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S. HRG. 107–914

COPYRIGHT ROYALTIES: WHERE IS THE RIGHT

SPOT ON THE DIAL FOR WEBCASTING?

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MAY 15, 2002

Serial No. J–107–80

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

MARIA CANTWELL, Washington 

JOHN EDWARDS, North Carolina 

ORRIN G. HATCH, Utah 

STROM THURMOND, South Carolina 

CHARLES E. GRASSLEY, Iowa 

ARLEN SPECTER, Pennsylvania 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

SAM BROWNBACK, Kansas 

MITCH MCCONNELL, Kentucky 

BRUCE A. COHEN, Majority Chief Counsel and Staff Director 

SHARON PROST, Minority Chief Counsel 

MAKAN DELRAHIM, Minority Staff Director 

(III)

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah ............................ 9

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 1

prepared statement .......................................................................................... 122

WITNESSES 

Navarro, Dan, American Federation of Television and Radio Artists, New 

York, New York .................................................................................................... 16

Potter, Jonathan, Executive Director, Digital Media Association, Washington, 

D.C. ........................................................................................................................ 5

Rose, William J., Vice President and General Manager, Arbitron Webcast 

Services, New York, New York ........................................................................... 7

Rosen, Hilary, Chairman and Chief Executive Officer, Recording Industry 

Association of America, Washington, D.C. ......................................................... 3

Schliemann, Frank, Founder, Onion River Radio, Montpelier, Vermont ........... 12

Straus, Billy, President, Websound, Inc., Brattleboro, Vermont ......................... 14

QUESTIONS AND ANSWERS 

Responses of Dan Navarro to questions submitted by Senator Biden and 

Senator Cantwell .................................................................................................. 34

Responses of Jonathan Potter to questions submitted by Senator Biden and 

Senator Cantwell .................................................................................................. 38

Response of Bill Straus to a question submitted by Senator Biden .................... 41

Responses of Hilary Rosen to questions submitted by Senator Biden and 

Senator Cantwell .................................................................................................. 43

Response of William J. Rose to a question submitted by Senator Cantwell ...... 52

Response of Frank R. Schliemann to a question submitted by Senator Biden .. 55

Responses of Intel Confidential, Attorney Client Work Product to questions 

submitted by Senator Leahy ............................................................................... 56

SUBMISSIONS FOR THE RECORD 

Alben, Alex, Vice President, Government Affairs, RealNetworks, Inc., Seattle, 

Washington, statement ........................................................................................ 67

Cablemusic Networks, John Hilbronn, statement ................................................ 73

Choiceradio.com, Valerie Star, President, California, statement ........................ 76

CyberRadio2000.com, Salvatore Lepore, George Halstead, and Jimmy Perna, 

statement .............................................................................................................. 79

DH NetRadio, Mark Douglas, statement ............................................................... 81

Free and Clear Broadcasters Association, Toby Sheets, statement .................... 84

Future of Music Coalition, Jenny Toomey, Executive Director; Michael Bracy, 

Director, Government Relations; Walter McDonouh, General Counsel; Kristin Thomson, Research Director; Brian Zisk, Tecnologies Director, Washington, D.C. ........................................................................................................... 86

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah, letter ................. 96

Independent artists and recording labels, joint statement .................................. 100

Internet Radio Hawaii, Robert Abbett, statement ................................................ 105

Intprogramming Incorporated, Robert Pullman, President, Renton, Washington, statement ................................................................................................. 111

Hounddogradio.com, Frank Coon, Owner and Operator, statement ................... 118

Jolt Radio, Mike Kramer, Owner, CEO, Des Moines, Iowa, statement .............. 119

Maddog Rock Radio, Don Mangiarelli, statement ................................................. 124

Page

IV

Megarock-Radio. Com, Robert Winklemann, statement ....................................... 125

Navarro, Dan, Major Label and Independent Label Featured Performer, NonFeatured Performer, Sound Recording Copyright Owner and Songwriter, 

statement .............................................................................................................. 128

National Association of Broadcasters (NAB), Edward O. Fritts, President 

& CEO, Washington, D.C. ................................................................................... 136

National Media Networks, Inc., Kevin H Amstutz and Dino V. Pileggi, statement ...................................................................................................................... 142

Live 365 (The Netherlands), Ludwig Th. Dirsz, statement ................................. 161

Potter, Jonathan, Executive Director, Digital Media Association, Washington, 

D.C., prepared statement .................................................................................... 143

Radiostorm.com, Joseph Naro, statement ............................................................. 162

Recording Artists Coalition, Don Henley, statement ............................................ 164

Reality Radio, Inc., Glenn G. Waddell, Biringham, Alabama, statement ........... 170

Rose, William J., Vice President, General Manager, Arbitron Webcast Services, statement ...................................................................................................... 172

Rosen, Hilary, Recording Industry Association of America, statement .............. 175

Onion River Radio, Frank Schlieman, Founder, statement ................................. 192

Solvent Loud Radio, Thomas McAllister, statement ............................................ 200

SomaFM, Rusty Hodge, General Manager and Program Director, San Francisco, California, statement ................................................................................. 202

Spacial*Audio Solutions, Bryan Payne, statement ............................................... 206

Twangcast.com, Mike Hays, statement ................................................................. 216

WCPE, Deborah Proctor, statement ....................................................................... 217

WGOR, Lee Hauser, General Manager, statement ............................................... 219

Wall Street Journal, Julia Angwin, article ............................................................ 221

Warpradio.com, Denise Sutton, CEO, statement .................................................. 223

Webcaster, James J. Brust, statement .................................................................. 226

Websound.com, Billy Straus, President, Brattleboro, Vermont ........................... 227

Webcaster, Joslyn Tillar, statement ....................................................................... 232

Webcaster, Elbert Dee Walston, statement ........................................................... 233

(1)

COPYRIGHT ROYALTIES: WHERE IS THE 

RIGHT SPOT ON THE DIAL FOR WEBCASTING? 

WEDNESDAY, MAY 15, 2002

UNITED STATES SENATE, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The committee met, pursuant to notice, at 9:38 a.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Patrick J. Leahy, 

chairman of the committee, presiding. 

Present: Senators Leahy and Hatch. 

OPENING STATEMENT OF HON. PATRICK J. LEAHY,

A U.S. SENATOR FROM THE STATE OF VERMONT 

Chairman LEAHY. Good morning, everyone. Senator Hatch has 

been delayed, but we are going to have to start because with the 

later events this morning with the President, a number of us will 

have to be there. 

So I am going to urge all witnesses to stay to the 5 minutes. 

Their full statements will be in the record. Feel free to hit us with 

the points you would want the most. The reason I am saying 5 

minutes—one, two, three, four, five six people here; that is 30 minutes. If anybody goes over, unfortunately the time will have to 

come from the person next to you, so think about that. 

The Internet, as we know, has become the emblem of the Information Age. There are actually some worthwhile things on the 

Internet, if one cares to search and search and search, but it is also 

very helpful. I was getting e-mails last night until after midnight 

from my staff, and I noticed when I logged on somewhere between 

4:30 a.m. and 4:45 a.m., there were a number of others, as well as 

from constituents in Vermont. 

I like the Internet. I also like the creative spirits who are the 

source of the music and films and books and news and entertainment content that enrich our lives and energize our economy and 

influence our culture. I am impressed by the innovation of new online entrepreneurs and I want to do everything possible to promote 

the full realization of the Internet’s potential. 

I think if we have a flourishing Internet, with clear, fair and enforceable rules governing how content may be used, that can benefit all of us, including those entrepreneurs who want us to become 

new customers and the artists who create the content we value. 

The advent of webcasting, streaming music online rather than 

broadcasting over the air as traditional radio stations do, is really 

one of the more exciting and quickly growing of the new industries 

that have sprung up on the Web. Many new webcasters, unconVerDate Mar 21 2002 11:46 Apr 30, 2003 Jkt 085887 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\HEARINGS\86043.TXT SJUD4 PsN: CMORC
2

strained by the technological limitations of traditional radio transmissions, can and do serve listeners across the country and around 

the world. 

In some of the countries ravaged by war, they put in a telecommunications system and they kind of leap-frog everybody else. 

They go into wireless systems that work far better, sometimes because they start anew and they are not held back by the way 

things have been done before. 

They provide new and specialized niches not available over the 

air, new and fringe artists, someone who does not enjoy a spot on 

the Top 40. They can bring music of all types to listeners who, for 

whatever reason, are not being catered to by traditional broadcasters. My taste in music may be different than others, and so 

forth. 

We have been mindful on this committee that has the Internet 

is a boon to consumers, we can’t neglect the artists who create and 

the businesses which produce the digital works and make the online world so fascinating. There is not going to be any content for 

the online world if our artists and producers and those who create 

it aren’t compensated for their own work. 

With every legislative effort to provide clear, fair, and enforceable intellectual property rules for the Internet, a fundamental 

principle to which we have adhered is that artists and producers 

of digital works merit compensation for the value derived from the 

use of their work. 

In 1995, we enacted the Digital Performance Right in Sound Recordings Act, which created an intellectual property right in digital 

sound recordings, giving copyright owners the right to receive royalties when their copyrighted sound recordings were digitally 

transmitted by others. 

We created a compulsory license so that webcasters could be sure 

of the use of these digital works. We directed that the appropriate 

royalty rate could be negotiated by the parties or determined by a 

Copyright Arbitration Royalty Panel, or CARP. I didn’t know how 

apt that acronym might become later on. 

Most webcasters chose to await the outcome of the Arbitration 

Panel proceeding, and now that the finding has been reached and 

is being reviewed by the Librarian of Congress, the industry is in 

an uproar. Nobody seems happy with the outcome of the arbitration. All of the parties have appealed. 

The recording industry and artist representatives feel that the 

royalty rate, which is based on the number of performances and listeners rather than on a percentage-of-revenue model, is too low. 

Many of the webcasters have declared that this per-performance 

approach and the rate attached will bankrupt the small operations 

and drain the larger ones. An outcome like that could be unfortunate not only for them, but also for the artists, labels, and consumers, who would all lose important legitimate channels. I have 

heard complaints from all sides about the fairness and completeness of processes and procedures in the arbitration. 

The Librarian of Congress can do three things. He can approve 

the decision which nobody seems to like. He could order a new proceeding, which would require considerably more time and expense 

for the participants, or he could reject the decision and set the rate 

3

himself without further input, and any aggrieved party could appeal. 

So it brings me to the question I want each of our witnesses 

today to consider. Why can’t everyone—Congress, artists, labels, 

and webcasters alike—take the CARP as a genuine learning experience and sit down to determine what is the next best step? If the 

parties could avoid more time and expense and reach a negotiated 

outcome more satisfactory, that would be preferable, I believe anyway. 

There are also lessons for Congress here as well, especially lessons about how compulsory licenses are no panacea and how we 

might reconsider the arbitration procedures and the guidance given 

to rate-setters in the DMCA. 

Thee is a lot more in my statement. I am not going to take your 

time to read it all. We will put it in the record. 

[The prepared statement of Senator Leahy appears as a submission for the record.] 

Chairman LEAHY. We will begin with Ms. Hilary Rosen, who is 

the Chairman and Chief Executive Officer of the Recording Industry Association of America. 

Ms. Rosen, you are no stranger to this committee and all of us 

benefit from it when you are here. 

