About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2014
>>
[2014] ZASCA 10
|
|
National Association of Broadcasters v South African Music Performance Rights Association and Another (119/2013) [2014] ZASCA 10; [2014] 2 All SA 263 (SCA); 2014 (3) SA 525 (SCA); 2014 BIP 405 (SCA) (14 March 2014)
IN
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
CASE
NO: 119/2013
Reportable
In
the matter between:
NATIONAL
ASSOCIATION OF
BROADCASTERS
..................................................
Appellant
and
SOUTH
AFRICAN MUSIC PERFORMANCE RIGHTS
ASSOCIATION
.............................................................................................
First
Respondent
SOUTHERN
AFRICAN MUSIC RIGHTS ORGANISATION
....................
Second
Respondent
Neutral
Citation:
National
Association of Broadcasters v South African Music Performance Rights
Association
(119/2013)
[2014] ZASCA 10
(14 March 2014).
Coram:
Navsa
and Shongwe JJA, Swain, Legodi and Mathopo AJJA
Heard:
17
February 2014
Delivered:
14
March 2014
Summary:
Correctness of determination by Copyright Tribunal in terms of the
Copyright Act 98 of 1978
of the rate of royalties payable by
commercial and public radio stations – Tribunal ignoring
relevant factors and evidence
– court at large to overturn
decision and determine the rate based on available evidence –
discussion about lack of
legislative regulation of procedure to be
followed by Tribunal – comment on convoluted legislative
structure in terms of
which determination is made and failure to
legislate a procedure for the Tribunal.
ORDER
On
appeal from
:
The Copyright Tribunal (Sapire AJ sitting as court of first
instance).
The
following order is made:
1.
The appeal is upheld to the extent reflected in the formula set out
below, and the cross-appeal is dismissed with no order as
to costs.
2.
The determination by the court below is set aside and substituted as
follows:
‘
A
........
C x 3
______
x _____
B
.........
100
Where:
A
= the amount of time used by a radio station in any period to
broadcast the sound
recordings
administered by SAMPRA;
B
= the total amount of time used by a radio station in that period to
broadcast editorial
content,
and
C
= a radio station’s net broadcasting revenue based on what is
certified by its
accountants
and confirmed in its financial statements.
“
editorial
content” is defined as content, including the repertoire,
broadcast for entertainment, information or interest of
members of
the public and shall not include broadcast time allocated to
advertisements.’
JUDGMENT
Navsa
JA
,
(
Shongwe
JA & Swain, Legodi & Mathopo AJJA
concurring):
[1]
Except for a period between 1916 and 1965, there was no legislative
machinery compelling commercial and public radio stations
to pay
copyright royalties to the recording industry and performers for the
use of sound recordings in their broadcasts.
[1]
This changed with legislative amendments to the Copyright Act 98 of
1978 (the Act) during 2002. The applicable provisions will
be dealt
with in due course. The present appeal and the related cross-appeal,
with the leave of this court, concerns the correctness
of a
determination by the Copyright Tribunal (Sapire AJ), established by s
29 of the Act,
[2]
about the rate
of royalties broadcasters are required to pay and it requires a
consideration of the extent of the Tribunal’s
jurisdiction.
This is the first case of its kind.
[2]
The appellant is the National Association of Broadcasters (NAB), a
non-profit organisation funded entirely by its members, more
than 80
in number, who are all active participants in the South African
Broadcasting Industry (the SABI). These members include
all
television broadcasters, most commercial and public radio stations,
community radio stations and signal distributors. The present
dispute
only concerns 31 commercial and public radio stations.
[3]
The first respondent, the South African Music Performance Rights
Association (SAMPRA), in terms of the Act and the regulations
promulgated thereunder, is an accredited
[3]
collecting society of royalties for sound recordings on behalf of its
only member, the Recording Industry of South Africa (RISA),
an
industry body representing members of the recording industry.
[4]
The second respondent, the Southern African Music Rights Organisation
(SAMRO), which represents the interests of composers,
played the part
of observers during proceedings before the Tribunal. Similarly,
before us, they chose not to participate but to
observe.
[5]
A sound recording (embodied in a record, CD, tape, digital or other
device) is usually the product of many talents, namely,
the musical
work of the composer, the literary work of the poet or lyricist, the
performance of the artist, and the arrangements
made for its making
by its producer. A sound recording need not contain music,
alternatively it need not contain words.
[4]
[6]
In appreciation of these talents the Act and the amendments thereto,
read with the provisions of the Performers’ Protection
Act 11
of 1967 (the PPA), recognises three kinds of copyrights involved in
the broadcast of a given piece of music. First, s 6(
d
)
of the Act protects the rights of the composer
[5]
in relation to the broadcasting of his or her work. Second, s 5(1)(
a
)
of the PPA, which deals with the rights of performers, states:
‘
(1)
Subject to the provisions of this Act, no person shall –
(
a
) without the consent of the
performer –
(i)
broadcast
or communicate to the public an unfixed performance of such
performer, unless the performance used in the broadcast or
the public
communication is itself already a broadcast performance; . . . .’
Third,
s 9A(1)(
a
) and s 9A(2)(
a
) and (
b
) of the Act
dealing with the position of the owners of copyright in sound
recordings, provide as follows:
‘
(1)(
a
)
In the absence of an agreement to the contrary, no person may
broadcast, cause the transmission of or play a sound recording as
contemplated in section 9(
c
)
,
(
d
)
or (
e
)
without payment of a royalty to the owner of the relevant copyright.
. . .
(2)(
a
) The owner of the
copyright who receives payment of a royalty in terms of this section
shall share such royalty with any performer
whose performance is
featured on the sound recording in question and who would have been
entitled to receive a royalty in that
regard as contemplated in
section 5 of the Performers’ Protection Act, 1967 (Act No 11 of
1967).
(
b
)
The performer’s share of the royalty shall be determined by an
agreement between the performer and the owner of copyright,
or
between their representative collecting societies.’
