Intellectual Property: Economic Arrangements Among Small Webcasters and Third Parties and Their Effect on Royalties
Published: 2004-06-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The emergence of webcasting as a means of transmitting audio and video content over the Internet has led to concerns about copyright protection and the payment of royalties to those who own the recording copyrights. Arriving at an acceptable rate for calculating royalties has been particularly challenging. Under the Small Webcaster Settlement Act of 2002, small commercial webcasters reached an agreement with copyright owners that included the option of paying royalties for the period of October 28, 1998, to December 31, 2004, on the basis of a percentage of their revenues, expenses, a combination of both, or a minimum fee rather than paying the royalty rates set by the Librarian of Congress. During debate on the act, copyright owners raised concerns that small webcasters might have arrangements with other parties, such as advertisers, that could produce revenues or expenses that might not be included in their royalty calculations. In this context, the Congress mandated that GAO, in consultation with the Register of Copyrights, prepare a report on the (1) economic arrangements between small webcasters and third parties and (2) effect of those arrangements on the royalties that small webcasters might owe copyright owners.
section_title: What GAO Found
paragraphs: Small webcasters have a variety of economic arrangements with third parties, the most common being agreements with bandwidth providers and advertisers. Almost all of the webcasters that we interviewed reported arrangements with bandwidth providers, and many reported arrangements with advertisers. Less commonly reported arrangements included those with merchandise suppliers and companies that help small webcasters manage or obtain advertising for their Web sites, such as by inserting ads on the Web site or into the webcast itself or selling advertising based on the aggregate audiences of multiple webcasters. Third-party economic arrangements have had a minimal effect to date on royalties owed by small webcasters to copyright owners. Of the 27 small webcasters we interviewed that had agreed to the terms of the small webcaster agreement and provided us with financial data, 19 reported revenue and expense estimates below the levels that would result in royalty payments greater than the minimum fee. We found limited evidence to suggest that small webcasters may not be reporting revenues and expenses as required by the small webcaster agreement. Specifically, 2 of the 13 small webcasters who reported receiving free or reduced-price items did not report the value of these items as revenue for calculating royalties. However, the data we obtained in our survey may not reflect conditions that could develop as the webcasting industry matures. According to industry analysts, revenues of small webcasters are likely to increase as they attract more listeners and advertisers rely more on the Internet to reach customers.

section_title: Letter
paragraphs: The Internet has led to a new generation of content providers, commonly  known as “webcasters,” who transmit digitized audio or video works over  the World Wide Web. The emergence of this new industry raised concerns  among record companies and performers because their works could be  widely disseminated, which might result in diminished sales of their  copyrighted works through record albums, compact discs, and other  prerecorded formats. To address these concerns and to support the  emergence of new digital technologies, the Congress extended limited  copyright protection to performances of sound recordings being digitally  transmitted.
Webcasting consists of several steps: assembling the recordings to be  digitally transmitted over the Internet, translating them into digital format,  and then delivering performances of the recordings to listeners through an  Internet connection. The audio quality of recordings that are webcast  depends on the bandwidth used—the number of bits of information  transmitted per second. Higher bandwidth results in better audio quality  and also allows a greater number of simultaneous listeners. Webcasters  typically contract with other entities (commonly referred to as third  parties), such as bandwidth providers, to supply different webcasting  services. In addition, webcasters may contract with other third parties,  such as companies who wish to advertise products on a webcaster’s Web  site, to obtain revenue that can help offset the costs associated with  webcasting and return a profit to the webcaster.
A copyright is a form of legal protection provided to the authors of creative  works, such as music and literature, that generally gives the owner certain  exclusive rights. These rights give the copyright owners control over their  works—usually in exchange for compensation, known as a royalty.  Generally, copyright owners and parties seeking to use copyrighted works  voluntarily negotiate the rates at which royalties will be paid. However, the  Congress has, in some cases, established a process under which the  Librarian of Congress sets the royalty rates.