STATEMENT OF HILARY ROSEN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, RECORDING INDUSTRY ASSOCIATION OF 

AMERICA 

Ms. ROSEN. Thank you. Good morning, Mr. Chairman, members 

of the staff. I will just—you said you are pressed for time—cut my 

statement in half, you will be pleased to know. So I assume that 

will go in the record. 

I would also like to put in the record a statement of Gary 

Himelfarb, from RAS Records, representing the Association of Independent Labels, who wanted to be here today. 

Chairman LEAHY. They will both go in the record in full. 

Ms. ROSEN. Let me just say what I hope is obvious, which is that 

we want webcasters to succeed. The application of this technology 

is exciting. It has energized music lovers and fans, some of whom 

have turned themselves into webcasting entrepreneurs, and it has 

also provided a new business opportunity for some of the world’s 

largest and most innovative media companies. If webcasters don’t 

succeed, artists and record companies stand to lose an important 

new revenue stream. 

For years, artists and record companies have been denied the 

performance rights enjoyed by other copyright owners in the 

United States, and indeed by artists and record companies around 

the world. That situation has been well documented for its inequity 

and was significantly addressed in 1995 by this Congress. 

New revenue streams are more important than ever in a world 

where new technologies are dramatically changing the way people 

get and listen to music. We worked closely with this committee and 

others in 1998 when Congress enacted legislation guaranteeing in 

an unprecedented manner that a new business called webcasting 

would have access to blanket licenses for sound recordings on a 

compulsory basis. 

4

We invested millions of dollars creating a collection and distribution system that would significantly ease webcasters’ burden of 

using hundreds of thousands of different recordings in their programming, and artists and record companies engaged in this activity despite the risk that payment would not come for several years 

as rates were worked in the marketplace or perhaps in a CARP 

proceeding. 

We fervently believe now, as we did then, that webcasters can 

succeed, while compensating creators of the sound recordings upon 

which their businesses are built at a fair rate. It is obvious that 

without sound recordings, there would be no webcasting business, 

a point eloquently made by the chairman. 

It is equally obvious to artists and record companies that 

webcasters were required to pay their other costs of doing business 

from day one—the cost of their rent, their hardware, their computer software, their supplies, their equipment, et cetera. 

So I recognize the issue of how much to pay for music is a complicated one, but obviously that compensation has to be determined 

by a fair process and based on the market value of the sound recordings. That was the bargain in having a compulsory license. 

We think that the recently completed CARP proceeding was fair. 

Just to comment on what you said, Mr. Chairman, we didn’t like 

the results, but we are not attacking the process. I think that is 

the difference, that we are willing to live with the result as it was. 

It was long, it was cumbersome, and it was expensive. But now, 

31⁄2 years later, artists and record labels are finally looking forward 

to actually being compensated for their works. 

I think it is important to keep a few things in mind as this hearing proceeds today. The first is that the statute actually directed 

the parties to negotiate rates in the marketplace, and a CARP proceeding was the last resort. Because webcasters had a compulsory 

license and therefore didn’t really need to negotiate a rate in order 

to get access to the music, they could avoid paying royalties for several years by not negotiating, which was fair under the statute. 

Many webcasters took advantage of this and have not paid royalties for several years as they began their businesses. In other 

words, they have already had the start-up boost to their business. 

Second, nobody was out-gunned in this process. Several large 

media companies—AOL, Viacom, Clear Channel—had many highly-paid and skilled lawyers and consultants in the CARP proceeding fighting for as low a rate as possible. Many small 

webcasters did participate and presented evidence and testified. No 

doubt, they also benefitted from the very able counsel and experts 

retained by the larger companies. Even if some webcasters did not 

participate, their views were well represented in the proceeding. 

Third, the arbitrators had a host of confidential financial information about these businesses, information that this hearing could 

never possibly unveil—things like costs and expenses and projected 

revenues and projected business plans, IPO offerings, operating expenses. In other words, the CARP had so much more detail about 

their ability to pay that it is tough, and inappropriate, I think, to 

read a newspaper or listen to rhetoric and imagine that the CARP 

somehow was just stupid and they didn’t get it. 

5

The Librarian of Congress is reviewing an unredacted version, 

which I certainly haven’t seen, of the arbitrators’ decision. That did 

have confidential financial data. I am sure that review is going to 

be thoughtful and considered, and it should be based on the extensive record. 

Congress set up this process. Let it work through without interference. We absolutely want to be productive with the webcasters 

as this decision gets implemented. We, of course, want to work productively with this committee as you look at the process for future 

proceedings, and I will be happy to answer any questions that you 

might have. 

Thank you. 

[The prepared statement of Ms. Rosen appears as a submission 

for the record.] 

Chairman LEAHY. Thank you. I will go into a number of steps 

that the CARP took. I will continue to read the newspapers, however. You never know. Every so often, like the blind pig, you actually find something worthwhile there. 

Ms. ROSEN. I confess I read them, too. 

Chairman LEAHY. I was going to say I know the distinguished 

witness reads them, and probably a heck of a lot more than the 

chairman does. 

Mr. Potter. 

STATEMENT OF JONATHAN POTTER, EXECUTIVE DIRECTOR, 

DIGITAL MEDIA ASSOCIATION 

Mr. POTTER. Chairman Leahy, thank you for inviting me to testify today on behalf of more than 20 DiMA companies that are 

webcasters and that support webcasters. 

In a factual vacuum, the CARP-proposed sound recording royalty 

rate of just over a tenth of a penny per song performed to a single 

listener may seem small. But in context, it bears no rational relationship to the economics of the broadcast, webcast, or music industries. The proposed royalty equals 78 percent of Onion River Radio’s gross revenue, while royalties to songwriters and publishers 

are less than 4 percent. 

Many other webcasters will have sound recording royalties more 

than double their entire budgets, or five times or more of their 

total revenue. For Yahoo, MTV, and other large webcasters, the 

royalty rate ensures that Internet radio, which has been embraced 

by consumers who relish diverse music offerings, will be uneconomical and likely abandoned as a viable line of business. 

Let me be clear, Mr. Chairman. The Internet radio industry is 

not seeking a subsidy or to perform music without paying creators. 

Rather, we are seeing fair pricing and fair market pricing. 

When the Digital Performance Right in Sound Recordings Act 

was enacted, this committee, to promote licensing efficiency, provided the recording industry a limited antitrust exemption to negotiate and license collectively. But to ensure that the collective did 

not over-leverage its monopoly position, the Act provided a safeguard, a Copyright Arbitration Royalty Panel, empowered to determine reasonable license rates and terms. 

When Congress expanded the performance right to webcasting in 

the DMCA, at RIAA’s urging Congress changed the standard by 

6

which the CARP determines a royalty, but it did not confer with 

the Justice Department about how the new standard dovetailed 

with the previously drawn antitrust exemption. The new standard 

eliminated all references to reasonableness or fairness and required 

royalty rates to reflect what ‘‘willing buyers would pay willing sellers in the marketplace.’’

RIAA immediately exploited this new standard. As the CARP 

concluded, RIAA offered licenses on a ‘‘take it or leave it’’ basis, almost exclusively to small, unsophisticated webcasters that paid 

negligible royalties. Why? As the Panel recognized, ‘‘this sacrificial 

conduct made economic sense only if calculated to set a high benchmark to be later imposed upon the much larger constellation of 

services.’’ In other words, the RIAA targeted an insignificant segment of the market whose peculiar circumstances prevented their 

awaiting a CARP outcome to establish what the CARP said were 

‘‘artificially high’’ and ‘‘above-market’’ prices in order to foist these 

prices on the industry as a whole. 

The CARP’s ruling resulted from a confluence of circumstances: 

first, the change to a ‘‘willing buyer/willing seller’’ standard that 

the arbitrators misconstrued not to require a competitive market 

outcome; second, RIAA’s scheme to use its antitrust exemption to 

ensure, as the sole seller of the new performance license, that the 

CARP would review an extremely limited set of ‘‘marketplace licenses.’’ Third, the restrictive CARP procedures, in particular the 

lack of notice, meaningful discovery and subpoena power, enabled 

RIAA to present a one-sided view of the so-called marketplace to 

the Panel. 

Whereas RIAA offered the Panel a royalty model based only on 

its 26 tainted licenses, webcasters offered a rate structure based on 

the well-established industry standard 50-year history of radio 

composition performance royalties. Remarkably, because the Panel 

misconstrued the new ‘‘willing buyer/willing seller’’ standard, they 

dismissed in one sentence decades of benchmarks for songwriter 

royalties. 

Unable to rely entirely on the 25 agreements that they had just 

characterized as tainted by anticompetitive conduct, the arbitrators 

instead turned to the only agreement that appeared even superficially to be the result of balanced negotiations, the RIAA’s deal 

with Yahoo. 

Unfortunately, even the Yahoo agreement was an inappropriate 

benchmark for industry-wide rates. As reflected in Yahoo’s written 

testimony to this committee, its radio service and its licensing goals 

were entirely different than virtually all other webcasters. Ninety 

percent of Yahoo’s service was retransmissions of terrestrial radio 

stations; only ten percent was original Internet programming. 

Thus, Yahoo ensured that its license rate for radio transmissions 

was as low as possible, and Yahoo was least concerned about what 

concerned the rest of the industry the most, the so-called Internetonly rate. So Yahoo did not resist when the RIAA sought to artificially inflate the Internet-only rate. The CARP though, conceding 

that Yahoo’s rate was ‘‘artificially high’’—their words—still used it 

to derive webcasting rates for the industry as a whole. 

Equally significantly, Yahoo realized that absent a deal with 

RIAA, its arbitration costs would exceed the entire amount of the 

7

royalty. Accordingly, Yahoo made the rational choice to settle at 

above-market rates and save the extremely high costs of the arbitration. 

Mr. Chairman, in 1998 DiMA was agreeable to having its 

webcasting member companies pay record companies and recording 

artists a performance royalty, so long as the statute was mutually 

supportive of the nascent Internet radio industry, as Congress intended. It cannot possibly be fair or reflect a fair market to have 

the sound recording copyright owners be paid 7 to 20 times, or 

more, than what songwriters are paid. Nor is it fair that a statute 

intended to promote Internet radio, as well as recording artists, results in a royalty that will devastate a nascent industry that Congress thought it was helping to promote, thereby resulting in no 

royalties or minimal royalties to artists. 

Thank you. 

[The prepared statement of Mr. Potter appears as a submission 

in the record.] 

Chairman LEAHY. Thank you. 

I will also place in the record an article from the Wall Street 

Journal this morning on music royalties written by Julia Angwim. 

Ms. Rosen, Mr. Potter, Mr. Schliemann and others are mentioned 

in it. I have found the Wall Street Journal news pages tend to be 

quite accurate and I toss that in there for what it is worth and others can read it. 

I would also point out, and I would hope all witnesses know 

this—Mr. Rosen and others who have testified here before understand that once the hearing is over if you find items that you wish 

had been included, feel free to send them to us. If they are not too 

lengthy, they will be included. 

By the same token, if you find in your own testimony as you look 

at it that there were another few sentences you meant to have 

said—as often happens, as you get on the elevator, you think of a 

question and what you should have added. This is not a ‘‘gotcha’’ 

kind of hearing; this is to help the committee. So just send those 

on to us and they will be included in the record. 

After all, I take the advantage of taking care of any Vermont colloquialisms or syntax that nobody would understand outside our 

State and we clean those up in the record. So at least we can offer 

the same courtesy to you. 

Mr. Rose. 