[7]
There is no statutorily prescribed
rate
of royalties to be paid by radio stations to record companies. The
legislature chose to leave it to agreement between radio stations
and
owners of copyright in sound recordings, failing which, arbitration
or, as in the present case, where the parties failed to
agree on
either a rate or referral to arbitration, determination by the
Copyright Tribunal.
[6]
[8]
This case does not involve the rights of composers. Essentially, it
is a dispute between NAB and SAMPRA, concerning the reasonableness
of
the rate of royalties the former should be paying the latter. It is
accepted by NAB that royalties should be paid to SAMPRA
for the
broadcast by radio stations of sound recordings. NAB and SAMPRA
differ on the formula to be used in determining what is
due. It is
common cause that the royalties to be collected are to be shared
between the recording studios and performers. During
the hearing of
the present appeal we were informed that recently, following
negotiations between their respective representatives,
an equal split
had been agreed.
[9]
Sound recording royalties are colloquially referred to as ‘needletime
royalties’, a throwback to the time when sound
was relayed from
a vinyl record via a stylus on a record player. Lobbying by
musicians, performers and the recording industry saw
the amendments
to the Act and the PPA, referred to earlier, being effected in 2002,
to protect performers and owners of copyright
in sound recordings.
Record companies were motivated by reduced sales of compact discs
(CD’s) due to piracy, facilitated
by technological
advancements. Musicians and performers, on the other hand, were
driven by their sense of being inadequately rewarded
for their
services.
[10]
The determination referred to in para 1 was made pursuant to a
referral to the Tribunal by SAMPRA in terms of s 9A
[7]
of the Act. In making the referral, SAMPRA proposed a formula which
it contended ought to be used to determine the royalty rate.
NAB, in
turn, resorted to a cross-referral in which it sought a determination
based on
its
proposed royalty formula. In addition, NAB sought a determination
from the Tribunal about the date from whence that royalty was
to
apply. That issue and the appropriateness of the formula proposed by
NAB are the subjects of the cross-appeal. Sapire AJ did
not address
whether he could or should determine the date from which the
royalties are to be paid, notwithstanding that it had
been
pertinently raised. More about that later.
[11]
Predictably, the royalty formula proposed by each produces a result
most favourable to the interests represented by each. Put
simply,
SAMPRA’s formula results in a higher rate of royalty, whilst
NAB’s formula produces a lower rate.
[12]
At this stage, it is necessary to set out the formulae proposed by
NAB and SAMPRA. The following formula is the one proposed
by SAMPRA:
‘
A
.............
C
______
x_____
B
............
10
Where:
A
= the amount of time used by a radio station in any period to
broadcast the sound
recordings
administered by SAMPRA;
B
= the total amount of time used by a radio station in that period to
broadcast editorial content,
and
C
= a [radio station’s] net broadcasting revenue.
Net
broadcasting revenue means the amount in South African Rands equal to
85% in number of the published rate card value (before
any . . .
deductions) of advertisements and
sponsored
promotions or features broadcast by the Station, including any such
broadcast
by
any entity which is an associate, subsidiary or agent of the Station
and including
advertisements
published on any internet simulcast service;
“
editorial
content” is defined as content, including the repertoire,
broadcast for entertainment, information or interest of
members of
the public and shall not include broadcast time allocated to
programme promotions and/or advertisements or promotions
on behalf of
the Station or any registered or unregistered charity or in support
of social action activities, including but not
limited to awareness
raising campaigns and initiatives, telephone helplines.’
[13]
In relation to C in the SAMPRA formula, the published rate card value
is obtained from data published by the A C Nielsen company.
Economists, analysts, the media and the advertising world all rely
extensively on the A C Nielsen data. The published data includes
the
monthly values of advertising spots broadcast by each radio station,
calculated by reference to each such station’s published
rate
card. The rate card does not take into account discounts, and the 85
per cent provided in SAMPRA’s formula is based
on its estimate
of a 15 per cent discount allowed by radio broadcasters to
advertisers.
[14]
NAB proposed the following:
‘
A
.......................
E
_____ x C
x D x______
B
......................
F
Where:
-
A
= the amount of time that a radio station broadcasts protected sound
recordings
per
time channel;
B
= the total broadcast time of the radio station per time channel;
C
= a radio station’s net revenue per time channel;
D
= the industry average net profit percentage for the period;
E
= the radio station’s audience for the period;
F
= the total radio audience for the period; and
The
needletime royalty per station is the sum of royalties calculated per
time channel for the period. “Time channel”
refers to a
fixed period within the 24 hour cycle, and according to which
audience is measured (and therefore advertising costed).
Net
revenue is defined according to the industry accredited body the
Radio Advertising Bureau (RAB) as actual gross advertising
revenue
adding all net events revenue and deducting all agency commissions,
discounts, public service announcements and trade exchanges.’
[15]
The major differences between the respective formulas can be seen
from what is set out in this and the four paragraphs that
follow.
SAMPRA takes into account the total amount of time used by radio
stations in any period during which sound recordings are
broadcast,
to which SAMPRA can lay claim, against the total amount of time used
by a radio station in that period to broadcast
editorial content,
which is defined to exclude the broadcast of specified items. SAMPRA
brings those two items into the reckoning
against the radio station’s
total revenue during the same period. The factor of ten employed in
SAMPRA’s formula is
based on its unflinching attitude that a
broadcaster that chooses to use sound recordings for 100 per cent of
its broadcast editorial
content time should pay a royalty equal to
ten per cent of the revenue that it derives from airtime. So, if
sound recordings constitute
58 per cent of the broadcaster’s
editorial content, the royalty is 5,8 per cent, and so on. What this
means is that, as a
broadcaster’s use of music as a percentage
of its total broadcast editorial content declines, so the royalty
percentage declines
proportionally.
[16]
The exclusion of certain items from editorial content has, as a
result, that the proportion of music will necessarily be higher
than
if the editorial content were to be broadened, so as to avoid the
exclusions contended for by SAMPRA. In simple mathematics,
the
smaller the denominator, the larger the result of the fraction. In
short, it increases the royalty rate. SAMPRA’s rate,
as can be
seen from what is set out above, can notionally be from ten per cent
downwards.