In 1995 and 1998, two key pieces of legislation gave copyright owners the  right to control performances of sound recordings when they are digitally  transmitted and gave webcasters the automatic right to use the recordings  in certain circumstances in exchange for the payment of royalties under a  statutory license. The royalties were to be set at either a voluntarily  negotiated rate or at a rate set by the Librarian of Congress, based upon  hearings before a Copyright Arbitration Royalty Panel and the  recommendation of the Register of Copyrights. However, arriving at the  specific royalty rates that small commercial webcasters should pay to  owners for the use of their copyrighted recordings has been challenging. In  2002, the panel recommended royalty rates for webcasters that the  Librarian subsequently rejected. The Librarian established lower rates that  proved controversial to both copyright owners and to small webcasters.  Copyright owners believed that the new rates were too low, while small  webcasters believed that they were still too high, and small webcasters  sought legislative relief to lower the rates further. In response, the  Congress enacted the Small Webcaster Settlement Act of 2002, which  allowed small webcasters and copyright owners to enter into an agreement  that provides for the payment of royalties based on a percentage of  revenues, expenses, both revenue and expenses, or a minimum fee, for two  time periods—the historical period, which began on October 28, 1998, and  ended on December 31, 2002, and 2003 through 2004.
During the debate on the Small Webcaster Settlement Act, copyright  owners also raised concerns about the economic arrangements that small  webcasters have with third parties, arguing that these arrangements could  produce revenues or expenses that might not be included in the calculation  of royalties that the small webcasters owed to them. To provide more  information on such arrangements, the Congress mandated that GAO, in  consultation with the Register of Copyrights, prepare a report on (1) the  economic arrangements between small webcasters and third parties and  (2) the effect of those arrangements on royalties that are based on a  percentage of the webcaster’s revenues or expenses.
As required by the act, we coordinated with officials from the U.S.  Copyright Office throughout the course of our work and incorporated their  technical and other comments into the report as appropriate. To respond to  the objectives of this study, we met with officials from organizations that  represent small webcasters, the Recording Industry Association of  America, and SoundExchange. We interviewed advertising agency staff, a  bandwidth provider, and industry analysts. We also reviewed relevant  copyright laws, regulations, and articles. In addition, we conducted  structured telephone interviews with 58 small webcasters located  throughout the country—30 that had agreed to the terms of the agreement  reached under the Small Webcaster Settlement Act and 28 that had not. In  conducting our interviews, we requested the same revenue and expense  data that these small webcasters were required to submit to copyright  owners under the small webcaster agreement. Twenty-seven of the 30 small  webcasters that had agreed to the terms of the small webcaster agreement  provided us with estimates of their revenues and expenses.
Because the U.S. Copyright Office does not enforce copyrights or collect  financial data, we did not have access to the financial records of the small  webcasters that we interviewed and thus could not verify the accuracy of  the revenue and expense data they provided to us. Nor did we attempt to  determine whether these small webcasters had paid the royalties based on  those estimates. Appendix I provides additional details on our scope and  methodology.
We conducted our work from May 2003 through May 2004 in accordance  with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The advent of the Internet and digital transmission of sound recordings  through personal computers has revolutionized the music industry and  created a new way to transmit music directly to listeners. Although  personal computers have been available since the late 1970s and music in  digital form since the early 1980s, it was opening up the Internet to  commercial activity in 1992 that set the stage for webcasting. In webcasts,  sound recordings, such as records and compact discs, and live  performances can be transmitted to listeners over the Internet. The  popularity of webcasting is growing, with the number of listeners tripling  over the past 3 years.
Webcasting and traditional radio broadcasting follow essentially the same  steps to deliver music to listeners (see figs. 1 and 2). Many webcasters and  traditional radio stations deliver music to listeners at no charge. A key  difference, however, concerns the number of potential listeners. In  traditional radio broadcasting, a station’s signal is available to any number  of listeners within range of the transmitter. In contrast, the potential  audience for a webcast is anyone in the world whose computer is equipped  with a media player.
Webcasting, also called Internet streaming, is the process of transmitting  digitized audio or video content over the Internet. The content can  originate from live performances, records, compact discs, or other  prerecorded formats. A webcast consists of several steps. The webcasters  must first assemble the music that will be transmitted and then translate it  into one or more digital formats. Music that is not streamed “live” must be  stored so that it is available to individuals who use their personal  computers to access the Web site created by the webcaster. The final step  is delivering the music through an Internet connection.
Choices about the audio quality of the transmitted music and the size of the  audience affect the webcaster’s operation costs. The quality of the resulting  music depends on the bandwidth—the number of bits of information  transmitted per second—used by the webcaster. Higher bandwidth results  in better sound quality of the transmitted music and allows a greater  number of simultaneous listeners. The size of the Internet connection to  the webcaster’s server and the choice of bandwidth determine the potential  size of the audience. Although in its most basic form webcasting can be a  relatively inexpensive “do-it-yourself” operation using a minimum of two  computers and an Internet connection, the trade-off is lower sound quality  and smaller audience size. Alternatively, webcasters that hope to reach a  large audience with high-quality music frequently contract with one or  more third parties to provide the different steps. Such third parties can  provide a single service or some combination of services, including  translating the music into digital form and adjusting bandwidth needs to  accommodate the number of simultaneous listeners. Some may also  provide data on the number and location of listeners. Because webcasters  frequently deliver their music at no charge to listeners, webcasters may  contract with other third parties, such as companies that wish to advertise  products on the webcaster’s Web site, to obtain revenue that can help offset  the costs associated with webcasting and return a profit to the webcaster.