STATEMENT OF WILLIAM J. ROSE, VICE PRESIDENT AND 

GENERAL MANAGER, ARBITRON WEBCAST SERVICES 

Mr. ROSE. Mr. Chairman, thank you. I am Vice President and 

General Manager of Arbitron Webcast Services and I thank you for 

the opportunity to speak with you today. 

Arbitron has been in the business of audience measurement and 

has 50 years of leadership and experience in the business. Since 

1998, Arbitron, together with Edison Media Research, conducted 

eight studies on how consumers use the Internet and streaming. 

You have several qualified panelists here today with a wide variety of backgrounds, so I will concentrate my comments on 

Arbitron’s areas of expertise, specifically the audience to traditional 

over-the-air media, how consumers use the Internet and streaming, 

8

and our general knowledge of advertising sales, planning, and buying processes. 

Consumer use of streaming media has grown substantially in a 

short period of time. According to our first study in July 1998, 6 

percent of Americans had ever listened to radio stations on the 

Internet. Arbitron’s latest study from January 2002 shows that 25 

percent have ever listened now to online radio stations. 

Consumer use of Internet audio and video is now at an all-time 

high, with an estimated 80 million Americans having ever tried it. 

Our research indicates that broadband will stimulate even greater 

usage, because people with super-fast, always-on Internet connections use far more streaming media than those with dial-up connections. 

Despite this remarkable growth, streaming media is still in its 

infancy compared to traditional broadcast media. As of January 

2002, 9 percent of the population aged 12 and over used streaming 

audio or video in the past week. In fall 2001, 95 percent of people 

over the age of 12 had listened to radio during an average 7-day 

period of time. That is 9 versus 95 percent. 

Streaming media provides a valuable service by enabling consumers to have a variety of choices that are not available on the 

traditional media. Traditional media limit the types of music the 

play over the air, while streaming media can expose consumers to 

a wide variety of music. For example, classical music is not found 

on commercial radio in most markets today, but it is widely available on the Internet through streaming media. 

The most active streaming media users are those who listen or 

watch each week. Among this group, nearly two-thirds agree that 

they use the Internet to listen to audio content they cannot get otherwise through traditional over-the-air media. 

Arbitron analyzed the proposed digital rights fees from the Copyright Arbitration Royalty Panel in an effort to understand the impact of the proposed fees and to put those fees into perspective. For 

example, if one of the top rated music stations in New York City 

rebroadcasted its programming online and it had the same audience on the Internet that it does over the air, that station would 

pay approximately $15 million a year in sound recording fees. 

Thus, the proposed fees would be more than 25 percent of what 

that station currently realizes from selling traditional over-the-air 

advertising. If that same online station had original programming 

instead of a rebroadcast, its fees would be approximately $30 million, or over half of the revenue from its over-the-air advertising 

sales. 

While broadcasters pay licensing fees to composers of music, currently they do not pay sound recording fees to artists and labels. 

However, if the proposed fees were applied to an over-the-air radio 

audience, the royalty would create an impact that would significantly hinder the financial viability of an already mature and 

healthy medium. Broadcasters would not be able to sustain a cost 

that amounts to 25 to 50 percent of their current over-the-air revenue. 

The webcasting industry is in its infancy, with little revenue and 

profit at this stage of the market’s development. If music radio had 

9

to face similar fees in its infancy, it is highly unlikely it would have 

grown into the business it is today. 

Arbitron and Edison recently conducted a poll from May 2 to 

May 6 of this year to understand consumer awareness and attitudes regarding audio streaming and digital rights issues. We 

spoke with 162 people who listen to Internet audio on a monthly 

basis. These are the regular audio streamees. Nearly two-thirds 

would be upset if the Web radio stations they normally listen to 

permanently stopped offering the ability to listen over the Internet. 

Two-thirds support action by Congress to address the proposed 

online licensing fees in ways that help Internet audio webcasters 

afford to continue streaming music. Nearly 4 in 10 feel strongly 

enough about the threat to Internet radio to indicate they would 

be willing to write their Congress representatives in support of 

Internet audio webcasters regarding licensing and performance 

fees. 

While webcasting’s audience is growing rapidly, it is still small 

compared to traditional media. Arbitron believes that all parties 

should work together to enable the webcasting media to grow a 

critical mass of audience big enough to support significant ad revenue. A broad distribution of programming, greater competition, 

and diversity of voices on the Internet will help to achieve this objective. 

Thank you. 

[The prepared statement of Mr. Rose appears as a submission for 

the record.] 

Chairman LEAHY. Thank you very much, Mr. Rose. 

Two announcements. This hearing is being webcast live over the 

Internet from the Judiciary Committee Web site using Real Video. 

Before we go to Mr. Schliemann, I am going to yield to the distinguished senior Senator from Utah, my friend, Senator Hatch. He 

and I have worked together on a number of these digital issues actually for as long as they have been on the radar screen. 

Orrin, I think we have put a few of those digital issues on the 

radar screen, good or bad. 

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 

THE STATE OF UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. I apologize for 

being a little late. I am in the middle of this trade promotion authority battle on the floor as well, so I had to go to a series of meetings on that before arriving here. 

I am grateful to you for holding this hearing today. I think it is 

important to continue our ongoing conversation about digital entertainment in general, and about Internet distribution of music specifically. I believe our discussion today needs to be viewed in a larger context of ongoing developments in the online music sector that 

we have been monitoring for the last couple of years. 

For about 2 years now, Mr. Chairman, we have been encouraging 

the exploitation of technology like the Internet to deliver the wide 

range of music that listeners want in a user-friendly way. We have 

encouraged online experimentation of broad licensing of popular 

content to foster the growth of this medium. We have hoped for the 

harnessing of technology and the creativity of intermediaries to creVerDate Mar 21 2002 11:46 Apr 30, 2003 Jkt 085887 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\HEARINGS\86043.TXT SJUD4 PsN: CMORC
10

ate synergies that allow artists and their audiences a new and closer experience. 

For the better part of 6 or 7 years, since creating a digital performance right in sound recordings in the copyright law with the 

Digital Performance Right Act of 1996, I have repeatedly expressed 

the hope that we were on the verge of a well-stocked, ubiquitous, 

and user-friendly celestial jukebox that not only would allow music 

fans easy access to music they love, but provide artists greater freedom to interact with their fans and increased income from the exploitation of their works. 

Let me suggest with some substantial understatement that we 

are not there yet. Indeed, over the past 2 years of litigation and 

some licensing activity, piracy over peer-to-peer networks has gotten worse and the online music market has gotten more consolidated. I believe this is the wrong direction. 

Consequently, Mr. Chairman, I have sent you a letter outlining 

my concerns and suggesting legislative items for us to develop that 

can help the online music market grow for music fans and help to 

ensure that more of the benefits of online opportunities accrue to 

the artists. 

I would ask that my letter to you be included as part of the 

record of this hearing. 

Chairman LEAHY. The letter is excellent. I have read it and it 

will be part of the record. I think maybe toward the latter part of 

this week or over the weekend, you and I could sit down and discuss it more. 

Senator HATCH. That would be great. 

Chairman LEAHY. You raise some very good points. 

Senator HATCH. Among the topics I think we should discuss are 

the following. First, artists ought to be able to exploit or benefit 

from the works that are not being exploited by the labels that currently hold the copyright, such as out-of-print works. 

Second, artists ought to be paid their online revenues directly, 

and those revenues should not be unfairly discounted because of 

traditional but inapplicable offsets. 

Third, artists should be able to keep their own online identifiers, 

their domain names, so they can more directly control their relationship with their fans online. 

Fourth, we need to explore how to make copyright ownership information available through the Copyright Office more accessible 

and usable through the Internet. 

Fifth, we must help ensure that market power and content is not 

unfairly aggravated, to the detriment of other legitimate distributors of online music who seek fair licensing opportunities. 

Finally, Mr. Chairman, I am glad that we have an artist viewpoint represented at this hearing. Mr. Navarro represents many, 

many artists who are also the smallest of small business people 

who hope to enjoy some of the benefits digital distribution happens 

to offer. 

To round out the input of artists in this process, Mr. Chairman, 

in addition to Mr. Navarro’s testimony here today, I received a letter from Mr. Don Henley on behalf of the Recording Artists Coalition, submitting written testimony from this hearing, and also outVerDate Mar 21 2002 11:46 Apr 30, 2003 Jkt 085887 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\HEARINGS\86043.TXT SJUD4 PsN: CMORC
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lining briefly some broader issues that we should consider as we 

continue our look at this industry. 

I would ask that this letter and statement be included in the 

record of this hearing. 

Chairman LEAHY. Of course, and this committee has relied on 

testimony and comments from Mr. Henley a number of times. He 

is someone that a number of us know personally and have relied 

on. I would be happy to put his letter and statement in. 

Senator HATCH. I have a lot of respect for him. He stands up for 

the artists like hardly anybody I know, and he is a reasonable person as well. Although not all of his ideas perhaps are readily workable, he is continually bombarding the committee with good ideas 

that we ought to consider. 

Without these artists, both famous and not so famous, there 

would be no music to distribute online and no businesses to distribute it. Our lives are richer because of their work and, whatever 

we do, we need to ensure that they continue to have the incentive 

necessary to create great music and to share their music with us, 

irrespective of the medium that brings it to us. I also don’t want 

to hurt the major music distribution companies, but we have to 

somehow find a way of helping everybody on this matter, and most 

of all the American consuming public. 

With that, Mr. Chairman, I look forward to our continued conversation on these issues. 

Chairman LEAHY. Thank you. I had written also to Mr. Henley 

and told him I appreciated his views because we had talked about 

this hearing. 

Mr. Schliemann is here from Onion River Radio. Now, I know 

that you are going to be eager to know this, Senator Hatch. Onion 

River is also known by its Native American name, the Winooski, 

and the Winooski River runs straight through Montpelier. I was 

born on the banks of the Winooski River, in Montpelier. 

Senator HATCH. I am starting to worry about it already, I will 

tell you. 

[Laughter.] 

Chairman LEAHY. I grew up there in a home that was literally 

on the banks of the river. We used to sometimes have to run when 

the floods would start. I lived there until I got married, 40 years 

ago this summer. 

I knew you wanted to know that and you will put this now on 

your list of things to look at when you come to Vermont with me, 

right? 

Senator HATCH. That was quite interesting to me. Winooski. 

Chairman LEAHY. Winooski. 

Senator HATCH. Winooski. 

Chairman LEAHY. Senator Hatch and I are planning trips to 

Vermont and Utah. 

Senator HATCH. I am just afraid, though, once he goes to Utah 

he may not want to go back to Vermont. That is the only problem. 

Chairman LEAHY. He always gets me. 

Senator HATCH. Vermont is beautiful. 

Chairman LEAHY. Mr. Schliemann. 

12

STATEMENT OF FRANK SCHLIEMANN, FOUNDER,

ONION RIVER RADIO 

Mr. SCHLIEMANN. Chairman Leahy and members of the committee and staff, I want to thank you for the opportunity to discuss 

the proposed sound recording royalty rate released by the Copyright Arbitration Royalty Panel and the devastating effect it will 

have on the webcasting industry. 

Onion River Radio is an Internet-only radio station located in 

Montpelier, Vermont. Because the rate is a flat rate based on the 

number of times a listener hears a song performed, Onion River 

Radio and other Internet radio stations must pay for every additional listener. 