[17]
NAB, on the other hand, contends that the rate should be determined
by reference to the use of copyright protected sound recordings
per
time channel, distinguishing between peak broadcasting times and
times during which most people are asleep, and that revenue
generated
should be considered in relation to each time channel. That,
according to NAB, should then be brought into reckoning
against the
total broadcast time of the radio station per time channel, without
any deduction, as envisaged by SAMPRA’s exclusions
in its
definition of editorial time.
[18
Furthermore, NAB brings profit into its formula, based on the
industry average, whereas SAMPRA’s proposal has regard to
an
individual broadcasting station’s total net revenue, without
reference to profit or NAB’s proposed time channels.
NAB’s
formula also takes into consideration audience-reach, which SAMPRA’s
formula disregards. There is also disagreement
about SAMPRA’s
use of the published rate card less a 15 per cent discount to
determine revenue. It was contended on behalf
of NAB that discounts
sometimes exceed 15 per cent and that it would be better to have
regard to the revenue reflected in a radio
station’s financial
statements.
[19]
NAB’s less restrictive approach to editorial content has as a
concomitant a reduced percentage use of musical content.
It is the
antithesis of what is set out in para 16. All
the factors referred to in the preceding two paragraphs
have the
effect of a restricted royalty rate which, it appears, equates to a
little over one per cent of a broadcaster’s
net income.
[20]
The merits of the relevant constituent parts of each formula will be
dealt with in due course after an assessment of the evidence
and the
contentions in relation thereto.
[21]
It is necessary to record that subsequent to the referral and the
cross-referral, the parties were at odds about the extent
of the
Tribunal’s jurisdiction, including the question whether it had
the power to determine the date from which royalties
were payable. In
the latter regard the following facts are relevant. Even though
Parliament amended the Act and the PPA in 2002
to provide for
needletime royalties, it was not until 1 June 2006 that the Minister
published Regulations that provided for accreditation
of collecting
societies and the conclusion of framework agreements between such
collecting societies on the one hand, and trade
associations and
representative bodies of potential users of sound recordings, on the
other.
[8]
There was a dispute
between the parties about whether the royalties became due when the
amendments were effected or whether they
were only due when the
mechanisms for collections were put in place legislatively. In
respect of the intervening period questions
arise about whether
performers and producers of sound recordings could otherwise sue for
copyright infringement. Issues such as
prescription also intrude.
[22]
There was uncertainty about the procedure to be adopted by the
Tribunal, in fulfilling its statutory function to determine
the
royalty rate. In this regard it is important to note that there are
no regulations prescribing the procedure. After the present
matter
was ripe for hearing before the Tribunal, and after representations
in this regard, the Minister of Trade and Industry (the
Minister),
recognising various lacunae in the legislation, established the
Copyright Review Commission to assess concerns and allegations
about
the Collecting Society’s model for the distribution of
royalties to musicians and composers of music. The Commission
completed a report in 2011 in which it said the following concerning
the procedure to be followed by the Tribunal:
‘
It
also became apparent to the [Copyright Review Commission] that the
present statutory provisions dealing with the Copyright Tribunal
requires substantial amendment to enable the Tribunal to perform
effectively in the various matters that may come before it. .
. .
In a memorandum submitted to the
[Copyright Review Commission] the Registrar of Copyright stated that
the delays in finalising the
two matters before it relating to
needletime royalties were “the result of unclear and vague
regulations
which do not prescribe the procedure to be followed
.”’
(My emphasis.)
These
are aspects on which I will comment further later in this judgment.
[23]
In light of the disputes referred to at the beginning of para 21 NAB
considered it necessary to apply to the North Gauteng
High Court for
a declaratory order concerning the Tribunal’s jurisdiction.
Despite opposition by SAMPRA it was successful
in that endeavour. The
following order was made by Claassen J:
‘
1.
THAT the copy-right Tribunal is to determine the following: -
1.1
The
royalties payable in respect of sound recordings;
1.2
The
date from when royalties are applicable;
1.3
Whether
any escrow payments are to be made in the interim;
1.4
Whether
any other royalties such as for the so-called mechanical reproduction
of sound recordings in the broadcast processes are
payable, and if
so, from when;
1.5
Costs
relating to the application of substituted service effected in
respect of this application, as authorized by the Court on
22 October
2008 following the applicant’s ex-parte application under case
number 44698A/2008 be reserved for later determination;
1.6
First
respondent pay the costs of this application, including the costs of
two councils.’
The
application to the high court and the resultant order will also be
dealt with later in this judgment.
[24]
Before the Tribunal the parties followed the conventional adversarial
procedure and evidence was adduced by each. Economists
testified in
support of each side’s proposed formula referring to economic
theory and relevant and practical factors to be
taken into account in
determining a royalty rate. Protagonists in both the broadcasting and
sound recording fields and other witnesses
testified. SAMPRA also led
evidence and presented documents that dealt with the rate of
royalties for sound recordings employed
internationally by a range of
countries. I consider it necessary to set out the relevant evidence
in the paragraphs that follow.
[25]
Mr Louric Richardt, an attorney and consultant with the International
Federation of the Phonographic Industry, testified about
his
experience and exposure to processes and practices worldwide. It
appears that not only economic realities but historical factors
are
taken into account in other countries. The more recent trend,
however, is for economic factors to play a more prominent role.
A
principle that applies universally is that broadcasters pay royalties
in relation to the time that music is played on their radio
stations.
Put simply, the principle is pay for play. Another rule is that rates
are based on a correlation between time and revenue
generated. In
some instances countries apply rates that increase in relation to
bands of increasing revenue.
[26]
According to Richardt the broadcasting industry in South Africa is
amongst the most profitable in the world with profit margins
reaching
to between 40 and 50 per cent. This evidence was largely supported by
Mr Peter Armitage who commented on the financial
results of three
entities that control most of the radio stations in South Africa.
[27]
In some countries the royalty rate payable to owners of copyright in
sound recordings is half of those payable to composers.