The Internet and the ability to digitally transmit sound recordings have  created opportunities for the recording companies that typically own the  copyrights in sound recordings to reach an unprecedented number of  listeners. Accompanying these opportunities are challenges for copyright  owners to maintain control over, and be compensated for, the use of their  copyrighted recordings. In the United States, the owners of copyrights in  sound recordings have not historically enjoyed the exclusive right to  control or authorize public performances of their recordings. Traditionally  these copyright owners generated royalties by selling copies of the  recordings in the form of albums, cassette tapes, and compact discs.  Although radio broadcasters pay royalties to publishers and writers for use of a musical work, they were not obligated to pay record companies for the  use of sound recordings.
Two key pieces of legislation gave copyright owners the right to control  performances of sound recordings when they are digitally transmitted and  gave webcasters the automatic right to use the recordings under certain  circumstances in exchange for the payment of royalties under a statutory  license. The Digital Performance Right in Sound Recordings Act, enacted in  1995, granted copyright owners the exclusive right to control or authorize  the use of recordings when they are digitally transmitted but not, for  example, when they are transmitted for use as background music in a  restaurant. In the Digital Millennium Copyright Act (DMCA), the Congress  expanded the scope of this digital transmission right. Among other things,  the DMCA specifies that webcasters may operate under an automatic  license to use copyrighted works at either a voluntarily negotiated rate or  at a rate recommended by a panel known as a Copyright Arbitration  Royalty Panel (CARP), subject to review by the Librarian of Congress.  These rates, retroactive to October 1998, were to apply through December  2002. The act called for this procedure to be repeated every 2 years as the  webcasting industry developed, though it could be extended by agreement  between the copyright owners and webcasters.
However, the legislation created conflict between record companies and  webcasters. The DMCA provided the opportunity to negotiate royalty rates  independently. But after negotiations between owners and webcasters  broke down, the Library of Congress convened a CARP to resolve the issue  and determine the appropriate rates. The CARP held hearings for 6 months,  during which both the copyright owners and webcasters presented their  cases. In February 2002, the CARP issued a royalty rate recommendation.
In June 2002, the Librarian rejected some of the webcasting rates  recommended by the CARP and issued a regulation that set royalty rates  for Internet transmissions. Both record companies and webcasters  contested the Librarian’s rates and sought relief in the courts. Some small  webcasters believed that the rates set by the Librarian were too high,  arguing that they would have to close their operations because they could  not pay the rates set by the Librarian and that these rates would put an end  to the promise of webcasting. Copyright owners believed the rates were  too low and did not reflect the true market value of their music, causing  them to, in essence, subsidize the webcasters. Moreover, they argued that  royalties are simply another cost of doing business, like buying bandwidth,  and webcasters that could not afford to pay them should not be operating.
In response to these concerns, the Congress passed the Small Webcaster  Settlement Act of 2002. The act did not set new royalty rates but instead  allowed small webcasters and copyright owners another opportunity to  negotiate an agreement on royalty rates for the period beginning October  28, 1998, through December 31, 2004. These negotiated rates were to be  based on a percentage of revenue or expenses, or a combination of both;  were to include a minimum fee; and were to apply in lieu of rates set by the  Librarian of Congress (see table 1). This option was available to any small  webcaster that met the agreed-upon eligibility requirements. In December  2002 the U.S. Copyright Office published the resulting agreement under the  act. The agreement contained specific guidance for webcasters to follow  in determining the specific revenue and expense categories that were to be  included in the calculation of royalties due to copyright owners. The  guidance defines revenues and expenses in ways compatible with generally  accepted accounting principles and income tax reporting.
