAB-SX Agreement is a comparable bargain. PPCA also noted that in these agreements Australia appears as a “top tier” or “core” territory so that the rates payable in Australia are similar to those in the US which PPCA said “further supports the comparability of the NAB-SX Agreement and the US rates applicable under that agreement for the purpose of considering the Scheme”.
The webcasting agreements are between major record companies and music streaming services such as Samsung Milk, Guvera, Rdio and the like.
We consider that these agreements support our conclusion that, insofar as the use of sound recordings by radio in simulcasts is concerned, the rates in the NAB-SX Agreement are too high. As a result, it is not necessary to deal with CRA’s submissions that PPCA’s reliance on these agreements was unsatisfactory because they had been introduced at the “heel of the hunt”.
There was a great deal of evidence and many submissions on the part of PPCA in support of the conclusion that webcasting and simulcasting are comparable activities. We are unable to accept this submission.
First, webcasting is a new and relatively untested business over the longer-term. New entrants are entering and exiting the market with different business models at a pace unlike anything seen in the radio industry which is well-established and has enjoyed relative stability in terms of audience numbers and growth in profits over many years. As such, the relative bargaining power of a new webcaster compared to a collective of radio stations when dealing with a record company is not comparable. The collective of radio stations will have greater bargaining power than most webcasters. The two industries are not readily comparable for this reason alone.
Second, webcasters are in a much weaker bargaining position in any dealings with record companies because they have no service to offer without music. Radio stations use music to greater or lesser extents. Radio stations can adjust their offering, making music play a different role in their programming over time. Radio stations thus enjoy greater flexibility as to content than webcasters which have no flexibility as to their content offering when negotiating with record companies.
Third, the relative weakness of the bargaining position of webcasters is evident in the requirement in the agreements that they pay a per stream rate or a percentage of revenue rate whichever is the higher, where the percentage of revenue rates nominated exceed by many orders of magnitude the rates any expert suggested might be reasonable for radio stations to pay.
Fourth, the service offered by webcasters, even when made to seem more like radio (eg Samsung Milk), is really nothing like radio at all. No matter what degree of interactivity offered, it was apparent that all webcasters offer far more than the largely passive listening experience which characterises radio listening. Competitions offered during broadcasts or online by radio stations do not alter the fact that a listener has no real choice about what the radio station offers. All webcasters offer a degree of control and choice to the listener about the music to which they listen which is foreign to the listening experience of a radio station. The webcasting agreements might refer to certain streaming services as “non-interactive” but interactivity is a concept which operates across a broad spectrum. Even a non-interactive webcasting service, by the use of various mechanisms (be they software controlled or involving direct physical input by the listener), offer a form of individualised or tailored listening service which radio does not.
Accordingly, we do not accept PPCA’s submission that these services are “very close to radio”. We consider these services, even when justifying the description of “lean-back listening”, are offering something different from radio. Requiring songs to be announced and advertisements does not transform listening to a stream of music by a webcaster into an experience like listening to a radio station where the listener has to take the whole package in common with every other listener (subject only, in the case of simulcasting, to the potential for targeted advertising). The fact that listeners to a radio station can choose genres (such as easy listening, classical or the like) is not equivalent, for example, to the Samsung Milk experience where the capacity to select by genre is far more fine-grained, and all that is offered is music, rather than whatever entire entertainment package is offered by a radio station. As Dr Epstein said the webcaster services involve a “far more sophisticated” offering, at least in terms of user control and catering to user tastes, than listening to the radio.
We also accept Dr Epstein’s evidence that the rates in the webcaster agreements have to be understood as one element of a complex array of rates negotiated as a package between record companies and webcasters. The packages involved disclose higher rates for services with greater interactivity. As Dr Epstein explained the rates chosen at the non or semi-interactive ad funded end of the spectrum in these packages are designed to encourage the listener to buy their way out of having to listen to advertisements by paying for a subscription rather than using the free service. Dr Epstein rightly said that this dynamic, which must be relevant to the rates which have been set, does not apply to simulcasting by listeners to radio. We agree.