For many
decades SAMRO has been collecting those royalties in South Africa.
Richardt accepted that in the South African context
and relative to
the international trend, the SAMRO rate is irrelevant. He appears to
base that conclusion on the fact that composers
have resisted
attempts to have the value of their intellectual property linked to
those of others. Richardt testified that other
benchmarks are
preferable.
[28]
Mr Richard Murgatroyd, an economist, testified in support of SAMPRA’s
case. His evidence on a particular pricing theory,
it was agreed by
the parties, can rightly be discounted. Of importance are his
concessions under cross-examination. He accepted
that the SABI was
extensively regulated. So, for example, they are statutorily obliged
to include local content of at least 25
per cent. Also, the public
broadcaster has language and specific religious broadcast
obligations.
[29]
Insofar as revenue is concerned, Mr Murgatroyd and other witnesses
agreed that the use of actual income was better than the
use of
notional amounts and in this regard they accepted that the financial
statements of NAB’s members ought to be employed.
Although not
entirely forthcoming, Mr Murgatroyd appeared to accept that
promotions by radio stations of the upcoming broadcasts,
might impact
beneficially on revenue and that they should perhaps not be excluded
in SAMPRA’s definition of editorial content.
He seemed to agree
with the proposition by counsel on behalf of NAB that if one could
link time channels to revenue generated by
advertising during those
particular segments, it would be preferable to have regard to revenue
in relation to time channels. I
will, in later paragraphs, deal with
other evidence on this aspect.
[30]
Mr Keith Lister, chairperson of the board of SAMPRA, testified that
he was formerly Chief Executive Officer of Sony Music Entertainment
Africa (Proprietary) Limited. He testified about how the Minister had
unsuccessfully been lobbied to change legislation to provide
for a
compulsory 50/50 sharing of the royalty between performers and record
companies. As stated above, this split now appears
to have been
agreed between their respective representatives. It appears from
Lister’s testimony that, historically, the
recording industry
considered a ten per cent royalty for 100 per cent of music usage by
broadcasters as fair, because it was then
thought that the ten per
cent should also embrace the present 3,25 per cent royalty paid to
SAMRO for composer rights. Later, the
recording industry thought that
ten per cent ought to be shared exclusively between performers and
the recording industry, with
composers being left to a separate 3,5
per cent to be collected by SAMRO. It appears from Mr Lister’s
evidence in-chief that
the ten per cent royalty claim is a rigid
position driven by a ‘sense’ that it would be reasonable,
without there being
any postulated rationale.
[31]
In his evidence, Lister dealt with the 15 per cent discount referred
to in SAMPRA’s formula and said that a closer examination
of
discounts provided in the available documentation indicates that the
discounts afforded to advertisers were closer to 18,9 per
cent. In
his view, discounts should not be allowed at all because they should
be considered as the cost of doing business. In respect
of the time
channels and related revenue proposal by NAB, Mr Lister testified
that the proposal is impractical, because advertising
is sold by
broadcasters to advertisers in bundles. Sometimes free spots are
provided to advertisers in non-peak advertising times
as part of a
bundle, to induce advertisers to buy premium spots at premium prices.
In addition music usage in non-peak periods
is substantially greater
than at premium times.
[32]
Mr Lister testified that there are other revenue streams that redound
to the benefit of owners of copyright in sound recordings,
including
from retailers, banks, shopping malls, sport stadiums, restaurants
and the like, and that the amount collected over the
past three to
four years from licensing is in the region of one hundred million
rand. Importantly, Mr Lister accepted that international
royalty
rates paid to composers were in most instances higher than rates for
sound recordings. He accepted that some of the largest
members of
RISA repatriated to America and elsewhere the greater percentage of
what was received as sound recording royalties.
Even though Mr Lister
was loath to make any concession concerning royalty rights for
performers in the United States of America
(the USA), it does appear
that at least a substantial percentage of performers have no royalty
rights in respect of terrestrial
broadcasting by radio stations in
the USA. Mr Lister testified that there is some money that accrues to
South African performers
from broadcasts internationally, but that
the outflow of funds to recording companies in other countries,
particularly the USA,
is greater.
[33]
An important aspect of Mr Lister’s testimony is the question of
how a radio station’s audience-reach is evaluated
in relation
to revenue. Some radio stations with a more limited audience charge a
higher rate because the audience is regarded
as having a higher value
to the advertiser. It might relate to affluence, or products
connected to the target audience. There is
undoubtedly difficulty in
placing a value on listenership.
[34]
An issue of significance is the percentage of works administered by
SAMPRA that is subject to copyright. The regulations under
the Act
require that a repertoire of copyright protected sound recordings be
made available by a collecting society. Regulation
7(1) of the
Collecting Society Regulations, promulgated under the Act,
[9]
provides as follows:
‘
7.
Licensing – (1) A collecting society shall make available, on
non-discriminatory terms, for any potential user of public
playing
rights the complete repertoire of records in respect of which the
public playing rights are owned by the South African
and foreign
rightholders that [are] represented by it.’
It
is necessary to point out that a complete repertoire has not yet been
compiled or provided by SAMPRA. Mr Lister testified that
a
substantial playlist provided by NAB to SAMPRA could in a relatively
short time be analysed to determine what percentage is not
protected
by copyright. This is an important issue because it appears that not
all the music administered by the SAMPRA is subject
to copyright.
[35]
The problem flowing from what is set out in the preceding paragraph
is that it would be difficult to invoice and charge broadcasters
for
the use of sound recordings without a proper reconciliation. Mr
Lister suggested that this problem could be met by resorting
to the
following procedure: A broadcaster would only be invoiced after an
analysis by SAMPRA of its playlist. He suggested that
provisional
payments be made, which could later be adjusted when a reconciliation
was completed, having regard to copyright in
sound recordings. It
also appears from Lister’s testimony that the royalty rate
collected by the SAMRO in respect of composer
rights is calculated at
3,25 per cent of revenue and that the rate is based on international
comparisons. That rate is current.
[36]
According to Mr Lister, since deregulation in 1995, the South African
music industry peaked in 2007 and went into decline thereafter.