Unless the Librarian of Congress or Congress itself includes a 

percentage-of-revenue alternative similar to what we pay songwriters and music publishers for the right to perform their copyrighted music, the recommended rate will force Internet radio to 

close its doors. I do not believe that this is what Congress intended 

when granting webcasters a statutory performance license under 

the DMCA. 

On Onion River Radio, listeners can hear lesser-known artists 

mixed in with more established artists. Local artists are also featured in regular rotation. We are a media sponsor of local community events. Our advertisers are local advertisers. In short, the 

Internet makes it possible to listen to Onion River Radio anywhere 

in Vermont and to broadcast Vermont to the world. 

Here is the catch–22: In order to increase my revenues, I need 

to build a much larger audience, but I can’t afford to build my audience under the CARP per-performance rate. To explain, we need 

a large number of listeners to attract local advertisers. We also 

need a large number of listeners to ensure that those advertisers 

see results. In a small market, it is crucial that advertisers see a 

return on their investment, or else they will not continue to spend 

money on our station. 

The advertising rate for a 60-second commercial on Onion River 

Radio is only $10. Our advertising rates have to stay low in order 

to compete with local FM stations. We cannot generate the same 

amount of revenue as a station in New York City, but because the 

rate is a flat rate based on ratings, we will have to pay the same 

per-song fee. 

I have 10 years’ experience in FM radio broadcasting. I saw the 

opportunity to build an Internet-only radio station, while keeping 

costs to a minimum. At $250 a month, bandwidth is our single 

largest expense. From January to March 2002, our composition performance fees to songwriters and music publishers will total 

$170.50. In contrast, if the CARP decision is approved by the Librarian of Congress, Onion River Radio will pay a sound recording 

performance fee for the same period that is almost 12 times what 

we pay to ASCAP, BMI, and SESAC combined. 

Over the last 6 months, the total time spent listening to Onion 

River Radio has doubled. Under the CARP recommendations, so 

would the sound recording royalty. But as I explained, we cannot 

grow our revenue to keep up with the royalty obligations. We will 

be bankrupted by royalties. 

13

We have done everything right. My background in music programming, computer networking, and engineering has enabled me 

to create a small business with very little overhead. Our ratings 

are growing fast and advertisers are starting to take notice. The future of my business should not be determined by an exorbitant flat 

per-performance rate. 

We are not asking for a free ride from record companies and recording artists, but I cannot built a webcasting business if Onion 

River Radio must pay a royalty on a per-performance basis that is 

currently 78 percent of my gross revenue. 

What webcasters need from the Librarian of Congress or from 

the Congress itself is a royalty rate at the established ASCAP, 

BMI, and SESAC standard rates, 31⁄2 percent of our revenue, and 

a reasonable minimum fee. A percentage-of-revenue royalty formula is fair to all webcasters, regardless of market size. 

Mr. Chairman, this issue is critical to the survival of Onion River 

Radio and hundreds of other Internet radio stations. This decision 

affects the future of the Internet webcast medium itself. Internet 

webcasting technology enables a small business like mine to create 

a compelling local broadcast medium that promotes local artists 

and interests to Vermont and communities around the world. If we 

cannot afford the royalties, Internet radio will not exist. 

When Congress enacted a statutory webcasting license, I believe 

Congress was saying that the future of Internet radio should not 

be controlled by the recording industry. If this committee’s intent 

was to encourage the growth of new technology, then the 

unaffordable rates proposed by the CARP will have the opposite effect. 

I urge the committee and members of Congress to save my industry. Please help prevent these calamitous rates from being implemented. 

Thank you. 

[The prepared statement of Mr. Schliemann appears as a submission for the record.] 

Chairman LEAHY. Thank you very much. 

Artists are also represented on the panel. RIAA had also suggested that Billy Straus, of Websound, Inc., that happens to be in 

Brattleboro, Vermont—now, that is on the Connecticut River, Senator Hatch. The Connecticut is the natural boundary between the 

eastern State of New Hampshire and the western State of 

Vermont. 

Mr. Straus has been nominated for Emmys for his musical direction work on TV. He was a nominated for a Grammy, I think, this 

year for producing the Broadway cast album of ‘‘The Full Monty.’’

Am I correct that you mixed that in Putney, Vermont? 

Mr. STRAUS. Yes, sir. 

Chairman LEAHY. This is to prepare you for that trip. Putney is 

a very small town where the Putney School came from and is. It 

also was the home of the longest-serving Senator from Vermont, 

George Aiken, who became Senator the year I was born and served 

until I arrived, for whatever that is worth. 

Mr. Straus. 

14

STATEMENT OF BILLY STRAUS, PRESIDENT, WEBSOUND, INC. 

Mr. STRAUS. Chairman Leahy, Senator Hatch, thank you very 

much for inviting me to appear before you today as a citizen of 

Vermont, Senator Leahy’s great home State. 

I am the President of Websound, a small webcaster based in 

Brattleboro. We provide online webcasts to consumers via the Web 

sites of our commercial clients, which include brands such as 

Volkswagen, Eddie Bauer, and Pottery Barn. I started Websound 

in my barn in the spring of 2000. 

On the screens, you are seeing and hearing a real-time webcast 

originating from Websound servers. I thought it might be helpful 

to quickly demonstrate for you what we do and how we do it. This 

particular program, ‘‘Radio VW,’’ is produced in Brattleboro for our 

client Volkswagen. The listener can select from four different channels of music and continue to listen after leaving the Volkswagen 

site. Other than Volkswagen’s branding, there are no commercials, 

just eclectic, interesting music programmed in a way reminiscent 

of the best of free-form FM radio. 

My passion has always been for music of all styles and genres, 

and though my role at Websound is that of entrepreneur, I am first 

and foremost a musician and a composer. In the context of this 

hearing, it is my hope that perhaps this unique perspective may be 

somehow useful to the committee. 

I would like to make three main points today in my testimony 

pursuant to the issues at hand. The first is simple enough: Artists 

must be fairly compensated for the use of their work in webcasts. 

It is simply not just to build an industry around the proceeds of 

artistic endeavor without adequate compensation to the creators. 

To do otherwise provides a short-term shot in the arm for the industry at the expense of a long-term liability. 

Secondly, we need to create a tiered system of royalty provisions 

in order to encourage innovation and creativity among fledgling as 

well as established webcasters. This will ensure that we avoid a 

perilous situation where the record labels are the only ones who 

can afford to stream music on the Internet. 

Thirdly, detailed reporting is not only possible, but is a key component in putting an effective tiered royalty system into effect. This 

can be accomplished without undue burden on either the webcaster 

or copyright owner and without running afoul of privacy issues. 

Websound has produced and streamed Web radio for clients on 

a fee-for-service basis under a license executed with the RIAA in 

September of 2000. Websound negotiated this license based on a 

carefully considered set of business parameters which make sense 

in the context of our fee-for-service model. The terms of our license, 

therefore, cannot necessarily be held up as a model for all other 

webcasters. 

It is crucial that we do not force all of the wonderfully diverse 

streams and sources of music programming out of the system by 

creating an untenable set of royalty provisions across the board. To 

do so is surely to sound the death knell for one undeniable promise 

offered by the Internet—global access to an infinitely broad range 

of musical expression. 

To this end, it is not fair to subject a small, non-commercial 

webcaster such as San Francisco’s soma-fam.com to the same royVerDate Mar 21 2002 11:46 Apr 30, 2003 Jkt 085887 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\HEARINGS\86043.TXT SJUD4 PsN: CMORC
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alty requirements as a large commercial webcaster like Yahoo, or 

for that matter a smaller commercial webcaster such as Websound. 

To respect the rights of copyright-holders while not overburdening the small webcaster, we should institute a multi-tiered approach. The thresholds could be tied in part to a maximum number 

of simultaneous listeners or to a monthly volume of performances, 

for example. Accurate reporting can and will help facilitate these 

distinctions, ensuring that each webcaster is properly classified. 

To the extent accurate reporting is needed in order to properly 

compensate copyright owners, webcasters can and should report on 

their use of sound recordings. Websound has been doing this successfully for about 18 months, and our total office staff other than 

myself consists of only two people. 

We have recently announced a new technology called RadLog, designed to streamline the tracking of sound recordings used in our 

webcasts. We plan to make this technology available industry-wide 

to help address the significant concerns mounting over webcast reporting for statutory licensees. 

There is no question, however, that an initial cost will be incurred in setting up a reporting system that serves the industry 

well and does not overburden either the webcasters or the copyright owners. It is crucial that the record labels take the lead in 

constructing a central database that can be made available to the 

industry for the purpose of streamlining reporting, encouraging 

compliance with the license, and providing the specific data needed 

to properly process and distribute the royalties collected. 

The record labels as the copyright owners are the logical source 

of this raw data. I wish to emphasize the importance of creating 

this centralized database of song information as we look to create 

a fully functional reporting scenario. 

As an industry, we must recognize that certain entities will undoubtedly cease doing business as a result of the costs and challenges, just as others come into the marketplace with new innovations. We must provide an environment where innovation and creativity are encouraged, but we cannot possibly hope to save every 

existing webcasting business. We must also value the artists whose 

music is central to the industry, but not at the expense of creating 

a scenario where the only companies able to afford streaming 

music online are the record labels who own the copyrights. 

It is my belief that a viable, flourishing webcasting industry 

made up of a range of participants from the smallest non-commercial entities to the largest commercial outlets is feasible under a 

tiered license that provides opportunity based on realistic concessions from both the webcasting community and the copyright owners. 

I would be happy to answer any questions the committee may 

have. 

[The prepared statement of Mr. Straus appears as a submission 

for the record.] 

Chairman LEAHY. Thank you very much. 

Mr. Navarro, we are very pleased to have you here. I know you 

have released six albums, and you and Eric Lowen have written 

‘‘Constant As the Night’’ and ‘‘We Belong,’’ and a lot of others. 

We are delighted to have you here, and please go ahead, sir. 

16

STATEMENT OF DAN NAVARRO, AMERICAN FEDERATION OF 

TELEVISION AND RADIO ARTISTS 

Mr. NAVARRO. Well, thank you, and I want to thank you particular, Senator Leahy, for including us, for your interest in this 

issue, and for the opportunity to explain the importance of the digital performance license income to recording artists. 

I am a recording artist and a member of the American Federation of Television and Radio Artists, AFTRA, and the American 

Federation of Musicians of the United States and Canada, AFM, 

the two labor unions that represent recording artists. Both unions’ 

members include many stars earning significant record royalties, 

but more numerous are the non-superstar, middle-class royalty artists and professional session singers and instrumentalists who seldom gain fame. 

As you said, for more than a decade my partner, Eric Lowen, and 

I have written, recorded, and toured, with six albums on major labels, independent labels, and our own label. We have had several 

adult rock radio hits. You have mentioned a few. 

To supplement my income, I have also sung background vocals 

on numerous albums, including releases by Julio Iglesias and Clint 

Black, performed as an instrumentalists on albums by 

Whiskeytown and others, and I am also a songwriter, writing that 

worldwide hit for Pat Benatar, ‘‘We Belong,’’ and songs for Dionne 

Warwicke, the Temptations, and many others. I would like a Gladys Knight cut, but that is Senator Hatch’s gig, I think. 

[Laughter.] 

Mr. NAVARRO. The recording process is involved and rigorous, 

and I will try to explain the process to help you understand our 

work. First, we decide the kind of record we want to make, the 

sound we are after. Then we compose or select material that reflects that artistic vision, constantly editing until we are satisfied 

we are saying what we mean to say. 