Nor do we think that the rates paid by Pandora are directly comparable. We accept PPCA’s submission that Pandora demonstrates why a simple valuation approach based on the net present value of present and future profits is not sufficient to value the simulcast right. Pandora, as Dr Eisenach and Mr Massarsky explained, is an enormously successful company which has not yet reported a profit. But the rates paid by Pandora do not show that a radio simulcast is equivalent or more valuable than the streaming service which Pandora offers despite Pandora’s rates being lower than those in the NAB-SX Agreement. Pandora offers a service unlike radio. As Dr Eisenach explained in the following exchange:
DR EISENACH: Pandora’s genius was to develop an algorithm which allowed it to identify if you listen to a song, based on what you listen to, to identify other songs that you would be likely to want…
…
Pandora allows you to put in an artist and it will automatically construct a radio station for you. And there are two flavours of Pandora. There’s a subscription-based flavour which is about five per cent of its subscribers and the non-subscription-based version which is about 95 per cent ad-supported. It is a non-interactive service. It’s often referred to as semi-interactive, but non-interactive in the sense that it’s limited to the number of skips advances. It doesn’t allow you to rewind. So many of the same kind of constraints that we saw for the new Webcaster agreements also apply to Pandora.HER HONOUR: But it serves up the music it thinks you like?
DR EISENACH: It serves up the music it thinks you like. So I have several radio – I have several stations on my Pandora, so if I want to listen to Mozart it will play – Mozart-like stations. There are limits on – it won’t let you play the same artist – one of the limits that the record companies put on is that you can’t play the same artist over and over, so - - -
HER HONOUR: But you can select an artist – how many times - - -
DR EISENACH: So if I put in Bob Dylan, it will play Bob Dylan-like music.
HER HONOUR: Right. But can you keep putting in different artists and select - - -
DR EISENACH: .....
HER HONOUR: You can. And it just keeps modifying your station?
DR EISENACH: You can have as many stations as you want.
Other than this we note that the percentage of revenue rates Pandora is paying exceed anything that would occur to us as reasonable for radio stations to pay for the simulcast right. This indicates that the Pandora per stream rates are also too high for the simulcast right in Australia.
Fifth, we are not persuaded to reach any different conclusion because of what Dr Eisenach described as a striking feature of Universal’s webcasting agreements, that they contained prices for the same services in different territories – including Australia and the United States. Webcasters are a business model in rapid development in both countries. Dr Eisenach said that the agreements showed “directly comparable products, directly identical parties setting prices where the only difference is the two markets”. We consider however that the agreements are between different parties, with different relative bargaining positions in respect of a different product.
Sixth, we consider there to be substance in a point made by Mr Samuel that the business models of webcasters and radio stations are so different that their respective bargaining positions with PPCA (or record companies) must also be different. As Mr Samuel put it:
… none of these services is required to provide a broadcast.
Now, the consequence of that comes to one of my fundamental points, and something I’ve been pushing somewhat ad nauseam. This has to do with the financial consequences when you look at these agreements. If you don’t need to provide a broadcast, you don’t need to pay for transition towers, a radio licence, personalities at breakfast drive-time, traffic reports, news reports. So the cost structures of these entities is going to be fundamentally different to the cost structures of an Australian commercial radio broadcaster.
As Mr Samuel also explained, using CRA’s words, “the ‘greater of’ rates structures in the record label webcasting agreements means that the per stream rates will only apply if it results in a royalty that exceeds the percentage of revenue amounts - the minimum royalty is therefore the percentage of revenue amount”. In relation to the percentage of revenue figures, Mr Samuel said that it is “demonstrably uneconomic” for Australian commercial radio stations to pay a royalty which is anything remotely in that region. We agree.
Accordingly, while we agree with PPCA that much unnecessary effort was expended in this case about whether certain forms of webcasting are more, less or equivalently interactive to radio, the fundamental point is that webcasting is not sufficiently like radio in substance to make the webcasting agreements a useful starting point.