Mr
Lister agreed that revenue is not always in direct proportion to
profitability, but pointed out that when revenue declines,
margins
tend to be lower and profitability less.
[37]
Mr David du Plessis, General Manager of RISA and CEO of SAMPRA,
testified that the rate proposed by SAMPRA, when compared to
international rates, is not below the average. However, it appears
that only Finland and France have a higher rate than the rate
proposed by SAMPRA. He added a qualification, namely, that the music
usage per radio station would determine the ultimate rate.
As pointed
out above, the rate reduces as the music used during a broadcast
period lessens. He accepted that the average SAMPRA
rate would be
above the SAMRO rate. Mr Du Plessis cautioned against a purely
mathematical international comparison, suggesting
that circumstances
in those countries have to be contrasted with circumstances locally.
According to Mr Du Plessis, only two per
cent of SAMPRA’s
repertoire is not subject to copyright. He was adamant that if SAMPRA
was provided with lists by broadcasters
they could determine which
qualify for copyright protection and which do not.
[38]
Ms Virginia Hollis, the Managing Director of Media Shop (Pty) Ltd and
the vice-chairperson of the South African Advertising
Research
Foundation that conducts audience research for all media, testified.
She spoke of the media’s reliance on the A
C Nielsen data.
Radio stations provide their logs of advertising broadcast to A C
Nielsen, which then publishes it. That then provides
a basis for an
estimate of what was spent by each radio station. A C Nielsen
provides the advertising rates as well. She testified
that the radio
stations do not provide particulars of discounts provided to any
advertiser. Ms Hollis confirmed what was said in
evidence by Mr
Lister, namely, that it is often difficult to calculate revenue per
time channel because of what she called ‘value
add-ons’,
namely, providing free airtime to advertisers in some time channels
instead of offering a discount, as an incentive
to advertise at
higher rates in prime time channels.
[39]
Mr Andrew McFarlane, a director and shareholder of a company that
uses technology to determine the time and duration of broadcast
of
sound recordings and to record the name of the artist as well,
testified. The data so collected enables the company to calculate
the
aggregate amount of time on any given day or over any period that is
utilised by any radio broadcaster for the broadcast of
music sound
recordings. The information gathered is sold to interested parties.
[40]
Mr Quintin Stewart, Managing Director of a company that monitors
radio and television broadcasts in South Africa testified
that, by
the use of technology, one can accurately determine the content of
broadcasts.
[41]
Mr Spiro Damaskinos, a director of Sony Music Entertainment Africa
(Proprietary) Limited, testified that for a decade he was
directly
responsible for its marketing and promotional relationships with
radio and television broadcasters. He testified about
how radio
stations clamoured for new releases and that recording companies were
always under pressure to supply new content. He
testified about what
is common knowledge within the recording industry, namely that,
ironically, even though consumers have increased
access to music
through the internet and digital technology and even though the music
they sell has never been more popular, revenue
through the sale of
physical and digital products has continued to decline. Much of this
is due to increasingly sophisticated illegal
downloads. It was
accepted that a benefit is derived by recording companies from
airplay by radio stations, but that did not necessarily
translate
into sales and revenue – certainly, not as much as it used to.
[42]
Dr William Bishop, an economist, testified in support of NAB’s
case. He, like others, accepted that placing a value on
intellectual
property is generally not an easy task. This proposition is not
contentious. In the event of a rate that is prohibitive,
radio
stations would resort to using the efforts of session musicians
captured on a disc or other device in their music broadcasts.
There
are instances of persons who use sound recordings, who have resorted
to this method, particularly in the United Kingdom.
[43]
Dr Bishop favoured the revenue per time channel calculation as NAB
would have it. Dr Bishop could not understand the logic
of SAMPRA’s
exclusions from editorial content. He was of the view that revenue in
either formula should be based on actual
figures rather than notional
ones. Simply put, this means financial statements, rather than the
rate card less the estimated discount.
Dr Bishop took the view that
either formula could be scaled up or down to get to a rate that would
avoid perverse reactions and
consequences. He agreed that an
acceptable formula was one that reduced distortions but warned
against setting the rate so low
that it was considered not
worthwhile. Dr Bishop was struck by the complexity of regulation in
the radio industry in South Africa.
In considering profit against
revenue, Dr Bishop testified that one could have revenue with a bad
profit-crunch and, similarly,
one could have profit soaring out of
proportion to revenue. Whilst he accepted that there was no direct
correlation between revenue
and profit, he stated that there was some
correlation.
[44]
It will be recalled that NAB’s formula incorporated the profit
average for the industry. Dr Bishop stated that it was
for someone
else to explain why that was adopted. He accepted that some form of
sharing, either in revenue or profits, has to be
factored into a
formula. Viable sharing has to be appropriate and efficient. Whilst
he described the symbiosis between the record
industry and radio
broadcasters as a joint venture of sorts, he accepted that it was not
truly such.
[45]
Mr Jonathan Shaw, a music business entrepreneur, testified that a
large proportion of music broadcast in South Africa originates
from
American companies.
[46]
Mr Colm Tonges, an accountant, testified on behalf of NAB. He is a
partner at Price Waterhouse Coopers (PWC), an auditing firm,
and was
instrumental in compiling NAB’s formula. He rejected the ten
per cent proposed by SAMPRA as being arbitrary. In justifying
the
revenue per time channel approach, he testified that one of the
principles PWC tried to incorporate was that the more people
were
listening, the more revenue would be generated, and that the time
channel proposal ought to be viewed in that light. Thus,
the best way
was to link revenue to time channels in order to ensure that that
objective was being met, rather than simply having
regard to revenue
across all time channels. Like other witnesses, he too favoured
actual revenue reflected in a broadcaster’s
financial
statements. In looking at letters of demand from SAMPRA, PWC
considered its formula in relation to seven radio stations
that were
different in size and got a range of a royalty rate of between 6,8 to
8,8 per cent. That exercise was purely to illustrate
the levels of
royalty that would ensue if SAMPRA’s formula was adopted.
