Face the Music

You could call Michael Huppe the Zelig of the music industry. The energetic lawyer shows up at concerts, festivals, and panel discussions everywhere. He’s at the South by Southwest festival in Austin, speaking at town hall meetings. He’s at an R&B festival in Philadelphia that’s raising money for struggling musicians. He mingles with celebrities at the Grammy Awards in Los Angeles and chats with politicians at a concert on Capitol Hill.

Huppe isn’t a record company executive, though. He’s general counsel for SoundExchange, Inc., a nonprofit organization designated by the U.S. Copyright Office to collect and distribute performance royalties when music is broadcast digitally. And he goes to the events with one mission: to tell musicians they might be owed money.

Performers are usually surprised, and invariably grateful, to learn that SoundExchange may have a check waiting for them, Huppe says, however small it may be. “Not everyone is a Bruce Springsteen or a Madonna,” he says. “Most, if they’re lucky, are just able to scratch out a living.” It’s a job Huppe, 40, describes passionately from his office in Washington, D.C., where he’s surrounded by a hip, young staff, many of whom moonlight as musicians.

In his conservative business jacket and button-down shirt, Huppe may not look like he represents the future of the music industry. But in the years ahead, he says, music labels and artists will increasingly depend on the performance royalties SoundExchange distributes to survive.

It’s no secret that the old ways of doing business in the music industry are dying. CD sales are plummeting. Online piracy and counterfeiting are robbing artists of income. Meanwhile, Internet radio is booming. About 60 million listeners tune in to an Internet station every month, according to a 2008 report by JP Morgan North, American Equity Research. That’s up from about 15 million listeners just three years earlier. One of the most popular Internet music sites and iPhone software applications, Pandora, creates personalized stations for listeners and is expected to bring in $25 million this year. “We’re an exploding part of the music industry, and one of the few growth sectors,” Huppe says, nearly rising from his seat. “We’re in unbelievably dynamic times.”

It’s not all rock festivals and industry galas, of course. Huppe spends much of his time defending SoundExchange. That’s because some Webcasters say there’s a big problem. The performance royalties that Internet radio stations must pay to broadcast music are so high, Webcasters say they’re being forced out of business. They warn that if the rates aren’t lowered, the entire music industry, from musicians to music lovers, will suffer. The Webcasters have done more than complain. They’ve formed a coalition with small record labels and listeners. They’ve won support from senators and congressmen, who have introduced legislation aimed at overturning the royalty rates. They’ve sponsored a day of silence in protest. And they’ve taken their grievances to federal court. While few people criticize Huppe personally, both he and SoundExchange are at the center of the ongoing controversy.

“It’s really put a damper on the entire industry,” says Kurt Hanson, owner of AccuRadio, an Internet radio station with 320 streams of music ranging from Chinese pop to West Coast jazz. “Advertisers are hesitant to embrace [Internet radio] fully. Webcasters find it nearly impossible to get any investment funding. It’s difficult in some cases to hire employees. It’s been bad news all around.”

Meanwhile, Huppe and supporters of the higher rates argue that no one wants Internet radio stations to go under. That wouldn’t be good for the music business or listeners. Huppe himself is a longtime music lover who’s played the keyboards since childhood. He took up the trombone in high school, and for his son’s fourth birthday, he gave him a guitar. But Huppe says he knew he’d never be another Billy Joel (one of his favorites). So he sympathizes with struggling musicians who deserve to earn a decent living for their work. “At the end of the day, it’s about basic fairness,” Huppe says. “It’s about fighting for what’s right.”

SoundExchange has negotiated deals so that some Webcasters can pay lower rates temporarily. And negotiations continue with the Digital Media Association, a trade association that negotiates royalties for its members. But ultimately, Huppe says, it will be up to Internet broadcasters themselves to find business models that turn a profit, and he believes eventually many will. For now though, predicting what’s ahead for the digital music industry is difficult, if not impossible.

Cydney Tune, who leads Pillsbury Winthrop Shaw Pittman’s copyrights practice and media and entertainment industry team from the firm’s San Francisco office, says her firm has represented both artists and copyright holders. So she sees both sides of the controversy, she says, and there are no easy answers. “We need to reach a balance where we can encourage a robust Internet broadcasting environment, and at the same time make sure that copyright owners are fairly compensated,” Tune says. “It’s an easy goal to recite, but perhaps a difficult goal to reach.”

SoundExchange originated as a division of the Recording Industry Association of America (RIAA), and was spun off as a separate nonprofit organization in 2000 to collect and distribute those performance royalties. It’s the only agency authorized to do so. Today, it represents more than 3,500 record companies and more than 6,000 labels and their artists.

It’s Huppe’s job to oversee all the nonprofit’s legal, regulatory, and legislative issues. But he does so under the direction of an 18-member board made up of small and large record labels, artists’ representatives, and others from the RIAA. Their business interests often diverge, and Huppe says he spends a lot of time talking to the board about issues and helping them work together. “We do have very active board members,” Huppe says, “and I shoot straight with all of them.”

