David Kent is a partner in the Toronto law firm of McMillan Binch LLP and a member of its Litigation, Knowlaw and Competition Groups.

Broadcasters, producers, composers and publishers are squaring off in the next round of their continuing dispute over music royalties. And there’s a lot at stake – at least six years of royalties, worth hundreds of millions of dollars, are in play. This may be the biggest bundle of claims, in dollar terms, ever handled by the Copyright Board.

The royalties

Two separate but related SOCAN tariffs are involved. One is Tariff 2.A, covering public performance music royalties to be paid by private conventional television broadcasters. This tariff has been around since the 1950s and was last set for 1997. The other tariff is Tariff 17.A. This tariff covers Canadian and foreign pay and specialty services, together with the cable and satellite companies and other ‘broadcasting distribution undertakings’ that carry them. This tariff was last set for 2000.

An unusual joint hearing

It is unusual for the Copyright Board to consider multiple tariffs at a single hearing. This time around, the mere possibility that it might do so provoked the first dispute among the participants.

Tariff 2.A is normally the preserve of the Canadian Association of Broadcasters, on the one hand, and SOCAN, on the other. But the Canadian Cable Television Association, which represents cable BDUs in Tariff 17.A, asked to intervene in Tariff 2.A. The CCTA foresaw that issues which were on the table in Tariff 2.A would come back before the Board in the context of Tariff 17.A and wanted to cover this off by participating in both matters. This led CCTA to request that the two hearings be combined.

Most of the other participants, including SOCAN, objected. The CAB, for example, did not want to be stuck in a combined hearing which included arguments by (and sometimes between) pay and specialty services on issues which did not affect conventional broadcasting. But the Board, concerned about the potential for inconsistencies between the tariffs, ordered a joint hearing.

The issues

The filings to date disclose a number of key issues:

Royalty rate: The main issue is the size of the royalty payable by conventional broadcasters for performing the music embedded in their programs. Expressed as a percentage of revenue, this rate has fluctuated since it was introduced in the late 1950s. It had risen to 2.4% in the mid-’80s, came down to 2.1% at that time, and was further reduced to 1.8% for 1997. SOCAN now seeks to turn back the clock and reverse that trend by having the Board revert to the earlier 2.1% rate. For their part, the broadcasters want to continue the trend by further reducing the rate to 1.4%.

The value of that gap is significant. If you assume annual private conventional television revenues of about $1.8 billion, the difference between a 1.4% and 2.1% royalty is about $11 million per year – that’s about $66 million for the period under review.

And the overall effect may be even greater. While the royalties payable by BDUs and pay and specialty services under Tariff 17.A are not generally expressed as a percentage of revenue, they were historically derived from the predecessor Tariff 2.A rate. If the Tariff 2.A rate is again used to set the Tariff 17.A rate for the period under review, the potential impact on SOCAN and the broadcasters becomes that much more.

Modified blanket licence: A second key issue relates to the so-called ‘modified blanket licence’ or MBL. This licence, which is an alternative method of calculating SOCAN royalties, permits conventional broadcasters to effectively exclude from their royalty calculations the ad revenue associated with programs in which they have cleared the performing rights in the music. In other words, programs which do not require a SOCAN licence do not ‘count’ for the purposes of calculating the revenues on which the percentage royalty rate is applied.

A similar arrangement has been actively used in the U.S. for some years. The CAB asked for it in 1993 but was unsuccessful. It tried again, successfully this time, in 1997. The MBL has only recently been used by broadcasters – it was in limbo while SOCAN unsuccessfully appealed from the last Copyright Board decision all the way to the Supreme Court of Canada.

The MBL issue appears to be as much about politics as about economics. SOCAN has taken the position that an MBL, which both assumes and permits bargaining between composers and producers, is contrary to the entire notion of a performing rights collective. SOCAN has gone so far as to state that the MBL is contrary to the Charter of Rights and Freedoms.

SOCAN is asking the Board to do away with the MBL for conventional broadcasters. On the other hand, some pay and specialty services are asking the Board to extend the MBL beyond conventional broadcasting and to make it available to them as well.

Low music use: A third issue to watch pits the BDUs and pay and specialty services against SOCAN, but raises the possibility of quarrels among the services themselves.

Pay and specialty services range widely in the amount of music they use. The conventional wisdom is that weather and news services use (or at least need) relatively little music, while the services which are defined by music use a great deal more. This has led some services to ask the Board to set a special rate for those which use relatively little music. A similar argument was successfully made a number of years ago by talk and classical radio stations, which use little of SOCAN’s repertoire.

The low-use services argue simply that a special low rate should be applied to them, with no particular consequences to the rate otherwise payable by other services. But SOCAN will inevitably argue that a reduction in the standard rate for some services should result in an increase in the rate for everyone else. If SOCAN takes that position, watch for the higher music use services to get involved.

What’s next?

The next two filing dates are in January and March 2003. We’ll all have a better idea of the positions and evidence at that time. And then buckle your seatbelts. The April hearing which follows will be intense, complex and may feature the interesting dynamic of having some participants firing both across the trenches and at their ‘allies’ at the same time.

McMillan Binch LLP represents the Canadian Association of Broadcasters in the proceeding described in this article. The article contains general comments only. It is not intended to be exhaustive and should not be considered as advice in any particular situation.