For these reasons we are unable to accept PPCA’s submission that we can “comfortably find that any minor differences between the interactivity of simulcasting and that of non-interactive webcasting is not so significant that the webcasting rates do not support PPCA’s proposed simulcasting rates”. In the circumstances we have described we are not persuaded that the bargains struck between the record companies and webcasters are a reliable guide to the notional bargain that would be struck between PPCA (or the record companies) and the radio stations which, unlike webcasters, have years of experience in the benefits of collective bargaining, are an established industry, offer a different entertainment package than webcasters of which music forms only one part, and have more flexibility in respect of music use than webcasters.
In common with the NAB-SX Agreement, all of the factors which we consider to be of weight demonstrate that the recent webcasting agreements disclose per stream rates that would be too high for the use of the simulcast right in Australia by radio stations. The agreements are therefore useful for this purpose.
5.9 The PPCA webcasting agreements
In 2013 and 2014, PPCA entered into a series of agreements with webcasters (some of which are already defunct) granting them the right to use sound recordings in their services, the required payment being on a per stream basis. The rates payable by these webcasters varied, but are substantially less than the rates in the NAB-SX Agreement (in general, somewhat less than half of those rates). PPCA expressly identified those agreements as “non-precedential”. It may readily be accepted that PPCA was, in effect, “testing the waters” with these agreements, the other parties to which were start-up companies entering a new market.
We accept, therefore, PPCA’s submission that these agreements are not comparable to the notional bargain that would be struck between PPCA and the radio stations. However, unlike PPCA, which wished to stress the lack of comparability of these agreements because they involve rates far less than the NAB-SX Agreement, we consider these agreements lack comparability for reasons similar to those set out above for the more recent webcasting agreements between the record companies and webcasters. Despite the fact that some of the webcasters had real commercial muscle behind them the enterprises in which they were involved were all experimental. They were all negotiating as start-up enterprises with no proven track record. The proposed enterprise was dependent on obtaining the required rights to use the sound recordings. The new enterprises had no flexibility in their use of music. Without music, they would not exist at all. These factors tend to suggest that the webcasters which entered into deals with PPCA in 2013 and 2014 were in a weak bargaining position in comparison to radio stations wishing to use sound recordings in their simulcasts.
While PPCA might have been willing at the time to offer these enterprises discounted rates compared to the NAB-SX Agreement to account for all of these factors, it is unrealistic of PPCA to assume that its bargaining position with radio stations would be the same. The NAB-SX Agreement provides an obvious appropriate starting point for negotiation with webcasters, as the deals the record companies have recently struck with webcasters disclose. But is does not provide an appropriate starting point for negotiations with radio stations for the use of sound recordings in simulcasts for the reasons set out above. As such, it is not realistic to characterise the PPCA webcasting agreements as embodying any form of discount insofar as those rates might be applied to radio stations. If radio stations had been negotiating with PPCA at that time, for the reasons we have given, they would have been in a position to negotiate lower rates than these start-up, experimental, enterprises. The PPCA webcasting rates are thus also useful in that they disclose per stream rates higher than what would be achieved in a notional bargain between PPCA (or the record companies) and radio stations.
Insofar as it is necessary to record this, we have difficulty with Dr Eisenach’s opinion that the agreements, taken together, show a trend of increasing rates for webcasting. We consider it impossible to discern any trend from the various agreements, each of which appears to reflect individual circumstances that happen to have pertained at the time. Unlike PPCA the recent agreements by the record companies were not experimental or a testing of the waters by the record companies. They represent a complex system of payments of which a per stream rate for ad funded so-called non-interactive services forms but one part. These facts alone might explain the difference in rates rather than an inference of a general trend in per stream rates for webcasting increasing.