Next, we create arrangements, make demos, select musicians, secure funding, select studios and engineers, set a working schedule 

and rehearse. By the time we begin recording, we have been working at it for months. Recording and mixing the album is a logistical 

and technological obstacle course requiring patience and stamina, 

not to mention artistry and technical skill. 

Later, we supervise mastering, take photos, create the cover, do 

clerical work like union reports. It is an overall process of long 

hours day after day for months on end, all with the goal of conveying an artistic expression that resonates with the public. And 

we are done, if we are lucky, we get to go back to square one and 

do it all again. 

One would expect that artists are paid handsomely for the level 

of talent and effort required, but that is not always the case. In 

fact, I discovered early on that there is little money to be made 

from recording albums. Costs incurred are advances recouped from 

my artist royalties. Manufacturing, promotion, marketing, videos, 

tour support and such are defrayed from my small share of the pie. 

So no matter what royalty arrangement I made with the label, 

or even when I produced my own albums, I never made a livable 

income from my records alone. So I wrote songs for other artists, 

sang as a background singer and instrumentalist for other artists, 

17

toured, and marketed merchandise. How ironic that after years of 

developing my skills and honing my creativity, I generate greater 

profits selling t-shirts. 

Unlike the rest of the world, for decades recording artists have 

not been paid performance royalties when their work is played on 

U.S. radio. Congress redressed a small part of this unfair position 

when it passed the Digital Performance Right in Sound Recordings 

Act. For the first time, at least some public performances of recorded music require payment to the artist for the right to perform 

it. 

Congress created a compulsory license for these uses and mandated that performers receive 50 percent of that compulsory license 

income, 45 percent to featured artists, 5 percent to backing singers 

and instrumentalists. I cannot overestimate how important this 

new income stream will be to both royalty artists and session singers and session players. 

There has been a great deal of publicity lately about the plight 

of webcasters who say that as new and small businesses they cannot afford to pay the digital performance royalty rate set by the 

CARP last February. We concur that fostering the growth of these 

new outlets for our music is of the utmost importance to performers. But the truth is we are also small businesses and without 

income streams we can rely upon to make a living, we will be unable to continue to create the recordings that the public wants to 

hear. 

Now, although webcasters have been liable for compulsory license payments since 1998, they have paid nothing, awaiting the 

outcome of the CARP proceedings, which comprised over 40 days 

of hearings, some 80 witnesses, thousands of pages of evidence, including confidential information about their businesses, and legal 

arguments on all facets of the license question. 

The AFM, AFTRA, and the webcasters all participated, ably represented by counsel. Neither side was completely satisfied with the 

recommendations that the arbitrators made to the Librarian of 

Congress and both sides have appealed the decision. But Congress 

must allow the CARP process to conclude and the final determination to stand or it will undermine the integrity of the very system 

it established. 

Our work provides the backbone of these new industries which 

pay for everything else they use. The electrical companies aren’t 

being asked to provide free power. Why should webcasters get the 

benefit of our music for free? Webcasters could get free content by 

making their own recordings, but they don’t because what their listeners want is our music. 

In conclusion, I wish to stress that this is not simply one business versus another. At the heart of this are individuals whose talents create sound recordings. Digital performance royalties will 

provide us with critically important income to performers both famous and not so famous. Without us, there would be no music on 

any station on the dial or the Internet. So please don’t make us 

wait any longer for fair compensation for the use of our recordings 

on the Net. 

Thank you. 

18

[The prepared statement of Mr. Navarro appears as a submission 

for the record.] 

Chairman LEAHY. Thank you, Mr. Navarro. 

We hear this debate over whether the Arbitration Panel’s rates 

were too high or too low and everybody has their feelings on what 

it should be. I hope that we don’t run into a case like the old legend 

of King Midas. He got one wish and the wish was that anything 

he touched would turn to gold, but that meant that his food, his 

family, and everything else he touched turned to gold and he ended 

up with nothing. 

If the webcasters are right, for example, that the CARP would 

force them out of business, in the end does that help artists, labels, 

and consumers? They all have nothing. Ms. Rosen has said, and I 

definitely agree with her, that if webcasters don’t succeed, artists 

and record companies tend to lose an important new revenue 

stream. So I think everybody agrees on the value of webcasters. 

What we are debating now is what is the value to everybody else 

and how do you get paid. 

Mr. Navarro, let me start with you. I appreciate that artists are 

often not sufficiently compensated. The artist groups are appealing 

the CARP decision because they feel that the CARP set the rate 

too low. A lot of my friends who are artists certainly do not reach 

the Top 10 or the Top 40, but they are tremendous artists and they 

want to be able to make a living from their artistry, and I want 

them to. 

So is it better to have higher rates, even if that forces many 

webcasters out of business, or to have lower rates that result in a 

larger number of webcasters playing your music? 

I ask this of both of you. It is not a trick question. I am reminded, for example, of the movie industry. They got very concerned when videotapes first came out and recordings, and they 

were quite concerned because they said people are going to record 

some of these movies off the air or whatever. They had plans of 

selling these movies to consumers on tape for $100, $125 a tape. 

I remember saying at the time, well, why don’t you sell them for 

$10 a tape? Outrageous; we never could make a living that way. 

Well, now one of the companies is going to put their DVDs in the 

Safeway and the Giant, and what not, at $8 or $9 or $10 a DVD 

because they know they are going to make millions doing that. 

So, basically, you understand the question, do you not? 

Mr. NAVARRO. I do indeed. 

Chairman LEAHY. Do you raise it and allow webcasters to go out 

of business, or lower it and encourage more webcasters? Which is 

better for you? 

Mr. NAVARRO. I am not sure there is any one answer. I think it 

goes hand-in-hand with whether, when you make a purchase, you 

buy something that costs a lot of money or you get something that 

is real cheap. Somewhere in the middle is an axis on the double 

Bell curve at which point value is achieved, and to achieve the 

greatest value, I think, is in everyone’s best interest. 

I am a songwriter and a performer. I am not sure that I am necessarily qualified to establish a business model for the webcasters, 

but if their business model is such that it can’t keep them in busiVerDate Mar 21 2002 11:46 Apr 30, 2003 Jkt 085887 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\HEARINGS\86043.TXT SJUD4 PsN: CMORC
19

ness, then that is something that they have to sort out, the same 

way that I have to sort out whether or not I can make my rent. 

Chairman LEAHY. I understand. But, Mr. Navarro, you are a 

good songwriter and you are a good artist, and we have to figure 

out what is the way that you have the widest dissemination. 

Again, I don’t want to push the movie thing too far, but there 

are a lot of movies today that are not blockbusters and are out of 

the theaters quickly, but they are good movies and lot of people 

want to see them. So they see them in the after-performance, 

whether it is DVDs or videotapes. I would think that an artist 

would want to make sure that there are as many accesses as possible in the long run to make more money. And I am not suggesting 

what the answer is; I am just curious. 

Mr. Straus, did you want to have a try on that? 

Mr. STRAUS. Yes, a few thoughts on that. I think that one of the 

places we get tripped up has to do with what the promotional value 

that an artist receives is from any given medium of distribution. 

Traditional radio is perceived as having an integral role in driving 

record sales, and I don’t think there is anybody here that would 

disagree that, for better or worse, traditional radio is vital in that 

process. 

Whether or not the Web currently provides or will eventually 

provide that same kind of benefit to artists is definitely a question. 

Currently, in my mind, it definitely doesn’t. We don’t see a lot of 

record sales from our service, and I don’t know if other webcasters 

who are webcasting can attest to seeing something different. 

So I think that is one of the issues tied up in this, is what is the 

benefit other than the direct royalty benefit to an artist from having their music played on various webcasts. So that is a question. 

What is that exposure worth? 

I think in terms of the rate itself, speaking for Websound, we are 

paying a higher rate than the CARP-recommended rate. 

Chairman LEAHY. Which you negotiated? 

Mr. STRAUS. Which we negotiated, and for our particular model 

it is fine. We knew what we were getting into. We had experience 

in the space. We had a sense of what clients were willing to pay 

for music and it worked fine from day one. I mean, we are not 

making a lot of money, but we are holding our own, and in the context of our existing business, which is creating music compilations 

for clients, it works fine. 

That rate might not work fine for a lot of other people, and I 

think I spoke to that. I think that the key thing is that—and this 

may be a somewhat circuitous answer—we need to limit the costs, 

I think, for webcasters so that Frank’s company, for instance, isn’t 

going to get buried if they are able to set up a broadcast that has 

a million listeners per-whatever a week. 

He is a small webcaster and he is sitting perhaps in his house 

streaming this music out. You don’t necessarily want to squash 

him at all. I mean, we want to encourage small webcasters. By the 

same token, they need to pay something, so my sense is that we 

need to come up with a rate that works and a scenario that caps 

what those royalties will be so that if a small webcaster is able to 

grow a big listenership, they are not getting killed. 

20

Chairman LEAHY. I am going to put in the record a letter we received signed by 138 independent artists and labels who actually 

want the CARP rate lowered. They say that,

We fear that the ultimate result of the performance royalty fee as proposed 

will be consolidation of the Internet radio industry to those few large corporate 

webcasters who can afford the high rate. Smaller Internet radio webcasters will 

be forced out of business. Independent artists and recording labels will lose a 

major source of exposure and promotion.

Of course, Mr. Straus, as you said in your case, you have negotiated a specific rate. 

Mr. STRAUS. Correct. 

Chairman LEAHY. You didn’t become a millionaire from that by 

any means, I know. 

Mr. Schliemann, Mr. Straus has referred to you, not to put words 

in his mouth, as probably more typical of what a lot of these Web 

sites are. Under the CARP’s proposed regulations, how much will 

Onion River Radio owe in royalties, both retroactively for the time 

you have been in business since 1998 and prospectively? 

Mr. SCHLIEMANN. We came on the air or started to broadcast in 

February 2001, so it would be retroactive to February 2001. I don’t 

have the number in front of me, but I can tell you that for the first 

3 months of 2000, so January through March, the sound recording 

performance royalty fee would be $1,180.93, compared to the $107 

that we are paying to songwriters and music publishers for the 

same performance of the same works. 

I am sorry. He is handing me the actual figure that I gave from earlier—$1,880.93 for the first 3 months. I apologize. 

The really scary thing to me is that it doesn’t end there. Our ratings have doubled in the last 6 months. Arbitron reports an explosive growth in Internet radio. Based on what they say and what 

a company, MeasureCast, says—MeasureCast reports actually that 

Internet radio listening is up 563 percent since January 1, 2001, 

roughly the time we came on the air. 

So at my best guess, I would say that we are going to be at 

100,000 streaming hours per month by the end of the year. A station that streams that much would spend $25,200 for the performance fee. Now, in Montpelier, in a small market, if we have a banner year in sales——

Chairman LEAHY. The total population of Montpelier is 8,500 

people, the smallest State capital in the country. 

Mr. SCHLIEMANN. That is right, and our market is actually the 

entire State of Vermont. And if you want to compare it to New 

York City, I think the population of New York City is 15 times the 

entire population of Vermont, so we have fewer prospects. Of 

course, our rate needs to remain low in order to compete with local 

FM. So we have a couple of issues there because we are also in a 

small market. 

So the best-case scenario for us is that we may be able to bill between $25 and $50,000 in sales revenue if we have a banner year. 