As of October 2003, 35 small webcasters that had elected to follow the  royalty rates and terms set out in the agreement were in operation. As  shown in figure 3, these webcasters were located throughout the United  States, with one in Canada. We interviewed 30 of these webcasters. Rock  and pop are the types of music they most often delivered to listeners,  although they also webcast rhythm and blues, jazz, “oldies,” and electronic  dance music. For 17 of these small webcasters, the targeted audience  includes both men and women, while the audience for the remaining 11 is  predominately men. Almost all of these small webcasters target listeners  between the ages of 25 and 34.
section_title: Small Webcasters Enter into a Variety of Economic Arrangements with Third Parties
paragraphs: Small webcasters have economic arrangements with various third parties,  including bandwidth providers, advertisers, and merchandise providers.    Other less commonly reported arrangements with third parties included  those with companies that help small webcasters manage or obtain  advertising, such as companies that insert ads either on the Web site or into  the webcast, and companies that sell advertising based on the aggregate  audience of multiple webcasters. We determined that the economic  arrangements of the small webcasters that elected to follow the terms in  the small webcaster agreement and those that elected not to do so were not  substantially different.
subsections: section_title: Arrangements with Bandwidth Providers and Advertisers are Most Common
paragraphs: Fifty-two, or 91 percent, of the small webcasters that we interviewed  reported having had arrangements with bandwidth providers during the  year 2003. In addition, 24 small webcasters said that they had received free  bandwidth. However, only 16 of them had received free bandwidth in 2003.  Fifteen small webcasters reported that they had received bandwidth at a  reduced price at some point, while 14 were receiving it at a reduced price in  2003. Although bandwidth is the dominant cost component for most  webcasters, some bandwidth providers offer these incentives as a means to  gain business for themselves and to promote the small webcaster market in  general.
Over half of the small webcasters interviewed had attempted to sell  advertising space, either directly or through advertising firms. Of the 40  small webcasters that reported having attempted to sell advertising space,  38 said they were currently running advertising on their stations and 2  stated that they had run advertising in the past, but were no longer doing  so. As shown in figure 4, these small webcasters had various methods of  selling advertising space. Most reported that the owners or employees of  their stations sold advertising space. Other arrangements to sell advertising  space, such as through advertising firms or coalitions of webcasters, were  less common.
Small webcasters use various types of advertising on their sites. Banner  ads, which are graphic images that typically appear toward the top of Web  pages, were the most common type of advertising used by small  webcasters (see fig. 5). Thirty-three of the small webcasters reported that  they use banner ads on their sites, and another 2 reported that they used  banner ads in the past, but no longer do so. Audio ads, which play at the  beginning or during a small webcaster’s stream, were currently being used  by 29 of the small webcasters, and another 3 reported having used them in  the past. Video ads, which are either shown on the computer screen  whenever the listener tunes to the station or during the stream, were less  common. Only 9 of the small webcasters reported using video ads, and  another 4 said they had used them in the past. Some of the small  webcasters reported using some other type of advertising on their sites.
Advertising is a primary source of revenue for the small webcasters we  interviewed. Twenty-seven of the 58 small webcasters interviewed reported  that advertising had provided at least 10 percent of their station’s gross  revenue in 2003 (see fig. 6). According to industry analysts and  representatives, advertising sales have remained low, in part due to the  collapse of the high technology business sector since 2000 and because of  the relative novelty of the Internet as an advertising medium. Twelve of the  small webcasters interviewed reported that they had received free or  reduced-price advertising since 1998. In addition to advertising, other  sources of revenue for the small webcasters included donations and  merchandise sales.
section_title: Arrangements with Merchandisers and Other Third Parties Are Less Prevalent
paragraphs: Small webcasters generally did not have arrangements with other third  parties, such as merchandisers and ad insertion companies. Twenty-five, or  44 percent, of the small webcasters that we interviewed reported that they  had economic arrangements with suppliers of merchandise, such as  T-shirts or coffee mugs in 2003 (see fig. 7). This represented an increase of  4 percent from the 1998 through 2002 time period. In addition to selling  merchandise on their sites, 15 small webcasters reported that they had  received merchandise, such as compact discs and T-shirts, for free or at a  reduced price.