5.10 Using the various agreements for per stream rate setting
CRA’s position, in common with the position of PPCA in the setting of a reasonable percentage of revenue rate, is that PPCA failed to demonstrate any rational foundation for a per stream rate. While we agree that none of the agreements which were put to us by PPCA provide an appropriate comparison for the assessment of a reasonable per stream rate for radio stations in Australia to pay for the use of sound recordings in simulcasting, we do not consider that the available material provides no rational basis for the assessment of a reasonable per stream rate.
Our starting point is that all of the webcasting agreements which we have identified above involve rates which exceed what would be reasonable for radio stations to pay for use of the sound recording right in simulcasting. This is because, as we have said, the businesses are different and have different cost structures, the products are different and radio stations are in a better bargaining position than webcasters in any (necessarily hypothetical) negotiation with PPCA (or the record companies).
Our difficulty, however, is that while we know from the available material rates that would be too high, we have not yet identified a rational way of determining rates that would be too low. We could estimate those rates based on a general conclusion that, in all of the circumstances we have identified, radio stations are likely to do substantially better than the webcasters PPCA did deals with, but this would still leave open a substantial range within which the selection of a particular rate would be guesswork. If necessary, we will not shy away from this task, guesswork or not, but will take into account any further submissions the parties may wish to make in this regard.
An alternative approach is provided by Dr Eisenach’s forecast of scheme fees payable to PPCA between 2013 and 2021 (Exhibit 94). The first observation we must make is that we are not certain we understand how the figures shown in this table have been derived. As such, and in common with our approach to the APRA-CRA Agreement, the following discussion is put forward on a provisional basis only, in circumstances where we are doing our best to avoid these proceedings being rendered futile. Further, and again in common with our approach to a reasonable percentage of revenue rate, there are two other unavoidable issues with which we must contend – procedural fairness and the power to vary a scheme. Neither party proposed using Dr Eisenach’s material in this way. Moreover, while on one view, the exercise involves nothing more than a variation to PPCA’s proposed scheme rates, on another it involves a different methodology and thus a different scheme. The tentative approach we adopted above in respect of the percentage of revenue rate thus also applies to the per stream rate (and method of arriving at that rate) which presently seems reasonable in the circumstances.
We know that Dr Eisenach’s purpose in these calculations was to identify the total equivalent percentage of revenue rate that would be paid to PPCA if PPCA’s per stream rates were adopted and to compare those amounts to the total amounts that would be paid to APRA. In passing, we note this seems to involve an implicit acknowledgment that the fees paid to APRA for the musical works right are relevant to the value of the right to use sound recordings in simulcasts, which is the foundation for our provisional conclusions about the percentage of revenue rates that should be paid for that right. For present purposes, however, and assuming that Dr Eisenach achieved his purpose, what is relevant is that the fees payable represent the total fees for both the simulcast right and the broadcasting right to use sound recordings.
We consider it likely, but are not certain, that Dr Eisenach has used the 0.4% broadcasting rate across the board in these calculations rather than attempting to use CRA’s internal breakdown of the percentage in fact paid by individual radio stations. If this is so the 0.4% can be deducted for each calculation to leave the equivalent percentage of revenue rate payable on PPCA’s per stream rates.
Focusing on the years 2013 to 2016 Dr Eisenach’s total percentage of revenue rates for PPCA are 1.5%, 1.8% and 2.0%. Deducting 0.4% from each would give equivalent percentage of revenue rates for the simulcast right of 1.1%, 1.4% and 1.6% for 2013/2014, 2014/2015 and 2015/2016 respectively. These percentages may be compared with those in the table at para [255] above which, in the @15% simulcast column, range from 0.0081% to 0.564% depending on music use percentage. This lack of equivalence confirms our view that the PPCA per stream rates are too high, being about twice as much as the highest percentage of revenue rate that would be paid by any radio station (one with more than 80% music use).
One of the advantages of a per stream rate is that there is a single rate with payments determined by actual use rather than gross proxies such as average music use percentage. Because CRA did not engage meaningfully with PPCA’s per stream rate case (as PPCA did not engage meaningfully with CRA’s percentage of revenue case) the available material requires use of the range of percentage of revenue rates which depend on music use percentages. There are many ways in which a reasonable percentage of revenue rate can be selected from that range. While we have not yet heard from the parties about any of them, obvious candidates are an overall average or the rate applicable to the average of music use which we understand to be 61%.