If you stream 100,000 hours per month, then it is $25,000 for that 

fee alone. Again, right now for us, the single largest expense is the 

cost of bandwidth. Of course, we already pay for music, but bandwidth is our single largest expense. To put it into perspective, the 

proposed royalty is almost three times our single largest expense 

21

at the moment, at our current number of streaming hours. So as 

we continue to grow, it gets worse and worse. 

Chairman LEAHY. Thank you. I appreciate the courtesy of Senator Hatch. I want to ask one more question. You had raised 

Arbitron and its take on this, and with Mr. Rose here, who is the 

Arbitron expert on this panel, Mr. Rose, you have had studies of 

the webcasting industry. 

How many webcasters will be forced to cease operations and how 

many will be able to stay in business if the CARP rates became 

final? Is it possible to make that judgment? 

Mr. ROSE. Mr. Chairman, I would love to be able to predict. I 

have learned many years ago to be able to predict in the age of the 

Internet is a pretty challenging task. Furthermore, we are not 

economists. We are a company that measures what consumers do 

with the Internet and streaming and how they listen to the media. 

But perhaps I can offer some perspective on that with some other 

research that we have done, pointing to the infancy of webcasting 

as an advertising medium. The point is advertising really hasn’t 

begun on the medium yet, and you layer on top a very high cost 

in addition to it and it really makes it difficult for the media to get 

traction. 

In June of this past year, we talked to our customers, which we 

are want to do, in a more formal way and some of the findings that 

we have point to the infancy of the medium. We asked advertising 

agencies, in particular, and webcasters, too, do advertisers in agencies include streaming media in their media mix on a consistent 

basis? Eighty-six percent of the agency people and eighty-six percent of the Webcasters said no. 

By the way, that was 6 months ago, before the issues that we 

are dealing with now, which by the way are very public and makes 

it hard for advertising agencies to go to their customers, the advertisers, and recommend the medium with this uncertainty. 

We then asked what size of weekly audience would be needed for 

advertisers and agencies to include the medium on a consistent 

basis in your media mix. Sixty-two percent of the agencies—those 

are the companies that count; they are the ones who spend the 

money—said that the size of the weekly audience needs to be more 

than twenty percent. Today, that number is 9 percent, so we are 

not even halfway there. 

Then we took it one step further and said when do you think it 

is going to get to that point? If it is not there now, when would it 

be there? The overwhelming response again from the agencies, the 

people with the money to spend, said 2004, 2005, or 2006. So, clearly, the industry has not really begun from an advertising medium 

point of view, and if you go back and look at FM radio or you look 

at the cable medium and its growth, it is very much in its infancy 

stage. 

Ms. ROSEN. Mr. Chairman, can I respond to that? 

Chairman LEAHY. Sure. 

Ms. ROSEN. First of all, I think the fact that Mr. Rose said he 

wasn’t an economist was helpful because actually the CARP had 

multiple economists testifying to the ability of webcasters to pay to 

the forecast projections of these businesses and to the rates that 

were being considered. So I think there is a lot of credit that should 

22

be given—economists hired by all sides, by the way, so I think 

some credit should be given to the evidentiary proceeding on that 

score. 

I think the other issue is one that Dan raised, which is this issue 

of affordability, I think, is troublesome for the artists and record 

companies to really deal with because it is really an issue of who 

is first in line. 

I have a chart that I think some of the webcasters distributed 

about how big a percentage the CARP fee is of their income, and 

I think that Frank just alluded to a high percentage there. But 

their operating expenses already, without a music fee, are hundreds and hundreds of percent of their operating income. So all of 

these businesses are already losing significant amounts of money. 

So I think that to somehow say, well, we are going to go out of 

business because we are going to have to pay copyright fees is 

frankly a little unfair, because we are last in line because we have 

waited for 31⁄2 years. I think you really have to recognize that the 

CARP looked at all of those numbers and came to those kinds of 

determinations. 

Mr. POTTER. Can I get a shot at this one, Mr. Chairman? 

Chairman LEAHY. If you don’t have any objection, Orrin, please 

go ahead. 

Senator HATCH. No. This is very interesting. 

Mr. POTTER. I will be very fast. Ms. Rosen’s point about the 

economists is well taken, particularly because it was the RIAA’s 

economist who said that it would be appropriate for the RIAA to 

charge monopoly rates in this circumstance, and particularly because it was the RIAA economist who said that essentially 25 or 

26 of the ‘‘marketplace agreements’’ were irrelevant as benchmarks 

because none of those companies, or very, very few of those companies had any chance of success. If a company doesn’t have a chance 

of long-term, viable success, it should not be viewed as a benchmark for an entire industry, and that is the trouble that we have 

today. 

Mr. Straus just acknowledged that his license is not applicable 

to the entire industry. He runs a fee-for-service business. He 

doesn’t run an advertiser-supported media business. The RIAA’s 

economist said these unique companies, all of whom the CARP 

called unsophisticated, uneducated, and who would be characterized in the ASCAP-amended consent decree as those in the early 

stages of an industry—and the new ASCAP consent decree does not 

permit the first 5 years of an industry’s agreements to be considered by a rate court for an overall industry-wide rate. It is for all 

of these circumstances. 

So the RIAA economist agrees with Billy Straus and agrees with 

the Department of Justice that all of these agreements were useless. Unfortunately, it is exactly what the CARP relied upon in setting a benchmark for the entire industry. 

Ms. ROSEN. That is the value of evidentiary proceedings. You 

don’t have to have the tit-for-tat. You know, there is actually a 

record to look at. 

Chairman LEAHY. Well, we will go into that in a bit. 

Senator Hatch. 

Senator HATCH. This is extremely interesting to me. 

23

Mr. Navarro, you raised some important issues in your testimony 

concerning the challenges facing a recording artist who is working 

to promote his or her music on his or her own. One issue you 

raised that I have heard from others is that some of your work is 

inaccessible to you and to your fans because the label that currently holds the copyright has chosen not to make the work available. 

Is it your sense that works that the labels decide are not worth 

keeping in print would be of value to artists who recorded them 

and their fans if we could find a way of making those works available through legislation or otherwise? If so, would it make sense 

to share the new revenues from those works among the artist and 

the label? 

Mr. NAVARRO. I see no problem with sharing those revenues. The 

big issue with regard to that for me is that a record company that 

releases 100 or so records a year, year after year, that is a pretty 

large number of recordings. For me, over my entire career so far, 

12 years, I have released 6, which is probably less than a week’s 

output for a major label. 

Each individual recording in my career represents a substantial 

portion of my creative body of work and what I am able to put out 

there for my audience and to sell. I have no problem sharing it. I 

just want to be able to get it, or else a big piece of my career disappears. 

Senator HATCH. Ms. Rosen, would your members support legislation to make unused catalogue available for the benefit of artists 

and fans, and if not, why would they not want to find a costless 

way of generating some revenues from these unused assets in a 

way that would also benefit artists and fans? 

Ms. ROSEN. I have actually been looking at this issue for the last 

several weeks, Senator Hatch, and I think that you don’t really 

need legislation because I think my conversations with at least 

some of the major record companies are that they actually on a regular basis have communications with artists whose music has been 

out of print. The only reason it is out of print is because some guy 

at a record company hasn’t seen a potential market value for it. 

Senator HATCH. Right. 

Ms. ROSEN. But if artists go to their record company and say 

that they perceive a market value for it, my understanding is that 

the record companies have come up with very creative and favorable scenarios for artists to either find another distributor or to distribute their own. I think that you should look into that. 

Senator HATCH. I think we should look into it, and to the extent 

you can help on that, I would appreciate it. 

Ms. ROSEN. I would be happy to. 

Senator HATCH. I think that that may be a way. Moods change, 

the public changes. Songs that may have been done 20 years ago 

may suddenly become popular—you never know—that didn’t make 

it then. I have seen that happen in the songs that I write. 

Mr. NAVARRO. May I respond? 

Senator HATCH. Yes. 

Mr. NAVARRO. I just wanted to respond to that. One of my six 

albums right now dropped out of print about 3 months ago by Mercury Records. The remaining 2 or 300 copies in existence we tried 

24

to purchase, and they were actually ordered to be ground up instead. 

We have been in negotiations. It is difficult for guys like us to 

get a phone call back, even to our manager, and what they wanted 

in return for allowing us—they offered us two options. One of them 

was to either press them on our behalf and charge us actually $3 

a CD more than they had been selling for when they were still in 

print. The other option was to pay a royalty to them. 

Now, we have no objection to that, but the royalty they requested 

was with a guaranteed return of a number of units over a 3-year 

period that equaled better than half of what they sold over a 7-year 

period especially when the record was new. We found that to be punitive. We are still in negotiations trying to figure out exactly how 

to get through this so that we can get the rights to this back, but 

essentially in terms of how they want to approach it right now, it 

is something that we can’t fathom. 

Senator HATCH. Well, how do you respond to that? 

Ms. ROSEN. I don’t know the particulars of Dan’s situation, but 

I would be happy to do what I can to help. 

Senator HATCH. Actually, for somebody who started writing 6 or 

7 years ago, I have had some interesting success, but with one of 

our CDs I had a very similar experience with a small record company or book company. We entered into an agreement that they 

would sell so many of them, and we thought it was a pretty darn 

good Christmas record. We also got an agreement that if they 

didn’t sell so many, it came back to us, and the agreement explicitly said that it should come back free. 

They said they were going to discontinue producing and selling 

them, but they would sell us their remaining inventory for $4 a 

CD. We couldn’t do that, so they went out and sold them at $4 a 

CD and then said if we want the master back, we will have to pay 

$10,000. 

Now, that is with me, a U.S. Senator. I can imagine the difficulty 

you must have, not that you are not my equal in every sense of the 

word, and better than I am as a musician. But I can imagine how 

tough it would be for somebody who doesn’t have a lot of bargaining power. 

Chairman LEAHY. Originally, we were going to play a few of your 

CDs on the video for the hearing, but we thought that might be a 

little bit over the top. 

Senator HATCH. Well, the only reason I mention that is because 

I know it is a misunderstanding and I will probably get it straightened out. But the fact of the matter is I understand what you are 

saying, and my experience with major record companies is that 

most of them would probably work it out with you in a satisfactory 

way. 

If Mercury is not doing that, I would suggest to Mercury they 

ought to do that. If they are not going to make a recording go and 

not going to put any money into it and not going to do anything 

for the artist, they at least ought to let the artist try to do it. 

Mr. NAVARRO. Well, I agree, and there is no question that what 

they stand to get from it now by sitting on it is absolute zero. 

Senator HATCH. Well, that is right. 

25

Mr. NAVARRO. So making the rates prohibitive doesn’t do them 

any good. 

Ms. ROSEN. That is right. 

Senator HATCH. You and I both, Ms. Rosen, and Mr. Navarro, 

have seen records that were made decades ago that suddenly become popular. There just may be a mood change. They may just fit 

the right scheme or the right situation, and some great music has 

been lost because we haven’t done that. So I think of worry about 

this a little bit. 

Mr. Navarro, you also mentioned how glad you are that you can 

use the Internet to interact with your fans and how important it 

is to control your own domain name. Can you explain why it is so 

critical that an artist be able to control that Internet identifier, especially when he or she leaves a label to work on his or her own? 

You have said you have worked with labels and you have sold your 

CDs on your own. 

