Webcasting, also called Internet streaming, is the process of transmitting  digitized audio or video content over the Internet. 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. We interviewed 30 of these webcasters. 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. Arrangements with Bandwidth Providers and Advertisers are Most Common

Fifty-two, or 91 percent, of the small webcasters that we interviewed  reported having had arrangements with bandwidth providers during the  year 2003. Available Data Suggest the Effects of Economic Relationships between Small Webcasters and Third Parties on Royalties Have Been Minimal to Date

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. 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). We found limited evidence to suggest that small webcasters might not be  reporting revenues and expenses as agreed. Effect of Economic Arrangements May Change As Industry Evolves

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. Industry analysts expect this growth  to continue. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov. 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. Data are not reported due to unreliability. 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.
Why GAO Did This Study

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.

What GAO Found

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.