Recently Mr. Yang Wenbo, manager of the Beijing Yujinghong KTV, has become extremely agitated over litigation and a potential 200,000 Yuan “loss” for not paying KTV copyright royalties.

On October 17 2008, the China Audio-Video Copyright Association (CAVCA) formally filed lawsuits in seven Beijing courts (including Beijing No 1 Intermediate People’s Court, Beijing No 2 Intermediate People’s Court, Beijing Haidian People’s Court and Beijing Chaoyang People’s Court) against 100 Beijing Karaoke operators, including Tongyishouge and Rainbow Plaza, for failing to pay royalties on songs and MTV videos used. To date, this is the largest collective civil action in China regarding Karaoke copyright royalties, with an unprecedented number of hearing courts and KTVs.

On October 29, the Dongcheng District People’s Court held a hearing that included defendants; Dongfangxindi (Beijing) Cultural Development Co., Ltd., Beijing Yujinghong Karaoke Bar, and the Beijing Dongfangjingui Entertainment Co., Ltd., all present and located in the district. During the 40 minute hearing, the attorney for CAVCA stated his case and claimed damages in the amount of 200,000 Yuan against each defendant.

Although the first hearing has concluded, each KTV has adopted a wait-and-see attitude, because they think this type of action is too murky and full of holes.

How was the 200,000 Yuan price calculated?

During the trial, the CAVCA claimed damages of 200,000 Yuan.

An angry Wang Li, manager of Dazong KTV which was second on the list to-be-sued, told China IP that “this amount would most likely reshuffle the whole KTV market in Beijing”.

On the date of trial, the manager of Dongfangxindi, Mr. Mou expressed his objections and called the damages “choking!”

Yang Wenbo supplied a breakdown of costs. The main expenditures at the Yujinghong KTV include: house rent, staff salaries, utilities, taxes and depreciation (KTV equipment is replaced every two years). He has thus far invested 10 million Yuan in the bar. 200,000 Yuan is the cost of one month of utility, accounting for 2~5% of annual expenditures.

“To be honest, for a medium-sized KTV like us, a 200,000 royalty is unbearable. But for those with smaller scale and less investment, it’s another story”. Mr. Yang continued, “The present KTV market is shared by three kinds of Karaoke bars: investment of less than 3 million Yuan, 3-10 million Yuan and more than 10 million Yuan. Yujinghong is on the medium scale.”

Dongfangxindi is in that “less than 3 million Yuan range”. It is even teased as a mini-bar. Its manager Mr. Mou said with a desperate tone, “Our investment is really low. We only have about 26 rooms. If we pay 200,000 Yuan, we will have to close down. The media always take Party World as the example of law abiding. It is the KTV flagship that has chain stores all over the country. It can afford the royalty. But we can’t.”

According to China IP’s interview, the KTV market in Beijing takes on a pyramid shape. On the top are a few of the leading players, such as Party World and Melody. There are not many KTVs that can open branches, and those are limited in the Beijing area. On the bottom are KTVs with minimal investments. They enjoy a large number, but their business is not always profitable. A 200,000 Yuan royalty payment will tie up the cash flow of many Beijing KTVs.

Besides the amount of damages, another controversial point is the uniform claim of 200,000. If CAVCA wants to charge the previous year’s copyright royalty, the amount should be different for different KTVs.

Mr. Yang expressed his dissatisfaction saying, “Royalties are paid based on number of rooms, so why is the compensation based on number of songs? We have tens of thousands of songs in our music library. By this calculation, don’t we have to pay hundreds of million Yuan?”

Asked about the method of calculation and criteria for the amount of compensation, CAVCA simply answered, “In this lawsuit, every case involves about 50 songs. We calculate according to relevant rules and so charge every KTV 200,000 Yuan.”

“What I can’t accept is the royalty rate. Besides, the follow-up management, service and other issues are still pending. If all these problems are solved, we will definitely take into consideration this royalty. But before this, what we can do is to wait and see”, said Mr. Wang.