Mr. NAVARRO. Our first deals were sort of pre–Internet-era. It 

certainly hadn’t hit critical mass, and when we signed with Mercury, in particular, they didn’t go out there and open up a Web site 

for us or register a domain name, or really didn’t even seem to 

have it on their radar. We did it ourselves, and thank goodness we 

were able to do that. 

The name of our group is Lowen and Navarro; it is our own 

names. If someone else owned my name and I couldn’t get that 

back, I would have to change my name to something facetious just 

to be able to survive in the business and it wouldn’t work. We have 

invested a lot of time and effort and money in the value of that 

name and to be able to control it so that I can continue my career 

with that label or without label. The Internet has been absolutely 

a cornerstone of how we are able to reach our fans, how we are 

able to continue to sell records, and without it we would be nonexistent. 

Senator HATCH. Ms. Rosen, as you know, I am a fan of all you 

do and I want your companies to succeed. But how do you explain 

the CARP finding that the RIAA had ‘‘developed a strategy to negotiate deals for the purpose of establishing a high benchmark for 

later use as a precedent’’ in the CARP proceeding, and that it concluded deals only in ‘‘substantial conformity with that sweet spot?’’ 

How would you react to this finding? 

Ms. ROSEN. Well, I actually didn’t find it much of an accusation. 

I mean, you know, the statute directed us to negotiate in the marketplace and, like other compulsory licenses the Congress enacted, 

provided us a setting to do that. I think it is natural for copyright 

owners to seek as high a rate as possible in those negotiations, and 

natural for the users to seek as low a rate as possible. 

I think the key finding, though, of the report was that actually 

the CARP didn’t respect the overwhelming majority of those deals 

that we had done. They threw out 25 of 26 of those deals, and then 

chose one closer to the lowest rate. So I think it is pretty clear that 

we were doing, in my view, what people should have expected us 

to do and what the statute called for, and the CARP made an independent judgment about the marketplace viability of those deals. 

Senator HATCH. Let me ask both of you this question and get 

your perspectives. Mr. Navarro raised the issue of consolidation 

26

among radio and concert venues. I have heard of some artists or 

labels being required to purchase advertising or play affiliated concert venues in order to get air play on their radio stations. 

Can you each tell me how you view these types of issues from 

your perspectives? Let’s start with you, Ms. Rosen. 

Ms. ROSEN. I think you are referring to the issue of Clear Channel Radio essentially owns the largest concert and venue promotion 

company in the country. I have heard sort of the same kinds of anecdotal complaints, I suppose, that you have that if artists choose 

another promoter, they are worried about being penalized by the 

Clear Channel radio stations in those cities where they would like 

to have a relationship with radio to promote their shows, but I 

don’t have any factual information about it. 

Senator HATCH. Mr. Navarro, do you care to comment? 

Mr. NAVARRO. As much I know about the situation is that the 

vertical integration by Clear Channel in particular, but also by 

other entities, has resulted in independent labels being shut out 

and has resulted in smaller or independent artists being shut out 

of the equation. 

If you can’t afford the time buys, if you can’t work with that particular promoter, you are not going to play in the marketplace, either on the radio or live. And without that, the ability to reach an 

audience is severely hampered. A smaller artist and a smaller label 

doesn’t necessarily have the wherewithal to play that game in that 

way, and as such is it is very anti-competitive and pretty damaging 

to the careers of modest artists who go out and pound the streets 

and tour the country and want to get played. 

Senator HATCH. Well, we know how some artists work as studio 

singers and all of a sudden they hit it. I remember when Faith Hill 

was doing studio singing and, of course, has really hit it big. Natalie Grant fell in love with her husband on one of our songs, and 

that song has become a fairly substantial song. 

Chairman LEAHY. You are the Renaissance Man. 

Senator HATCH. Yes, the Renaissance Man here. 

I wish we could find a way where all these really great talents 

could really come to the forefront. Some of the greatest singers and 

some of the greatest musicians I have ever seen never have a 

chance and I wish I could find some way of helping them. I know 

we have got to have a viable recording industry to do that, and we 

have got to have viable people who are playing these things. 

So anybody who can help us do a better job here, I would like 

to do it. And everybody is important; it isn’t just one side or the 

other. I would like to see us do a better job with as few mandates 

as we can possibly have. 

Some have raised concern about the major labels’ online joint 

ventures, suggesting they aggregate market power in ways that 

distort competition and therefore harm smaller competitors or artists in the online market. The primary concern, at least it seems 

to me, seems to be where large content competitors act jointly in 

aggregating their content for distribution and then do not make the 

content available on a fair and non-discriminatory set of terms to 

their distribution competitors. 

I would like to ask each panelist if any of you share these concerns, and if so, do you think that a legislative remedy is warVerDate Mar 21 2002 11:46 Apr 30, 2003 Jkt 085887 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 C:\HEARINGS\86043.TXT SJUD4 PsN: CMORC
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ranted to limit competitive harms where there is joint conduct by 

content competitors? 

Ms. ROSEN. Well, this is a very big question, so forgive me for 

trying to answer it and put it in context for the very thing that we 

are discussing today. 

With regard to the specifics of the online ventures and the competitive nature of their deals, I think you can be comforted that the 

Justice Department is looking closely at this and won’t let a speck 

of paper go by without scrutiny. But I think it points out the bigger 

issue, which is that in some respects for music, unlike other copyrighted works, we all still have a little bit of an old-fashioned notion about how consumers get music and how the various businesses interrelate. 

The issue of promotion came up. Now, despite the fact that the 

CARP found that there was no evidence of promotion in webcasting 

or no evidence of substitution of sales, and they looked at things 

like click-throughs and other issues, people still think that exposure is what artists and record companies want. But that is, if we 

think about it, based on the old-fashioned notion that once there 

is exposure, somebody is going to go into a record store and buy 

a CD or go to Amazon.com and buy a physical good. 

I think what you two, in your prescient wisdom, and other members of Congress did in 1995 was say, you know what? The world 

is changing, where people are not going to depend on the sale of 

physical goods, and so we have to do for music what we already 

had done years ago for things like movies. Senator Leahy referenced this. 

The risk and return on investment in movies is paid from theatrical release. It is paid from selling it to broadcast, it is paid from 

selling it online, it is paid from selling it in video cassettes, and in 

satellite and a host of other areas that enables them to spread out 

the risk. 

So, for instance, if you see a DVD in the store and it is $10 and the CD is still $15, well, the DVD is their tertiary market. It is the 

third time they are selling it. So what we are getting here in the 

webcasting issue is how do we move the music business into the 

21 century? How do you create incentive to these companies to license all of these users online? 

You have to be able to recognize that there are going to be growing pains in that because people are going to be paying for things 

they never paid for before because we always depended on returns 

on sales in the record store. The only way prices come down for everybody and we all grow is if you recognize that multiple distribution streams and multiple revenue streams are really going to be 

the future that is best for everybody. 

So I think what we are experiencing here is the growing pains 

of the webcast side of it, but it is illustrative of the problems that 

record companies have in their licensing in the new models because 

nobody wants to pay what people think it might be worth. So you 

have to consistently anticipate the impact of a new stream on your 

existing business. But if you worried less about that and more 

about growing multiple streams, you really have something there, 

and I think we have something here, but there is no question there 

are going to be growing pains. 

28

Senator HATCH. Mr. Potter. 

Mr. POTTER. It is a very large question, Senator Hatch, and it is 

one that DiMA members are deeply embroiled in. Many of those 

DiMA companies that don’t exist today would argue it is largely as 

a result of their inability to get licenses, which seems to be the 

same case at company after company after company. 

There clearly is a history in the record industry of most favored 

nations clauses in licensing contracts, which some would allege is 

a constructive price-increasing and price-equalizing across the horizontal spectrum of the industry impact. 

There are issues associated with digital licensing when one is 

distributing downloads and one is therefore not subject to the traditional wholesale/retail pricing limitations. For instance, on resale 

price maintenance, downstream price controls for products, there 

are traditional antitrust laws that are absent when one is licensing. 

When the chairman or the vice chairman of the company that 

owns PressPlay acknowledges that that joint venture will control 

downstream pricing all the way through the distributors to the consumer, that suggests that not only is digital different and it feels 

different, but, in fact, it has very different legal implications for 

consumers and for customer choice, and for frankly the ability of 

retailers to compete on choice, and that is troubling. 

In this context, sir, to bring it back to webcasting, the RIAA had 

a webcast negotiation licensing committee that met regularly. It 

created white lists of ‘‘approved companies’’ that were distributed 

to all the record labels, and somehow those white lists occasionally 

made it into individual record company negotiations with individual webcasters. Frankly, that is troubling. 

What we are most concerned about, however, is that the CARP 

seemed constrained by what it thought the willing buyer/willing 

seller standard required of it, which was to only look at actual sellers and actual buyers. In this marketplace, there was only one seller, the RIAA, and if you are a willing buyer and the only place you 

can buy the sweater you want is Nieman–Marcus, you have a 

choice. You can buy it at the Nieman–Marcus price or you can go 

without it. The CARP construed everybody who went without it to 

be not a willing buyer. 

There are 2,800 terrestrial radio stations that are simulcasting 

their over-the-air broadcasts on the Web. Not a single one of them 

licensed the content from the RIAA in a negotiation. That does not 

mean they weren’t willing buyers, but they were not acknowledged 

by the CARP as having any consideration in the rate because they 

weren’t actual buyers. 

There are thousands of webcasters that did not negotiate with 

the RIAA because it was clear for months and months that the 

RIAA had the sweet spot price. It was ‘‘take it or leave it, have a 

nice day.’’ Frankly, after the 80-something witnesses and the 43 

days of hearings, the arbitrators concluded that was the marketplace, that was the actual marketplace. 

Unfortunately, the arbitrators also felt that they were constrained to set a rate based on the actual marketplace which they 

acknowledged over and over again was manipulated. So the probVerDate Mar 21 2002 11:46 Apr 30, 2003 Jkt 085887 PO 00000 Frm 00032 Fmt 6633 Sfmt 6601 C:\HEARINGS\86043.TXT SJUD4 PsN: CMORC
29

lem is how does Congress clarify the standard to ensure that it is 

a competitive marketplace. 

As the rate court for ASCAP for 40 years has said, the standard 

is competitive; it is fair market value, a reasonably competitive 

marketplace. Otherwise, what is the purpose of the CARP? If the 

RIAA, the sole seller, can go out and license these small companies 

at high-priced rates because they don’t want to pay lawyers and 

they don’t want to go to the CARP, and then can walk in and say 

here it is, 26 agreements, willing buyers, willing sellers, that is the 

sole parameter of the evidence you should consider in setting the 

rate—they can hear a lot of other witnesses, as they did, but that 

doesn’t mean in the ultimate outcome that they have to go to with 

any hypothetical marketplace which was proposed or to any analogous marketplace, such as 50 years of ASCAP rates or broadcast 

radio rates. 

Instead, they were forced to return to the actual marketplace; 

they felt forced by the law. Frankly, they ended up with a Yahoo 

agreement which is completely opposite. 

Senator HATCH. Mr. Rose. 

Mr. ROSE. Senator Hatch and Mr. Chairman, you asked some 

questions having to do with broad distribution of content or somewhat limited distribution of content. I think both of you talked 

about that in slightly different ways, but the essence of it is there, 

and ultimately what is better for the consumer, what is better for 

the artists, et cetera. 

If I was listening carefully, I think I heard Mr. Navarro say 

something to the effect regarding his CDs that they are sitting on 

it and if they sit on it, nothing is sold. Well, one of the biggest 

value propositions of the Internet, according to consumers, is their 

ability to get things they can’t get through traditional media. 

