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The voluntary royalty deal between Yahoo! and the RIAA that the Librarian of Congress announced as his template for the entire industry last week was a deal crafted by Yahoo! to shut out small webcasters and decrease competition, Broadcast.com founder and Dallas Mavericks owner Mark Cuban revealed to RAIN on Friday.

Although he had left the company by the time the deal was signed, Cuban explained in a "RAIN Reader Feedback" e-mail, printed in its entirety below, that the deal conceded a high royalty price to avoid a "percentage-of-revenue" royalty rate.

By doing this, Cuban explains, he hoped that low-revenue webcasters would be unable to compete against the well-funded Yahoo!

Cuban also explains that he wanted a per-stream deal because he intended to use "multicasting" technology to serve multiple listeners with a single stream and report only the initial streams to the RIAA!

The final deal between Yahoo! and the RIAA was the lone "marketplace deal" upon which the webcast royalty rate was based, both in the CARP recommendation last February and the Librarian of Congress's final decision last Thursday.

Cuban sold his network of streaming broadcasters, Broadcast.com, to Yahoo! in August 1999, for a reported $5.7 billion.

The thinking behind the deal structure, Cuban explains below, was that smaller webcasters, who would be unable to afford to webcast on their own under such terms (because of the fixed rates), would be compelled to use the services of well-funded aggregators like the Yahoo! Broadcast service.

IMPORTANT NOTE: The villian in this story is not Yahoo! (They were simply being savvy businesspeople!) The villian is the CARP process by which this anti-broadcaster, anti-small-webcaster deal became the template for the industry! (See "RAIN Analysis" below.) -- KH

Cuban's e-mail to RAIN follows in its entirety.

"As Broadcast.com, I didn't want percent-of-revenue pricing"

It's very interesting that they built this on the Yahoo!/RIAA deal.

When I was still there (the final deal was signed after I left Yahoo!), I hated the price points and explained why they were too high. HOWEVER, I was trying to get concession points from the RIAA. Among those was that I, as Broadcast.com, didn't want percent-of-revenue pricing.

Why? Because it meant every "Tom , Dick, and Harry" webcaster could come in and undercut our pricing because we had revenue and they didn't. Broadcasters could run ads for free and try to make it up in other areas so they wouldn't have to pay royalties.

As an extension to that, I also wanted there to be an advantage to aggregators. If there was a charge per song, it's obvious lots of webcasters couldn't afford to stay in business on their own. THEREFORE, they would have to come to Broadcast.com to use our services because with our aggregate audience, if the price per song was reasonable, we could afford to pay the royalty AND get paid by the webradio stations needing to webcast.

More importantly -- and of course I didn't tell the RIAA this -- we had a big multicast network (remember multicasting? Yahoo! didn't seem to after I left). Well, multicasting only sends a single stream from our server, so that is what we would record in our reports for the RIAA, and that is what we would pay on.

So that was the logic going into the Yahoo!/RIAA deal. I wasn't there when it was signed, but I'm guessing and I've been told that there weren't dramatic changes.

Now, no one asked me any of these things prior, during, or after the first or second pricing. I'm not sure that this matters. But if it does, here it is: The Yahoo! deal I worked on, if it resembles the deal the CARP ruling was built on, was designed so that there would be less competition, and so that small webcasters who needed to live off of a "percentage-of-revenue" to survive, couldn't.

There you have it, if anyone cares.

Mark Cuban
Dallas Mavericks


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This e-mail reveals more clearly than anything else to date the complete breakdown in the U.S. Copyright Office's royalty-setting process for Internet radio.

In the Digital Millennium Copyright Act (DMCA) of 1998 (excerpted here; see section 114), Congress instructed the Librarian of Congress, in the absence of a successful negotiation between record labels and webcasters, to set a rate as follows:

"The copyright arbitration royalty panel shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. In determining such rates and terms, the copyright arbitration royalty panel shall base its decision on economic, competitive and programming information presented by the parties, including —

"(i) whether use of the service may substitute for or may promote the sales of phonorecords or otherwise may interfere with or may enhance the sound recording copyright owner's other streams of revenue from its sound recordings; and

"(ii) the relative roles of the copyright owner and the transmitting entity in the copyrighted work and the service made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, and risk.

"In establishing such rates and terms, the copyright arbitration royalty panel may" — emphasis ours — "consider the rates and terms for comparable types of digital audio transmission services and comparable circumstances under voluntary license agreements..."

The CARP, and subsequently the Librarian of Congress, ignored virtually all of Congress's instructions.

Instead, the arbitrators decided that if any agreement had actually been negotiated in the relevant marketplace, that would reflect the willing buyer/willing seller price.

In other words, instead of looking at what a willing buyer and willing seller WOULD have agreed on, in a world where willing sellers existed, the CARP chose to simply look at what one grudging seller (the RIAA negotiating as a collective) and one extremely-atypical buyer DID agree on!

(This approach ignores the possibility that the RIAA labels, as a group, were essentially an unwilling seller, licensing their material only because they were required to do so under the DMCA.)

As for all the other criteria that Congress instructed the CARP to consider, the arbitrators glibly wrote in their report, "We would expect these considerations to be fully reflected in any agreements actually negotiated between webcasters and copyright owners in the relevant marketplace."

In reality, however, the considerations Congress asked to be considered were trivial compared to the actual motives of the parties in this deal. (The RIAA was constructing a case for the upcoming CARP, and Yahoo! wanted to squeeze out less-well-funded competitors.)

If I were a Congressman, I'd be FURIOUS right now:

In setting a statutory license designed to encourage the growth and diversity of a new industry, the arbitrators and the Librarian ignored Congress's instructions and used the terms of a deal that was specifically constructed to have the opposite effect! -- KH

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