These examples of possible approaches would yield the following results:
(1)An overall average by adding all of the rates in the simulcasting @15% column and dividing by 12:
0.296%
(2)Overall average music use percentage of all radio stations (61%):
0.363%
For ease of calculation, assume the equivalent percentage of revenue rate adopted is a flat rate of 0.3%. In other words, on this assumption, the per stream rates should result in a radio station paying around 0.3% of revenue for the simulcast right. PPCA’s 2013/2014 rate is $0.0018. Dr Eisenach says this rate would equate to radio stations paying 1.5% of total revenue for both the broadcast and the simulcast right or, deducting 0.4% for the broadcast right, 1.1% for the simulcast right. If 0.3% is used instead the relevant per stream rate for that year would be roughly one third of PPCA’s proposed rate (or, as calculated, $0.00049 or 0.049 cents per stream).
Accordingly, if Dr Eisenach’s calculations are correct it would be possible to adjust the PPCA per stream rates downwards to achieve a per stream payment system we would consider reasonable at least at this stage.
We are not confident, however, that Dr Eisenach’s calculations are correct. Apart from the uncertainty as to whether he has used the 0.4% to represent the broadcast rate, he explained that he used actual data for the years 2010-2012 and then projected forward using a linear trend, as we understand it, for revenues and simulcasting audiences. As CRA pointed out:
The projected numbers start at $1.271 billion for FY14. Mr Samuel noted that the total FY12 revenue for the radio sector in Dr Eisenach's calculation was $1.12 billion. Mr Samuel commented that he did not know how Dr Eisenach produced the numbers in Exhibit 94, but raised the issue that those figures were not correctly based on the actual revenue of commercial radio stations.
Using the actual revenues from 2010 to 2012 and the two year compound growth for the gross earnings of the radio industry adopted by ACMA, CRA calculated that the revenues for 2013/2014 would be about 20% less than Dr Eisenach calculated. Ultimately, however, the problem, as CRA noted, is that Dr Eisenach did not present the full basis for the calculations in Exhibit 94. CRA estimated that the true equivalent percentage of revenue rate for the 2013/2014 year would be 1.75%. If that figure is used as the starting point (from which 0.4% must be deducted to give 1.35%, as opposed to 1.1% for the simulcast right), the equivalent per stream rate for 0.3% would be $0.0004 or 0.04 cents.
While these calculations are rough and ready (and we must give the parties a further opportunity to deal with the issues which we are raising), they yield results that are generally consistent with the views we have expressed. In particular, they support the view we have that PPCA’s rates are too high because they are based on an inappropriate starting point. They also support the view that CRA’s percentage of revenue rates for the right to use sound recordings in simulcasts of between 0.0341% and 0.065% are too low because they also are based on an inappropriate starting point.
For these reasons, and subject to hearing from the parties further, we are currently of the view that it would be reasonable to include in the scheme a per stream rate as PPCA proposes, the rate selected being calculated to be less for the initial year than an appropriate equivalent percentage of revenue rate to provide an incentive to radio stations to use the per stream payment system. In common with our current conclusion about the percentage of revenue payment system, we do not consider it necessary to resolve whether this would be within the power of variation and, as part of any further hearing, invite the parties to submit a scheme which assesses an appropriate per stream payment rate on this or some similar basis.