Thirteen, or 23 percent, of the small webcasters reported that they had  economic arrangements in 2003 with ad insertion companies, which sell  either the technology for inserting ads into a webcaster’s audio stream or  the service of inserting the ads. This technology can help small webcasters  target their advertisements to the profiles of their listening audiences as  well as provide links to their advertisers’ Web sites. Other types of  economic arrangements that were even less common involved coalitions of  webcasters and arrangements with aggregators. Twelve, or 21 percent, of  the small webcasters reported that they had economic arrangements in  2003 with a coalition of webcasters. Such coalitions have formed to help  webcasters market themselves to advertisers. Seven percent of the small  webcasters reported that in 2003 they had economic arrangements with  companies that sell advertising based on the aggregate audience of multiple  webcasters. When an advertiser purchases advertising space from a  webcaster, the advertiser is purchasing the chance to present a message to  as many listeners as possible. While some webcasters are small and may  not have enough listeners to attract advertisers on their own, they have  entered into arrangements with companies that sell advertising space  based on an aggregate audience of multiple webcasters. Other  arrangements included those with parent and sister companies and with  corporate sponsors.
section_title: Available Data Suggest the Effects of Economic Relationships between Small Webcasters and Third Parties on Royalties Have Been Minimal to Date
paragraphs: Data obtained from small webcasters that agreed to the terms of the small  webcaster agreement suggest that to date the overall effect of their  economic arrangements with third parties on royalties owed to copyright  owners has been minimal. Most of these small webcasters owed the  minimum royalty fee for either or both of the time periods for which  payments were to be made. Because royalty obligations for these  webcasters are based on a percentage of their revenues or expenses, or a  minimum fee, whichever is greater, accurate reporting is essential to  ensure the appropriate payment of royalties. We found only limited  evidence to suggest small webcasters might not be doing so.
subsections: section_title: Royalties for Most Small Webcasters Equal the Minimum Fee
paragraphs: The majority of small webcasters we interviewed that had agreed to the  royalty terms in the small webcaster agreement owed royalties equal to the  minimum fee because they did not generate revenue or incur expenses  sufficient to exceed the thresholds for owing royalties above the minimum  fee. Nineteen, or 70 percent, of the 27 small webcasters that provided us  with financial information reported revenue and expense estimates that  were below the levels that would result in royalty payments above the  minimum fee for one or both of the time periods for which payments were  to be made—the historical period, which began on October 28, 1998, and  ended on December 31, 2002, and 2003 (see table 2). The specific revenue  and expense thresholds vary, in part, depending on when the webcaster  began operating. The revenue threshold ranged from $25,000 for those that  began operating in 2002 to more than $100,000 for those that began in 1998,  while the expense threshold ranged from $40,000 to $170,000. For the  period 2003 to 2004, the revenue threshold varied in relation to anticipated  revenue, with the threshold at $20,000 for those earning less than $50,000  and at $50,000 for those earning more. During the same time period, the  expense threshold was $28,571 for those earning less than $50,000 and  $71,429 for those earning more. Most small webcasters reported revenues  or expenses that were less than half the thresholds required for royalty  payments to exceed the minimum fee.
Eight small webcasters owed royalties that were based on either revenues  or expenses and exceeded the minimum fee. Five owed $3,000 or less  above the minimum fee and one owed $5,000 above the minimum fee. The  remaining two small webcasters owed more than three times the amount of  the minimum fee. These two owed royalties based on their revenues in  both time periods. One webcaster attributed much of its revenue to a  relationship with an online retailer, while the other received revenue from  an Internet service provider that offered its customers the option of  including the webcast as an additional service. The specific minimum fee  applicable to any individual small webcaster varied in the first period in  relation to when it began transmitting, ranging from a low of $500 for a  webcaster that operated only in 1998 to $8,500 for one that was operating  for all or part of each year from October 28, 1998, through December 2002.  The minimum fee for the period 2003 to 2004 varied in relation to  anticipated revenue and was $2,000 for small webcasters earning $50,000 or  less and $5,000 for those earning more.
Reporting revenue and expenses in accordance with the small webcaster  agreement is important to help ensure the proper payment of royalties.  Under the agreement, all money earned and all expenses incurred, with  certain exceptions, are to be reported for purposes of calculating royalties.  For example, small webcasters may exclude revenues from the sale of  recordings or assets such as land or buildings and such expenses as  royalties paid, the cost of recordings used in the webcast, and the value of  residential space used in the operation of the webcasting service.
Transactions that do not involve the exchange of money but result in the  webcaster receiving something of value are to be included in statements of  revenues or expenses. The value of the goods or services received is to be  included in the small webcaster’s revenue, and any goods or services the  small webcaster offered in exchange are to be reported as expenses. For  example, if a small webcaster received free bandwidth, the value of that  service should be included as revenue. In some cases, small webcasters  contract with an advertising firm that forwards a portion of the advertising  sales to the small webcaster and retains a portion as commission. In these  cases, the small webcaster is to report the money it received as revenue  and the portion retained by the advertising firm as an expense.