[47]
PWC factored in audience-reach in its formula to ensure that radio
stations with a greater audience paid more. Mr Tonges accepted
that
revenue bears a relationship to listenership, but testified that it
is not the only variable and that demographics impact
on revenue as
well. Audience income is thus not irrelevant. Audience size can be
fairly accurately determined by market surveys.
[48]
A concern by PWC was that if the level of royalty was too high, the
viability of radio stations may be affected. Justifying
the inclusion
of industry average profits in the NAB formula, Mr Tonges stated that
basing a formula on an individual station’s
profit might prove
inequitable. So, for example, a well-run station would pay higher
royalty than one less so. This, he stated,
should be contrasted with
loss making radio stations that would not pay any royalty, even
though, notionally, they could have higher
music usage. An industry
average avoided such a result.
[49]
Dr Nicola Theron, an economist who is the Managing Director of an
economic consultancy, testified. Like others, she preferred
revenue
in the formula to be based on actual rather than notional figures.
She too spoke of the difficulty of placing a value on
intellectual
property. In respect of exclusions from SAMPRA’s definition of
editorial content, she stated that the exclusions
are something one
needs to be certain of. She thought that in respect of international
comparisons, developing countries would
be more comparable to South
Africa. Dr Theron took the view that there was some value to
international comparisons, but qualified
it by saying one should be
conscious of peculiarly South African circumstances. Although, more
recently, there has been a decline
in radio listenership, there has
overall been a growth in the revenue of radio stations.
[50]
Dr Theron agreed that, from an economist’s point of view, one
would be concerned about the net outflow of currency from
South
Africa in determining a royalty rate. She took the view that in
determining the royalty rate, one should minimize the impact
on all
parties. Importantly, Dr Theron thought that a simple, rather than a
convoluted formula would be preferable. As an economist,
she
testified in relation to any proposed formula that a result that is
startling should make one revisit the methodology producing
the
result.
[51]
Johannes Koster, the Executive Director of NAB, testified. In respect
of advertising discounts, he testified that a maximum
of 16,5 per
cent is allowed as discounts to advertisers. In respect of a
50 000-odd play list obtained from SAMPRA, NAB had
difficulty
identifying the originality of all the sound recordings. In relation
to editorial content, Mr Koster testified that
promotional
competitions have entertainment value as well as playing a role as a
reward for listeners participating, and the advertiser
attached to it
gets exposure. It certainly could help to generate revenue.
[52]
Finally, I consider it useful to reproduce a broad based table
compiled by SAMPRA on sound recording royalty rates that apply
in
other countries. It is necessary to point out that the table does not
provide motivations or qualifications. However, as appears
from what
is set out above, there was testimony in relation to royalty rates
that apply in still other countries. The table that
appears hereafter
sets out the comparative rates.
0 –
1%
1 –
2%
2 –
3%
3 –
4%
4 –
5%
5 –
6%
>6%
Australia
Chile
Japan
Malaysia
Romania
Argentina
Barbados
Costa Rica
Lithuania
India
Italy
Jamaica
Panama
Paraguay
Poland
Canada
Dominican Republic
Latvia
Portugal
Slovenia
Spain
Switzerland
Bulgaria
Peru
Austria
Czech Republic
Denmark
Greece
Hong Kong
Netherlands
Thailand
United Kingdom
France
Germany
Sweden
Slovak Republic
Finland
Ireland
[53]
That then, in summary, was the totality of relevant evidence.
[54]
Sapire AJ found most of the evidence referred to above unhelpful.
Throughout proceedings it was evident that he required of
the expert
witnesses to actually provide the rate he was called upon to
determine. He disregarded the evidence of royalty rates
applied
internationally. He described how he would go about determining the
rate payable as follows:
‘
I
do not propose to analyze or adopt the opinions of the experts but
will . . . use the SAMPRA formula with an adjustment to the
denominator representing the percentage of the broadcaster’s
net income, to produce the desired result.’
[55]
Sapire AJ considered the appropriate rate to involve a value judgment
on his part. It is difficult to discern the rationale
for his
ultimate conclusion. Towards the end of his determination he stated
the following:
‘
This
assessment is made on the limited information available, but will
result in an equitable reward to the referrer’s clients,
while
not imposing an unaffordable burden on the broadcasters.’
The
following is the formula he determined should be used in calculating
the needletime royalty:
‘
A
.............
C
x 7
_______ x
________
B
.............
100
Where:
A
= the amount of time used by a radio station in any period to
broadcast the royalty protected sound recordings administered by
SAMPRA;
B
= the total amount of time used by a radio station in that period to
broadcast editorial content
“
editorial
content” is defined as content, including the repertoire,
broadcast for entertainment, information or interest
of members
of the public and shall not include broadcast time allocated to
programme promotions and/or advertisements or promotions
on behalf of
the Station or any registered or unregistered charity or in support
of social action activities, including but not
limited to awareness
raising campaigns and initiatives, telephone helplines
and
C
= a radio station’s net broadcasting revenue.
Net
broadcasting revenue means the amount in South African Rands equal to
85% in number of the published rate card value (before
any deduction
of agency commissions or any other deductions) of advertisements and
sponsored promotions or features broadcast by
the Station, including
any such broadcast by any entity which is an associate, subsidiary or
agent of the Station and including
advertisements published on any
internet simulcast service; . . . .’
[56]
In essence, the maximum royalty rate of ten per cent was reduced by
Sapire AJ to a maximum of seven per cent with the percentage
decreasing relative to music use. Other than that change, the SAMPRA
formula remained largely unaffected. It is against that determination
that this appeal in terms of s 36 of the Act is directed.
[57]
It is necessary at the outset to say something concerning the rather
tortuous statutory scheme in terms of which the Tribunal
derives its
power. As pointed out by Dean in
Handbook
of South African Copyright Law
,
[10]
the factual matrix set out in Chapter 3 of the Act has to be read
‘
mutatis
mutandis
to accommodate the adjudication of disputes arising out of s 9A’.