5.11 Minimum fees
PPCA proposes minimum fees, recoupable against the licence fee payable, as follows:
Music Use:
Minimum Fee for metropolitan Stations or Regional Stations with licence area more than 2% of Australian population as per the ACMA Schedule (exclusive of GST):
Minimum Fee for Regional Stations with licence area 2% or less of Australian population as per the ACMA Schedule (exclusive of GST):
0 – 29.99%
$5,000
$1,200
30 – 49.99%
$10,000
$1,200
50 – 69.99%
$15,000
$1,200
70 – 79.99%
$20,000
$1,200
80%+
$25,000
$1,200
We do not consider the amounts proposed, particularly for metropolitan stations or regional stations with licence area more than 2% of Australian population, represent a genuine minimum fee. Instead, they represent a form of initial up-front payment of the licence fee itself. In our view, the proper purpose of a minimum fee is to ensure that PPCA’s administrative costs are covered. This is a different purpose from obtaining an up-front payment of part of the licence fee. While we do not accept Mr Samuel’s view that there should be no minimum fee at all (because it is a legitimate object to ensure that the costs of administering the scheme are covered), we are persuaded that the fees PPCA proposes are not reasonable in the circumstances.
As matters presently stand we cannot see any reason to require payment of a minimum fee greater than $1200 for any radio station irrespective of music use percentage, which should be able to be recouped against the licence fee payable.
5.12 PPCA’s concession
As part of its scheme PPCA proposed a concession so that any regional radio station with a licence area of less than 2% of the Australian population could opt out of the per stream payment system, and all associated reporting requirements, if it imposed a cap on the number of simultaneous internet connections available of 100. For such stations a flat fee of $5000 per year would apply.
If a per stream payment system alone were to be imposed we would consider PPCA’s concession to be reasonable and appropriate. However, as we propose that every radio station can choose whether to pay on a per stream or percentage of revenue basis we can see no justification for this concession.
5.13 Record keeping requirements
Consistent with the conclusions above in respect of the technical and practical issues to which a per stream payment system gives rise, we see nothing unreasonable in PPCA’s proposed record-keeping requirements for a per stream approach.
Insofar as the percentage of revenue payment system is concerned, the issue is affected by our views about the appropriate form of the licence which we deal with below.
5.14 The form of the licence
We accept PPCA’s submission that the relevant licensee is not CRA but each individual radio station.
Consistent with this approach, we make the following comments on the form of licence proposed:
(1)CRA is not a relevant party to any licence granted under the scheme. Accordingly, the principal form of agreement proposed by CRA is inappropriate.
(2)In respect of the alternative version of licence which CRA proposed, there should be no requirement that any radio station be a member of CRA reflected in the licence.
(3)There should be no requirement that any radio station appoint CRA as its agent.
(4)There should be no requirement for a CRA Collection Agreement between CRA and radio stations.
(5)There should be no Gross Licence Fee. Instead each radio station should be required to pay the fee it owes to PPCA on the basis of a percentage revenue or per stream rate as decided by the radio station.
(6)If there are confidentiality concerns about radio stations disclosing gross revenues to PPCA the licence can provide for the required information to be provided to an independent auditor (not being CRA).
(7)Subject to these matters, there should be nothing in the licence which prevents a radio station from appointing CRA as its agent, not for the purpose of being responsible for a collection agreement based on a Gross Licence Fee, but to assist the radio station to comply with the licence.
6. INTERIM CONCLUSIONS
It is convenient to express our interim conclusions in a propositional form. Our conclusions about the kind of scheme we consider would be reasonable in the circumstances are necessarily provisional because, as explained above, we consider the parties have a right to be heard about the scheme we have in mind and there should be an opportunity, if either party is so minded, for the referral of a further scheme to the Tribunal so that any issue about the power of the Tribunal to vary the schemes which have to date been referred to it need not be resolved.
Our interim conclusions are as follows:
(1)None of the schemes which have been referred to us are reasonable in the circumstances.
(2)One reason none of the schemes are reasonable is that they require payment to be made on either a per stream basis or a percentage of revenue basis and do not give radio stations the choice of which payment system they prefer. In circumstances where, first, there is a long history of payment for use of sound recordings on a percentage of revenue basis and such payments will continue under the PPCA-CRA Broadcast Agreement but also, second, there are material advantages to all parties to payment on a per stream basis, a reasonable scheme in the circumstances is one which provides a choice of payment method. The choice should be that of the radio station alone and should not operate on a “greater of” basis which would encourage the kind of gamesmanship which PPCA was concerned about for payments on a percentage of revenue basis.