Although the extent to which small webcasters comply with the  agreed-upon guidance for reporting revenues and expenses could not be  determined without a detailed review of their financial records, small  webcasters that elect to follow the terms of the small webcaster agreement  subsequently certify that the figures they report to copyright owners are  accurate under penalty of law. Copyright owners have the right to initiate a  detailed review of financial records to verify the accuracy of the reported  figures. However, an attorney representing copyright owners said that, to  his knowledge, no such reviews have been conducted.
We found limited evidence to suggest that small webcasters might not be  reporting revenues and expenses as agreed. Specifically, while 13 of the  small webcasters interviewed said they had received goods or services at  no charge, 2 reported having no revenue, although they had received free  bandwidth. In each case, however, these small webcasters reported  revenue and expense estimates that were well below the revenue and  expense threshold, and both were subject to the minimum fee for both the  period from 1998 to 2002 and for 2003.
section_title: Effect of Economic Arrangements May Change As Industry Evolves
paragraphs: Although the majority of small webcasters that we interviewed reported  revenues and expenses that were substantially below the levels required to  pay a royalty above the minimum fee, this may change as the industry  matures.Revenues and expenses of small webcasters might increase as  they attract more listeners, and advertising opportunities and rates may  also increase as the webcasting industry matures and advertisers rely more  on the Internet as part of their advertising efforts. Two trends that may  affect the amount of royalties that small webcasters may have to pay in the  future include growth in audience size and growth in advertising. The  number of Americans listening to Internet transmissions nearly tripled  between 2000 and 2003, and about 40 percent of Americans have listened to  webcasts, including Internet transmissions of over-the-air radio  programming, at least once, according to recent reports by an international  media and marketing research firm. Industry analysts expect this growth  to continue. Small webcasters that we interviewed also reported growth in  the sizes of their audiences.  Thirty-six, or 76 percent, of the small  webcasters that we interviewed that started webcasting before January  2002 said their audience size had increased, although they could not  quantify the extent of the increase (see fig. 8).
As mentioned earlier, the small webcasters that we interviewed indicated  that they depend upon advertising as a primary source of revenue.   According to an estimate from one of the reports cited above, if the  aggregate webcast audience could be “sold” to advertisers as if it were an  over-the-air radio network, it could generate up to $54 million per year in  advertising revenue.  However, according to industry analysts, webcasters  have the potential to increase their advertising revenues over current  levels, in part because they have the ability to provide demographic  information about their listeners, which allows advertisers to more  accurately target advertisements to potential consumers.
We will send copies of this report to the appropriate House and Senate  committees; interested Members of Congress; the Librarian of Congress;  and to the Director, Office of Management and Budget. We will also make  copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you have any questions about this report, please contact me at (202)  512-3841. Other major contributors to this report are listed in appendix III.
section_title: Scope and Methodology
paragraphs: As required by the Small Webcaster Settlement Act of 2002, we conducted a  study in consultation with officials from the U.S. Copyright Office in the  Library of Congress to determine (1) the economic arrangements between  small commercial webcasters and third parties and (2) how those  arrangements affect royalties due to copyright owners and performers. We  consulted officials from the U.S. Copyright Office throughout the course of  our work and incorporated the suggestions and comments we obtained  into our report as appropriate.
To respond to the objectives set out in the act, we met with officials from  the U.S. Copyright Office, the Library of Congress, and representatives of  organizations that represent copyright owners. In addition, we interviewed  staff from businesses that provide advertising and other services to small  webcasters and industry analysts. We also reviewed relevant copyright  laws, regulations, and articles.
To obtain information from small webcasters, we developed a structured  interview. We pretested the content and format of this interview with 6  webcasters. During these pretests we asked the small webcasters to assess  whether the questions were clear and unbiased and whether the terms  were accurate and precise. We made changes to the interview protocol  based on pretest results. We conducted the interview via telephone with 58  small webcasters located throughout the country—30 who had agreed to  the terms of the agreement reached by copyright owners and small  webcasters under the Small Webcaster Settlement Act and 28 who had not.
The U.S. Copyright Office is not required to and does not maintain a list of  small webcasters. As a result, to identify the universe of small webcasters,  we obtained a list from SoundExchange of 35 small webcasters that had  elected to follow the terms of the small webcaster agreement. We  subsequently learned that one of the webcasters had determined that it was  not eligible to follow the terms of the agreement because the station made  too much revenue, and a second webcaster operated only as a subscription  service. A third webcaster informed us that it had ceased operating in  December 2000. SoundExchange later sent us an updated list that included  3 additional small webcasters. Thus, the number of eligible small  webcasters that were operating as of October 2003 and had agreed to  follow the terms of the agreement was 35. We completed interviews with 30  of these small webcasters for a response rate of 85.7 percent.