This means that one has to strain to make those provisions
compatible
with those of s 9A, more particularly those of s 9A(1)(
b
)
and (2)(
c
)
.
Put simply, the licensing scheme provisions are applied to the
determination of the royalty rate. That notwithstanding, the learned
author rightly points out that to adopt a different view would render
the provisions of s 9A nugatory – a consequence that
should be
avoided. Section 33(5)(
b
)
therefore, applies
mutatis
mutandis
and
requires the Tribunal, when it is determining a royalty rate, to make
such order as it may ‘determine to be reasonable
in the
circumstances’
[58]
One other preliminary issue that needs to be addressed, albeit
briefly, is the failure of the Regulations under the Act to
prescribe
the procedure for the adjudication of a royalty rate. It is
distressing that, despite a lapse of more than three years
since the
report by the Copyright Review Commission in which it described the
regulations as vague and unclear and lamented the
failure to
prescribe a procedure for the adjudication of a royalty rate, no
progress has been made. This is an aspect the Minister
should address
urgently.
[59]
I now turn to deal with the manner in which the Tribunal made its
determination. In my view, Sapire AJ wrongly discounted the
evidence
that both parties took care to adduce to assist him in reaching a
decision. There are areas of commonality and divergence
which ought
to have been taken into account in arriving at a conclusion.
[60]
First, almost all the witnesses were agreed that in considering
revenue, the financial statements of the radio stations ought
to be
considered rather than the SAMPRA calculation of the rate card less a
15 per cent discount.
[61]
It is not irrelevant that many countries calculate a royalty rate
based on the percentage of revenue with some choosing to
increase
rates relative to revenue thresholds. I will in due course deal with
comparable rates.
[62]
That the broadcasting industry is extensively regulated is a factor
to be taken into account in NAB’s favour.
[63]
It does not appear that royalty rates for sound recordings
internationally exceed composer royalty rates. It is arguable, though
not definitive, that composers are the key component in relation to
the production of music. In Chile sound recording rates are
determined at half the rate of the composer royalty rate.
[64]
Whilst NAB’s proposal that revenue should be linked to time
channels, distinguishing between peak periods and the midnight
shift
in which listenership is minimal, is superficially attractive, the
following oddities arise: It discounts the fact that advertisers
are
offered free spots in the midnight shift in order to induce them to
pay a premium for advertising spots during peak time, and
it ignores
the fact that the greater amount of music is used during off-peak
periods.
[65]
A concern expressed by the Advisory Committee on the Act in relation
to the imposition of too high a royalty rate was the financial
implications for South Africa, which translated, means excessive
negative currency outflow. As pointed out, much of the money
collected by SAMPRA will find its way to the USA and other countries.
[66]
In addition, consideration should be given to perverse consequences
for the music industry by too prohibitive a rate driving
broadcasters
to the alternative of using session musicians and the like.
[67]
The problem with the introduction of profitability in the form of the
industry average is that it does not properly or necessarily
give
vent to the pay-for-play principle and might be punitive on people
whose profits are below the industry average. It might
also lead to
manipulation on an accounting basis in order to lessen the royalty
burden. There appears to be no precedent internationally
for
including profitability in the calculation of a royalty rate. Dr
Bishop, who testified on behalf of NAB, did not champion its
inclusion and left it to others to justify.
[68]
Although there appears to be some logic to factoring audience-reach
into a formula, one has to be mindful of the difficulties
of valuing
an audience as became evident from the evidence set out above.
[69]
There is force to the submission on behalf of NAB in relation to
editorial content, namely, that the exclusions by SAMPRA are
too
liberal. Whereas advertisements ought rightly to be excluded, it
appears to me that programme promotions and other content
such as
charity drives or competitions ought not to be. They are part of the
total cachet of a radio station and can all be said
to be part of the
revenue generating effort.
[70]
As far as can be ascertained, only six countries, who probably all
qualify to be described as developed countries, pay a rate
of more
than five per cent. Only two developed countries pay more than six
per cent of total revenue. India, which is probably
the more closely
comparable country, charges between one and two per cent of total
revenue. In considering the international experience
and practice, I
am not unmindful of South African circumstances, more particularly
that South African performers have been clamouring
for years for
their due.
[71]
It is clear that the factor of ten representing a maximum rate of ten
per cent proposed by SAMPRA is purely arbitrary. Sapire
AJ considered
that, because the determination by him involved a value judgment, he
was free to arrive at a conclusion by a sense
of what was reasonable
without any real consideration of all of the factors set out above.
He appears to have considered that the
SAMRO rate multiplied by two
would be reasonable. In this regard, instead of arriving at 6,5 per
cent, he determined seven per
cent to be reasonable. It certainly was
never suggested, with substantiation, by any of the witnesses that
owners of copyright
in sound recordings were entitled to rate their
talents at twice the rate received by composers.
[72]
It was submitted on behalf of SAMPRA that the discretion conferred on
the Tribunal in terms of s 31(5) of the Act was the widest
form of
discretion in our law and that the Tribunal could legitimately adopt
any one of a range of options about which there may
well be a
justifiable difference of opinion as to which one would be the most
appropriate. Such discretion, so it was contended,
is what is known
as a strict discretion. In this regard the judgment of this court in
Oakdene
Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd
2013 (4) SA 539
(SCA) is relevant.
[73]
NAB, on the other hand, contended that the Tribunal did not have an
unfettered discretion. Both parties, however, agreed that
if we were
to conclude that the Tribunal proceeded from incorrect facts and
ignored relevant factors, the determination could be
overturned and
we could substitute a conclusion based on the available evidentiary
material.
[11]
The parties were
ad
idem
that
any further delay was undesirable.
[74]
In my view, Sapire AJ’s determination occurred without
reference to the very important evidence and factors set out above,
with the consequence that the determination is liable to be set aside
and substituted.