(3)Another reason all of the schemes referred to us were not reasonable in the circumstances was CRA’s schemes proposed a value for the simulcast right which was too low and PPCA’s scheme proposed a value for that right which was too high.
(4)The polarisation of the parties about the appropriate kind of payment system and the value of the right for which payment is to be made extended to all of their forensic decisions. As such, and despite a request by the Tribunal, CRA’s evidence did not engage meaningfully with PPCA’s case (so that CRA did not suggest any per stream rate that might represent the proper value of the simulcast right) and PPCA’s evidence did not engage meaningfully with CRA’s case (so that PPCA did not suggest any percentage of revenue rate that might represent the proper value of the simulcast right). Instead, in a forensic version of mutually assured nullification, PPCA contended that there was no rational basis upon which a reasonable percentage of revenue rate could be assessed and CRA contended that there was no rational basis upon which a reasonable per stream rate could be assessed. Neither seemed concerned that if they were both right, the result would be that the Tribunal could do nothing other than reject all schemes resulting in substantial wasted time, cost and effort. We have tried to avoid that result but the consequences of so doing gives rise to issues of procedural fairness and the Tribunal’s power to vary a scheme.
(5)As a result of the unhelpful position of the parties, in order to determine a scheme which would be reasonable in the circumstances, we have been forced to consider different methods from those proposed in the schemes the parties devised. While the result of this consideration is a scheme which permits payment on a per stream rate (as PPCA proposed) or a percentage of revenue rate (as CRA proposed), albeit the per stream rate being lower than PPCA sought and the percentage of revenue rate being higher than CRA sought, the parties must, in fairness, be given an opportunity to be heard in this regard and, if they see fit, an opportunity to address any issue about the Tribunal’s power to confirm such a scheme, if necessary, by referral of another scheme to the Tribunal.
(6)The basic elements of a percentage of revenue payment which we currently consider would be reasonable in the circumstances involve these steps:
(a)acceptance that the sound recording right has at least the same value as the musical works right;
(b)identification of the current average simulcast audience (10.7%) to which must be added a percentage to reflect the unique benefits of simulcasting and the advantages it provides to radio stations; and
(c)applying that percentage to the rates for musical works in the APRA-CRA Agreement to derive percentage of revenue rates for simulcasting.
(7)The basic elements of a per stream payment which we currently consider would be reasonable in the circumstances involve these steps:
(a)acceptance that the per stream rates in the NAB-SX Agreement and the various webcasting agreements are inapplicable and too high for simulcasting by radio stations in Australia;
(b)acceptance that the per stream rate should be generally equivalent to the percentage of revenue rate we consider reasonable;
(c)provision for some incentive to radio stations to elect to pay on a per stream basis by giving an initial discount to the per stream rate which ceases after, say, one year, when the per stream rate should increase to be equivalent to the percentage of revenue rate; and
(d)acceptance that PPCA’s reporting requirements are basically appropriate.
(8)Licences under the scheme should be between PPCA and each radio station. There is no requirement for a head agreement between PPCA and CRA. Moreover, the licence should not require the radio station to be a member of CRA. Nor should the licence provide for CRA to collect and distribute payments based on a gross licence fee concept. Rather, the obligation to pay should be that of each individual radio station. Concerns about confidentiality should be resolved, if need be, by interposing an independent auditor. The licence can provide for the radio station to appoint an agent for compliance purposes but should not require any radio station to do so.
We propose to adjourn the matter for a period of not less than 21 days so the parties have an opportunity to consider these reasons and can inform us of the directions they consider appropriate at a directions hearing thereafter.
I certify that the preceding three hundred and thirty-three (333) numbered paragraphs are a true copy of the Reasons for Determination herein of the Honourable Justice Jagot and Dr Rhonda Smith . Associate:
Dated: 28 August 2015
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