We also interviewed small webcasters that did not elect to follow the terms  of the small webcaster agreement. We obtained a list of 121 names of small  webcasters from BRS Media (a private firm that maintains a list of Internet  broadcasting firms). To the best of our knowledge, this encompassed all  small webcasters operating in the United States. Of these 121 webcasters,  28 were no longer operating or did not appear to meet the definition of an  eligible small commercial webcaster, and 4 had signed the small webcaster  agreement (and thus were on the list of “signers”). We attempted to reach  the remaining 89 small webcasters. Forty-two small webcasters were  contacted. Interviews were completed with 28 that met the criteria of  “small webcaster.” Fourteen webcasters refused to be interviewed. We  were not able to contact the remaining 47 webcasters, although we made  repeated attempts and left messages when we could. We did not calculate  the response rate for the group of small webcasters that did not sign the  agreement because we did not know how many of those not interviewed  were eligible small webcasters, and we did not have enough information to  reasonably estimate the percentage that might be eligible.
To protect the confidentiality of the small webcasters we interviewed, we  randomly assigned each an identification number and documented their  responses to our interview questions with the identification number.  During the interviews, we asked the 58 small webcasters about economic  arrangements they had with third parties, whether they were currently  receiving or had previously received any free or reduced-price goods or  services, and requested estimates of their revenues, expenses, and third  party revenues. For those small webcasters that had signed the election  form to follow the terms of the small webcaster agreement, we asked for  their reasons for doing so. For those that had not signed the election form,  we asked for their reasons for not doing so. For many of the questions, we  asked small webcasters to provide separate responses for two different  periods to correspond with the reporting periods contained in the  agreement—the historical period, which began on October 28, 1998, and  ended on December 31, 2002, and 2003 to 2004. We asked small webcasters  to provide information through the date of our interviews, which were  conducted in November and December 2003.
We also asked each of the 30 small webcasters we interviewed who had  elected to follow the terms of the small webcaster agreement to sign a  release form allowing us to obtain access to the financial records they had  submitted to SoundExchange. We obtained signed release forms from 25 of  the 30 (83.3 percent) small webcasters. A representative of SoundExchange  subsequently informed us that it had no financial information for 9 of these  25 small webcasters. We reviewed the information the 16 remaining small  webcasters had provided to SoundExchange to determine whether it was  comparable to the information they had provided to us.
To assess the effect that economic arrangements between small  webcasters and third parties have on the royalties due to copyright owners  and performers, we used financial information obtained during our  interviews with 27 of the 30 small webcasters that elected to follow the  terms of the agreement. Three of the 30 small webcasters declined to  provide any financial information. We calculated the threshold revenue  amounts that each of the 27 small webcasters would have had to exceed to  owe more than the minimum royalty fee. These revenue amounts were  calculated for both time periods—October 28, 1998 through December 31,  2002, and for 2003—and were based on the length of time the small  webcaster had been in operation. We then estimated the amount that each  small webcaster owed in royalties for each of the two time periods based  on the revenue and expense data that they provided to us. For small  webcasters that did not report revenue or expense estimates for the entire  year, we used their average monthly revenues to project their yearly gross  revenue and/or expenses. These estimated values were compared to the  threshold amounts and allowed us to determine whether the small  webcasters were subject to royalty payments above the minimum fee.
section_title: Results of GAO’s Survey of Small Webcasters
paragraphs: Q1:  Number of Webcasters Who Began Operating Current Nonsubscription Webcasting  Service in Years 1997 to 2003  (N=30) (N=24) (N=58)
Q3:  Percentage of Webcasters Streaming One or More Channels  (N=30) (N=24) (N=58)
Sex of listeners  Mostly males  (N=28) (N=23) (N=55)
Q6:  Percentage of Webcasters Who Track Size of Audience  (N=30) (N=24) (N=55)
Q7:  Size of audience.  Data are not reported due to unreliability.
Q8:  Percentage of Webcasters Reporting Increase or Decrease in Size of Audience Since  (N=29) (N=24)
Q9:  Percentage of Webcasters Currently Offering a Subscription  (N=29) (N=23) (N=58)
Use of advertising  Currently use  (N=29) (N=24) (N=57)
Have never  used but  intend to use  in the future*  (N=21)
Did not sign small webcaster agreement  (N=16)
Banner ads  Audio ads  Video ads  Other types of ads   (N=40)
Banner ads  Audio ads  Video ads 10.00  Other types of ads  2.50  *This question was asked only of those respondents who answered that they “had  never used” that type of advertising.