Charging rule needs to be more specific

On the day of trial, Dongfangxindi’s manager expressed his disagreement with CAVCA over the royalty rate, which is set by NCAC – 12 Yuan per room per day. In court, Mr. Mou contended, “we admit that our KTV has played those songs, and you did own the copyright. We know we should pay, but the royalty rate is by no means reasonable. When your people (from CAVCA) came to collect the fee last time, we had only four rooms open. But you charged us by 26 rooms. Is it reasonable?”

Other KTV managers also held firm on this point. They believe that since the rooms are not 100% open, the scope of fee collection should never cover all of them.  

“On average, only half of the rooms bring us income. And this is an optimistic estimation. It’s too much for us to pay the fees of all rooms”, Mr. Yang told China IP.

Mr. Wang from the Dazong KTV complained: “Our KTV has consumed vast investment but does not run well. Such charging without rule or humanitarianism is beyond our acceptance.”

A China IP journalist, after he visiting and investigating several KTVs, concluded that the Yujinghong KTV, for example, has a room occupancy rate during week days at usually less than 50%. Even in the Jinbai KTV that is near Beijing Jiaotong University, the occupancy rate during weekends is far from full – a great contrast from the queuing scene in Party World. There is fierce competition in the KTV market in Beijing. Most KTVs can only manage to survive.

As for the royalty rate, most KTV operators believe it should be based on the actual use of the songs.

“Charging based on click rate is fairer. We know that CAVCA wants to protect the interests of copyright owners. When a song is sung by more people, the owner of this song will get more, and we will pay more. If a song is of no interest by anyone, the owner will get nothing, and we will pay zero. This is the fair and square way. So if our business goes well, we will pay more, and vice versa”, Mr. Yang told China IP.

This controversy over royalty rates is actually the expectation of all KTVs of a market-adapted rule, instead of that of a uniform one. When the copyright royalty standard was promulgated, NCAC emphasized, the charging standards would be differentiated by regional economies, and also stipulated the particular royalties for particular provinces. But considering the present situation, this differentiation rule shall not only apply among provinces, but also among KTVs in the same province, even in the same city.

Even if the royalty rate is accepted by all, the charging process still has a long way to go.  

“When we update our music library, we have paid the supplier of the VOD song order system. We wonder whether it is a way of paying royalties. Repeated charging bothers us. Furthermore, the CDs we bought are authentic, and should have already contained royalties. So why should we pay for them again?” Mr. Wang from Dazong KTV is full of questions.

“If the charging is based on rooms, do I have to pay more if the number of rooms is increased, say, after redecoration? And if I have paid the fees, can I get the excessive money back if the number of rooms is decreased due to some reasons?” Mr. Yang wondered.
 
The controversy escalates

The scope of work for the CAVCA is not limited to only Beijing. It is trying to help rights owners receive royalties from around the country. The Beijing Excellent Union Communication Co., Ltd., a company entrusted by CAVCA for royalty collection, and all its branches throughout the country has become the “vanguard”.

However, the collection of royalties in other places is just as rocky as in Beijing. In mid-November, 40 KTVs in Guangzhou refused to pay the royalties for 2007. Although negotiations prevailed with several KTVs, there are more than 30 KTVs observing their “nonpayment pact”.

At the end of November, the Beijing Haidian Amusement Association and 257 legally operating KTVs under its jurisdiction questioned the rationality of the CAVCA’s royalty rate. They think the charge is too high and too inflexible. A spokesperson stated that “before a public price hearing is held and detailed charging rules are stipulated, it is not reasonable to collect the royalties for 2007 and 2008, otherwise the only result is a more intense controversy.”   

The current situation shows that this “marathon” lawsuit will put the royalty issue in front of all KTVs, and more importantly, make KTV operators and the CAVCA understand each other’s requirements, so as to solve the problem efficiently and conscientiously. Actually, royalty collection can never be simply realized through a lawsuit or a rights safeguarding activity. It is a comprehensive social problem. Lawsuits are only one way, whereas solving the problem is the goal.

In a final thought from an official of the CAVCA to China IP “A lawsuit is simply one means of supervising and urging users to pay the royalty. It is our last choice since all those supervisions are fruitless. It is also our expectation that we could settle problems through friendly negotiation, instead of any lawsuit”.

(Translated by Hu Xiaoying)