[75]
For all the reasons set out above, a reasonable rate would be 3,0 per
cent of revenue as a maximum rather than the seven per
cent
determined by Sapire AJ or the ten per cent proposed by SAMPRA. In my
view the only justifiable exclusion from SAMPRA’s
definition of
editorial time is the broadcast of advertising. There is no doubt in
my mind that revenue should be that which is
reflected in a radio
station’s financial statements. In this regard the practice
followed by SAMRO, about which we were advised
from the Bar, appears
salutary. It appears that broadcasters are invoiced two months in
arrears, based on the revenue certified
by its accountants, which,
after the end of the financial year, is verifiable by way of audited
financial statements. The time
lag will enable SAMPRA to verify,
pre-invoicing, that part of a radio station’s play list that is
rightly subject to copyright.
From what is set out above, it is clear
that I did not consider profitability or audience-reach to be
included in a formula to
arrive at the royalty rate. In my view, for
the reasons already provided, I am un-persuaded that NAB’s
proposal that revenue
should be calculated per time channel within a
total broadcast period is justified. In this regard I bear in mind
the concession
by Ms Hollis who testified in support of NAB’s
case that a simple formula is to be preferred. NAB’s formula is
somewhat
complex and more susceptible to disputes.
[76] Thus, the formula to
be applied in determining the royalty rate is the following:
‘
A
...........
C x 3
______ x
_____
B
...........
100
Where:
A
= the amount of time used by a radio station in any period to
broadcast the sound recordings administered by SAMPRA;
B
= the total amount of time used by a radio station in that period to
broadcast editorial content,
and
C
= a radio station’s net broadcasting revenue based on what is
reflected in its financial statements or certified by its
accountants.
“
editorial
content” is defined as content, including the repertoire,
broadcast for entertainment, information or interest of
members of
the public and shall not include broadcast time allocated to
advertisements.’
[77]
I now turn to address the remaining issue flowing from the
cross-appeal by NAB. In my view, the approach to the South Gauteng
High Court for the declaratory order referred to earlier in this
judgment was misplaced. Counsel representing NAB rightly did not
argue the contrary too strenuously. It was for the Tribunal to
consider whether what it was required to determine was within its
statutory powers. If it erred, that decision could be challenged on
appeal. Counsel on behalf of NAB accepted that we were not
bound by
the decision of the high court concerning the powers of the Tribunal
to determine the date from whence the royalty is
payable. In the
latter regard, it is important to note that the Tribunal’s
power is narrowly circumscribed and does not include
the power to
deal with disputes concerning the time from which the royalties are
due. Moreover, there are a number of issues that
impact on the
question of the date from which royalties become due including, but
not limited to, prescription and claims for unlawful
breach of
copyright. Questions concerning the application and enforceability of
the provisions of the Act also come into play.
Sapire AJ did not
address the question raised in the cross-appeal at all. In my view,
there is no basis for concluding that the
Tribunal was empowered to
deal with the questions that arise from the cross-referral on this
aspect.
[78] No costs were
awarded in the court below. This was justified by Sapire AJ on the
basis that both parties had contributed equally
towards his
determination and that he did not wholly adopt the formula of either
one. In my view, the same reasoning applies in
this court. For the
reasons set out above, the following order is made:
1. The appeal is upheld
to the extent reflected in the formula set out below, and the
cross-appeal is dismissed with no order as
to costs.
2. The determination by
the court below is set aside and substituted as follows:
‘
A
..............
C
x 3
______
x _____
B
............
100
Where:
A
= the amount of time used by a radio station in any period to
broadcast the sound
recordings
administered by SAMPRA;
B
= the total amount of time used by a radio station in that period to
broadcast editorial
content,
and
C = a radio station’s
net broadcasting revenue based on what is certified by its
accountants
and confirmed in its financial statements.
“
editorial
content” is defined as content, including the repertoire,
broadcast for entertainment, information or interest of
members of
the public and shall not include broadcast time allocated to
advertisements.’
MS
NAVSA
JUDGE
OF APPEAL
APPEARANCES:
FOR APPELLANT:
Adv C E Puckrin S.C (with him O. Salmon)
Instructed
by:
Webber
Wentzel, Johannesburg
Honey
Attorneys, Bloemfontein
FOR
RESPONDENT: Adv. I Miltz S.C. (with him C LRobertson)
Instructed
by
Edward Nathan
Sonnenbergs, Johannesburg
Matsepes
Inc., Bloemfontein
[1]
See para 18 of the
report of the Advisory Committee of the
Copyright Act, dated
5
November 1993.
[2]
Section 29(1)
provides:
‘
The
judge or acting judge who is from time to time designated as
Commissioner of Patents in terms of
section 8
of the
Patents Act,
1978
, shall also be the Copyright Tribunal (in this Chapter referred
to as the tribunal) for the purposes of this Act.’
Section
36 provides for appeals from the Tribunal to this court.
[3]
SAMPRA was
accredited as a representative collecting society in terms of
Regulation 3(1)(
a
)
of the Collecting Society Regulations published under Government
Notice No 517/06 to administer the right to receive payment
of
royalties in terms of section 9A of the Act.
[4]
See discussion in
para 5 of the report referred to in note 1.
[5]
Section 6(
d
)
of the Act.
[6]
Section 9A(2)(
c
).
[7]
Section 9A(1)
reads as follows:
‘
(
a
)
In the absence of an agreement to the contrary, no person may
broadcast, cause the transmission of or play a sound recording
as
contemplated in section 9(
c
),
(
d
)
or (
e
)
without payment of a royalty to the owner of the relevant copyright.
(
b
)
The amount of any royalty contemplated in paragraph (
a
) shall
be determined by an agreement between the user of the sound
recording, the performer and the owner of the copyright, or
between
their representative collecting societies.
(
c
)
In the absence of an agreement contemplated in paragraph (
b
),
the user, performer or owner may refer the matter to the Copyright
Tribunal referred to in section 29(1) or they may agree
to refer the
matter for arbitration in terms of the Arbitration Act, 1965 (Act No
42 of 1965).’
[8]
GN 517 of 1 June
2006.
[9]
GN 517 of 1 June
2006.
[10]
O H Dean
Handbook
of South African Copyright Law
2012 at 1-55.
[11]
See para 20 of
Oakdene
.