Much of what Huppe and the board can do is dictated by a long, often mind-numbing list of federal statutes and regulations, many of which Huppe can recite from memory. To begin with, SoundExchange doesn’t actually set the performance royalties it collects. It makes recommendations to three judges who sit on the Copyright Royalty Board, which was created by Congress in 2004 to set royalty rates and terms for statutory licenses. The Librarian of Congress appoints the judges.

And the judges are doing something relatively new. Few people realize that in the United States, musicians and singers don’t get paid when traditional radio stations broadcast their songs-only songwriters and publishers do. That changed in 1995, when Congress passed the Digital Millennium Copyright Act, which provided a limited performance right for cable and satellite radio. In a controversial move, it was expanded in 1998 to cover Internet transmissions.

So when Huppe isn’t traveling to music events telling musicians about SoundExchange, which he does several times a month, he’s lobbying politicians on Capitol Hill to support the nonprofit. His primary responsibility, though, is implementing all the regulations that apply to SoundExchange, and that includes making sure royalties are collected and distributed efficiently and accurately. By the end of 2007, the group had collected royalties of more than $248 million, half of which goes to record companies, and the other half to performers. It’s distributed more than $150 million total to artists so far. Getting money out the door isn’t as easy as it may sound, he says. It can take about six months. It can take longer when playlists are sent incorrectly. Sometimes, musicians they’ve contacted never collect the money they’re owed.

“We judge our success on how much money we can get out the door, and how quickly we can do it,” Huppe says. “The less money that goes out the door, the less pleased we are with our process.”

Huppe has a small staff to help with that process. For example, it’s the job of Colin Rushing, senior counsel for Sound Exchange, to make sure radio stations report data accurately, and to work with them when they don’t. No station has been taken to court yet for noncompliance, but that’s always a possibility. “More often than not, they’re willing to work with us,” Rushing says. “Because if they’re not reporting like they should, they’re guilty of copyright infringement, and the damages are huge.” (Fines can range up to $150,000 for willful infringement.)

Huppe’s job may not be easy, say those who work closely with him, but it is exciting. “Everything that he does every day is cutting-edge,” says Thomas Perrelli, managing partner of the D.C. office of Jenner & Block, a law firm that handles litigation for SoundExchange, such as the rate-setting procedures for Internet and satellite radio before the Copyright Royalty Board. “It’s the first time for everything, and that makes it an extraordinarily difficult job for a lawyer, and incredibly interesting.”

Huppe says he never imagined becoming a player in the music business when he graduated from Harvard Law School in 1995. Intellectual property law first piqued his interest while he clerked for federal district court judge Leonie Brinkema in the Eastern District of Virginia. Then he spent a few years honing his litigation skills at Akin Gump Strauss Hauer & Feld in Washington, D.C. Those skills led him in 2000 to the RIAA as its deputy general counsel. He handled digital copyright lawsuits and started working with the legal department at SoundExchange. In 2007, when the nonprofit needed a general counsel with strong litigation experience to replace Gary Greenstein, who had joined Wilson Sonsini Goodrich & Rosati’s office in Washington D.C., SoundExchange hired Huppe.

Days later, on March 2, the Copyright Royalty Board issued its first rate decision for Webcasters, after 18 months of negotiations and testimony involving 40 different parties, and the real fun began for Huppe and his legal department. Using a “willing buyer, willing seller” standard, the judges set the new royalty rates at $.0008 per performance per listener, effective retroactively to 2006. The rates would gradually increase to $.0019 per performance per listener in 2010. A minimum fee of $500 per station or channel was also set.

Webcasters immediately balked, saying some stations would have to pay 70 percent or more of their revenue as royalties, and that they couldn’t survive. Jonathan Potter, executive director of the Digital Music Association, says that after the judges’ decision, he told SoundExchange executives, “Congratulations, you won. But you won too big.SoundExchange has to grapple with, do they want to put these companies out of business, or do they actually want to grow a marketplace?”

This isn’t the first time that Webcasters and the industry have clashed. In 2002 the Copyright office set the first digital performance royalty at a much higher rate of $.07 cents per song per listener. Internet radio stations banded together and convinced Congress to suspend the fees altogether. A new deal was worked out that instead calculated royalties based on revenues or expenses. So for example, a station that brought in less than $1.2 million a year would pay 7 percent of its expenses, or 10 percent of revenues, whichever was higher. The plan stayed in effect until 2005.

But online media companies wanted more than lower rates. They also wanted reforms to make negotiating future rates easier and less expensive. So in 2004, Congress created the Copyright Royalty Board to set performance royalties. The board’s first ruling, though, was a huge disappointment for Webcasters, and they quickly began a campaign to overturn the rates.

The Digital Music Association, which represents AOL Radio, Napster, and Yahoo! Music, spent nearly $700,000 last year, mostly to fuel opposition to the Web radio royalty increase. Bills were introduced in the House and Senate to overturn the new rates. Webcasters held a day of silence, shutting down their broadcasts on June 26, 2007, to support the legislation.