So it seems to me that in essence what we are hearing from the 

consumers is their vote is a broad distribution of different choices 

to get different content from different sources, not limiting it to a 

select few and thereby potentially driving the market. 

For that matter, we have also been talking a little bit about the 

promotional value of streaming media. As we are want to do, we 

have some research from the consumers to hopefully address this 

issue. In January, we had asked consumers between the following 

choices—the Internet, radio, television, and newspapers—which 

medium do you turn to first to learn about new music, the very 

music that we want to sell? 

Among everybody 12 and older, whether they are online or not, 

whether they are streaming or not, the answers came out like this: 

63 percent said radio. There it is, evidence that radio promotes the 

value of the medium, or promotes music. TV, 14 percent; I guess 

we can call that the MTV revolution. Internet, 9, and certainly no 

one can argue that newspapers really are that relevant at 2 percent. 

Now, we are going to look at it among those who listened to 

Internet audio in the past week. These are regular audio 

streamees. The numbers are different. Radio goes from 63 percent 

to 47 percent. The Internet goes from 9 percent to 31 percent. TV 

is essentially the same at 13, and newspapers essentially the same 

at 3 percent. 

30

So the essence of the point here is that consumers are going to 

go online to learn about new music far more among the streaming 

population than among the general population. So I think there is 

certainly some evidence here that streaming media does, in fact, 

have a promotional value for music on the Internet. 

Senator HATCH. Does anybody else care to comment? 

Mr. SCHLIEMANN. Yes. I guess I will approach it from the radio 

station side of it, Senator Hatch. Since Congress enacted the Telecommunications Act of 1996, the result is a few large companies 

owning the majority of radio stations. I would like to think that a 

radio station such as Onion River Radio provides an alternative to 

the cookie-cutter radio that you hear on broadcast FM. 

One of the trends in broadcast radio is to limit the number of 

songs that can be scheduled for air play. Another trend is to decrease the amount of time before a song can be repeated, and the 

reason that they do that is it is called a tighter rotation. It will increase a listener’s chance of hearing his or her favorite song when 

they drive to work, and then, of course, when they drive home they 

are probably going to hear those same songs again. That is what 

I call cookie-cutter radio. You know what is coming up in the play 

list. 

Unfortunately, that makes it difficult for local artists, it makes 

it difficult for lesser-known artists to receive radio air play. But 

that lack of diversity, of course, creates the opportunity for our station. We play a few local Vermont bands; if I want to name a few 

here, Strange Folk and Soma Seth Yacavone Band. I mean, those 

bands don’t receive a lot of FM radio air play, and when we play 

them on our station alongside more established artists out of 

Vermont such as Phish or the Grateful Dead, or if we play them 

along with John Mellencamp, we cross over a few different formats 

that you wouldn’t hear on an FM station. 

We receive e-mails from listeners asking how can they purchase 

that CD. You know, they want to know more about that band 

Strange Folk that they haven’t heard of before. So then, of course, 

we can provide that information for them. I think the success of 

Internet radio is proof that the consumers want that variety and 

they want that originality that we can offer. 

Chairman LEAHY. Let me ask this. I think most people feel that 

normal radio play promotes sales of CDs. Six months ago or eight 

months ago or whenever it was when I heard a cut from ‘‘Red Dirt 

Girl,’’ by Emmylou Harris, I actually picked up the CD the next 

day. If I hear a cut from Sheryl Crow’s new album or if I play 

something from Steve Earle or John Prine or U2—Buddy and Judy 

Miller came out with a great album and I heard a cut from that 

and got the album. But it might also be Rostropovich or Yo–Yo Ma. 

They are all different ones that I like, somewhat eclectic taste. I 

have to listen to things from Dick’s Picks to get more Grateful 

Dead today. 

The RIAA argued before the CARP that webcasting actually 

hurts CD sales. I am wondering if you all agree on this because I 

might hear Steve Earle more often on webcasting. I might hear 

Buddy and Judy Miller’s songs because they have written so many 

for other people, but I might here them there, or Nancy Griffith, 

31

or people like this. I am not trying to promote any particular artist, 

but I am just thinking of some of the ones that I might hear first. 

Now, the CARP declined to make any finding on the impact of 

webstreaming on sales of records, but I have heard from a lot of 

webcasters that artists and independent labels appreciate the exposure they get because it helps record sales. I put into the record 

the letter from 138 of them. They are concerned that the CARP 

rate is going to force smaller webcasters out of business and consolidate it, as some of you have said, to large corporate webcasters. 

I am just wondering what is the answer here. Do these promote 

sales? If U2 comes out, as they did with their last album, with a 

mega-tour, it is not going to make any difference if any of you play 

it. Sold-out concerts. You know, Edge, if he just waves out there, 

they are going to sell another 20,000 albums. That is no problem. 

But I am thinking of some of the lesser-known ones, those who 

don’t go on a mega-tour. 

Mr. POTTER. Mr. Chairman, 2 days ago I spoke to one of the 

major Internet radio companies who polled their data and said that 

in January of 2002, they sold tens of thousands of CDs directly 

through the tuner on the Web site. Another actually much smaller 

Internet radio company gave me survey data last week from a survey they had done just this year, but it reflected trends from a survey they had done 6 months ago of approximately 16,000 people. 

Each time was a 30-day survey of people who were tuning into 

their radio programming, and the survey data showed a significant 

double-digit, 20-, 30-percent of people were having their purchases 

influenced by online radio. But more importantly perhaps, frankly, 

40, 50 percent of those people whose purchases were influenced—

actually, two-thirds of the people whose purchases were influenced 

were still buying offline. 

So if you extrapolate from the 30,000, 40,000, 50,000 CDs that 

the major online player is selling and two-thirds are still buying 

offline, you can double and triple that amount, and that is just for 

that one Internet radio company. There is no doubt that small artists and small labels are getting valuable exposure from Internet 

radio. There is no doubt that Internet radio sells CDs and promotes 

CDs by providing exposure to people frankly who otherwise 

wouldn’t be listening to the radio. 

Chairman LEAHY. Mr. Rose, do you get that same impression at 

Arbitron? 

Mr. ROSE. In fact, we do. Again, from January 2002, we had 

asked consumers, have you ever purchased a CD on the Internet, 

not got it for free, did you pay money for it? Among all Internet 

users, 1 in 5, or 22 percent, said yes, I have bought a CD on the 

Internet. 

Among those who listened or watched on the Internet in the last 

week, the active streaming media users we talked about before, 

that percentage is 46 percent. They are far more likely to buy 

music on the Internet than those who aren’t streaming. 

Chairman LEAHY. It is interesting because you walk into a record 

store now and more and more something they didn’t do before—you 

have got the earphones to listen to this. And they are not doing 

that out of the goodness of their heart. It obviously works in selling. 

32

Ms. ROSEN. Mr. Chairman. 

Chairman LEAHY. Just a moment, Ms. Rosen. 

A friend of mine, Peter Yarrow, called me yesterday and a basic 

question he asked is shouldn’t artists be compensated for the work 

they have done? Does anybody disagree? It has always been my 

basic bottom line that artists should be compensated for the work 

they do. 

Mr. SCHLIEMANN. We are fans of the music that we play. We 

want to ensure that all the artists and all the creators are compensated fairly, but we can’t pay a royalty rate that is so far out 

of whack, in plain English, with every other expense that we have. 

It is 12 times higher than what we pay the songwriters and music 

publishers. 

If Senator Hatch would write a song and somebody else would 

perform that song, why is their performance 12 times more valuable than his creative genius? 

[Laughter.] 

Ms. ROSEN. Don’t worry, I am not going near that one. 

Chairman LEAHY. I listen to Orrin’s music. I don’t know if he is 

listening to me saying this, but I listen to his music. 

Go ahead. 

Ms. ROSEN. Well, this issue of this other music keeps coming up, 

and perhaps Frank isn’t aware that a substantial part of the CARP 

proceeding is how much they pay for the underlying musical work. 

The arbitrators came to the conclusion they did with a significant 

amount of evidence to distinguish between the rates. 

I have to clarify the record, Mr. Chairman. We did not say that 

webcasting hurts sales. What we said was that we didn’t see evidence that it helped sales. 

Chairman LEAHY. I have got CARP here and it says, ‘‘RIAA did 

not attempt to offer any empirical evidence to support its concerns 

that webcasting causes a net substitution of record sales.’’

Ms. ROSEN. Right, because we just don’t know, and that is what 

we told the arbitrators. We don’t know whether these are substitutional, we don’t know whether it is promotional. In fact, the 

CARP ended up agreeing with that question mark, which is exactly 

the point I raised before. 

But, you know, we met with a whole host of small, independent 

labels yesterday, all of whom said you know what? We want the 

money. Who knows whether people are going in the stores? Maybe 

this will be the only way people are going to get music, if it is so 

ubiquitous—thousands and thousands of channels of the most 

niche programming possible. 

It is attractive to have that be the way you get music. It is not 

an accusation. These guys are not pirates. It is a fact of changing 

technology and new opportunity for consumers, in particular. So 

what we are saying is you can’t assume that the pricing structure 

is going to be that we get it at rates that are so low that they are 

useless here because we are going to drive sales here. We are moving into a new era. 

Chairman LEAHY. Well, some of your answers raise more questions than we have time for, and unfortunately this is a hearing 

that has to end now. I am going to submit questions to all of you. 

33

I don’t mean to do this to burden you. If you have questions about 

the questions, please call me or the staff on it. 

In many ways, this may be the beginning of hearings on this because if I was given the power right now to make the solution, I 

am not sure what that solution would be. So maybe it is just as 

well for all of you that I don’t have the power because I have a feeling whatever I were to decide in a case like that, some of you 

would like, some of you wouldn’t like. 

Maybe you are all in a situation—and I am obviously not telling 

you what to do, but you may want to consider whether it is the 

time to seek yet again a global settlement of this issue. 

Mr. Straus, you made your own settlement within your own business model. A lot of others will not be able to do that, if it is possible to do it. 

Artists should be paid, artists should be compensated. Otherwise, 

you are not going to have anything else to carry anywhere. But 

small companies like Mr. Schliemann’s should continue. If I turn 

on the Top 10, I may not hear Steve Earle every time, but I like 

to listen to Mr. Earle. I may not hear others that I might want. 

There is a lot of opera I like, a lot of classical music I like, and 

I want to find niche areas to listen to that. 

So what I urge, if anything, is if you are continuing talks on 

this—again, I can’t tell you what to do; I can only make recommendations, but if you are continuing in talks, consider that the 

world is changing very, very rapidly and the way of selling music 

and getting music out there is changing and will continue to 

change in a digital age and in an Internet age. Newspapers are 

finding this, book publishers are finding this, everybody is finding 

this, and music is not going to be any different. It really is not. 

I think there are also some potential advantages here for artists, 

for advertisers, for businesses, and certainly for the listening public. If the listening public finds they benefit, I have to be convinced 

that you can build business models where all of you benefit, too. 

We have several written statements that the committee has received that we will insert into the record at this point. 

Chairman LEAHY. With that, we still stand in recess. You will all 

have a chance to add to your comments. I want to thank Senator 

Hatch for his work and effort on this and, of course, our staff. 

Thank you. 

[Whereupon, at 11:27 a.m., the committee was adjourned.] 

[Questions and answers and submissions for the record follow.]

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