Don’t do  and don’t  intend to  in future  (N=20)
Did not sign small webcaster agreement  (N=16)
Sold by an advertising  agency Sold by owners or  employees of the  station  Sold by owners or  employees of parent  company Sold through a  coalition of webcasters  Other ways (N=39)
Sold by an advertising  agency Sold by owners or  employees of the  station  Sold by owners or  employees of parent  company Sold through a  coalition of webcasters  Other ways 2.56  Q13:  Percentage of Webcasters Who Had Economic Transactions With Different Types  Type of business  Ad insertion company  Advertising agency  Audience aggregator for   advertisers  Bandwidth provider (i.e., an  ISP)  A music content provider  A corporate sponsor  A coalition of webcasters  A parent or sister company  Suppliers of merchandise (e.g.,  T-shirts)  Other types of businesses  (N=22) (N=21) (N=47)
Type of business  Ad insertion company  Advertising agency  Audience aggregator for   advertisers  Bandwidth provider (i.e., an  ISP)  A music content provider  A corporate sponsor  A coalition of webcasters  A parent or sister company  Suppliers of merchandise (e.g.,  T-shirts)  Other types of businesses  (N=29) (N=24) (N=57)  50.88  Q14:  Percentage of Webcasters Using Different Methods to Pay for Goods and Services  Method of payment  Direct payment, that is, with  cash or a check  Commissions  Revenue or profit sharing  Barter or other noncash  exchange Other ways  (N=22) (N=21) (N=47)
Method of payment  Direct payment, that is, with  cash or a check  Commissions  Revenue or profit sharing  Barter or other noncash  exchange Other ways  (N=29) (N=24) (N=57)  3.51  Q15:  Percentage of Webcasters Who Reported Receiving Different Types of Goods and  Goods and services  Free bandwidth  Reduced-price bandwidth  Free or reduced-price  advertising for your webcasting  service  Other goods  (N=22) (N=21) (N=47)
Goods and services  Free bandwidth  Reduced-price bandwidth  Free or reduced-price  advertising for your webcasting  service  Other goods  (N=28) (N=24) (N=56)
Goods and services  Advertising  Cash donations  Noncash donations  Merchandise sales  Other sources  (N=21) (N=21) (N=46)
Goods and services  Advertising  Cash donations  Noncash donations  Merchandise sales  Other sources  (N=28) (N=24)
Q17:  Webcasters’ Estimates of Their Gross Revenue  (N=20) (N=19) (N=41) (N=27) (N=22)
Q18:  Webcasters’ Estimates of Their Expenses  (N=20) (N=18) (N=40) (N=27) (N=21) (N=50)
Q.19:  Percentage of Webcasters Who Participated in the Negotiations  That Led to the Small Webcaster Settlement Act  (N=28) (N=24) (N=56)
Q20:  Percentage of Webcasters Who Elected to Pay Royalties to  Performers Under the Terms of the Small Webcaster Agreement  (N=28) (N=23) (N=55)
Q21:  Month and Year Election Forms Submitted to  SoundExchange.  Data are not reported due to  unreliability.
Reasons for electing to pay royalties  The royalty rates for performers under  the small webcaster agreement seemed  reasonable.  Thought there was no choice but to sign  the election form.
The implementation of your business  plan required the certainty of knowing 63.33 performer royalty obligations.  Wanted to take advantage of the “delay of  obligation” option, which allows a small  webcaster to delay performer royalty  payments.  Other reasons66.67 *This question was answered only by those respondents who  elected to pay royalties under the agreement.
Reasons for electing to not pay royalties  The performer royalties under the  agreement seemed too high.  Arranged a private agreement with  performers.  Not familiar with the process and did not  know this was an option.  Waiting to see if the rate would change.  Only stream music by independent artists  and labels.  Terms and conditions set by the Library  of Congress were more favorable.  Other reasons  *This question was answered only by those respondents who  elected to not pay royalties under the agreement.
Q24:  Webcasters’ Estimates of Revenues Earned by Third Parties  (N=10) (N=13) (N=27) (N=15) (N=15) (N=34)
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
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paragraphs: Stephen M. Brown, Jason Jackson, Jonathan McMurray, Lynn Musser,  Deborah Ortega, Janice Turner, and Mindi Weisenbloom made key  contributions to this report.
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