This past July, Joe Kennedy, president and CEO of the online radio site Pandora, told a Senate Judiciary Committee that more than 70 percent of his company’s $25 million anticipated revenue in 2008 would go toward paying royalties. That could shut his service down for good, he said. “This is simply a crushing amount,” Kennedy said. A spokesperson for Senator Ron Wyden (D-Oregon), who cosponsored a bill to overturn the new rates, says they will “strangle new and better ways for Americans to receive audio content and would have the long-term effect of limiting, rather than increasing, royalties that creative artists would receive.” National Public Radio also jumped in, joining with the Digital Music Association to file motions for rehearing with the Copyright Royalty Board. NPR argued that the minimum fee of $500 per station would be a substantial financial burden because it has so many member stations. NPR had been exempt from royalties under a special deal which has expired.

The board denied all the motions. Then the Digital Music Association and others filed an appeal before the U.S. Court of Appeals for the District of Columbia. Webcasters also filed an emergency motion to keep the new rates from going into effect on July 15, 2007. But a three-judge panel of the D.C. Circuit denied that motion, too.

Huppe says SoundExchange isn’t insensitive to Webcasters’ concerns. In August 2007 it worked out a deal with small commercial Webcasters earning less than $1.25 million a year that lets them pay royalties of 10-12 percent of their revenue through 2010. Huppe says he’s continuing to negotiate with the Digital Music Association, and expects a deal to be reached by the end of the year. At press time the Webcaster Settlement Act, which would give Internet radio stations more time to negotiate for lower rates, had passed the House by a voice vote. “It’s in our interest and the industry’s interest to have these platforms thrive,” Huppe says.

During those negotiations, Webcasters shared their financial information and business models with SoundExchange, says Lisa Namerow, general manager of AOL Radio. And they’ve had frank discussions about how to generate more revenue.

SoundExchange’s job got harder when the Copyright Royalty Board set lower royalties for satellite radio of between 6 and 8 percent of revenues in December 2007. Webcasters became even more irate. “Internet radio is paying a rate by a standard that no other broadcaster is asked to meet,” says Jake Ward, spokesperson for SaveNetRadio, a coalition of Webcasters, Internet radio listeners, and artists.

And to make Huppe’s job even more difficult, critics have accused SoundExchange of not distributing payments to artists as they should. In September, Greg Scholl, president of The Orchard, a company that administers royalties for small broadcaster, wrote a letter to Billboard magazine stating that his clients still hadn’t been paid correctly. “A very public and very detailed accounting of SoundExchange’s books and business practices is in order,” he wrote. SoundExchange executive director John Simson responded in a letter to Billboard that The Orchard hasn’t provided the proper tax documents so payments could be sent to the record labels it represents.

Huppe says there will always be some delay in getting checks out the door, regardless of who they’re paying. “A lot of people who complain about what we do are acting on misinformation,” Huppe says. “Once you sit down and explain how things work, they become converts.”

Supporters of the higher royalty rates say controversy is to be expected. Whenever new technologies emerge and begin transforming people’s lives, there are bound to be problems. It’s also a new royalty system, and millions of dollars are at stake. “Whenever you’re involved in the collection and distribution of money, there are going to be people who are dissatisfied with who knows what,” says RIAA president Cary Sherman, who is also a former board member of SoundExchange.

And building trust with musicians and critics over the long term is just one of the many challenges Huppe faces, Sherman says. He has to build long-term trust with the SoundExchange board, too. But Sherman says he has no doubt that they’re challenges Huppe embraces with gusto, and a sense of humor. “Everything he does, he does full-bore,” Sherman says. “He dives into issues with incredible intensity. He has grown into every role he’s assumed.

“It’s an assessment that many who work with Huppe share. During the rate proceeding for satellite radio, for example, Huppe didn’t just turn the case over to outside counsel, says Michael DeSanctis, a partner with Jenner & Block, which litigated the rate-setting procedures for SoundExchange. He worked with outside counsel daily, setting strategy and helping pick expert witnesses. “It’s great to have that kind of involvement,” DeSanctis says. “You unquestionably get a better case that way.”

For now, both Webcasters and Huppe are waiting to see if Congress passes legislation this year to overturn the digital royalty rates. Meanwhile, Huppe says he and his staff are already preparing for the next rate-setting procedure, which begins next year. New rates will go into effect in 2010.

And Huppe will bring his seemingly boundless energy to a new, perhaps even tougher fight: getting Congress to pass pending legislation that would require traditional radio stations to pay performance royalties, too. History and politics have conspired over the years to prevent that from happening, Huppe says. Now it’s time to change that. “All we’re asking for is a fair shake for artists and copyright owners, the people who bring these songs to life,” Huppe says. “It really is the right thing to do.” N

Playlist: SoundExchange

soundexchange.com

Created: 2000

Executive director: John Simpson, lawyer, artist manager, ex-singer-songwriter

Number of board members: 18

Number of record companies represented: more than 3,500

Total digital performance royalties collected: $248 million (end of 2007)

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