Why the Differing Perceptions of the Value of Music by Digital Music Services and Copyright Holders Make Royalty Decisions So Hard
With the National Association of Broadcasters big convention coming up next week in Las Vegas, this week we’ll look at a couple of the issues that will likely be discussed when the industry gathers for its annual reunion. On Sunday, before most of the NAB Show begins, the Radio and Internet Newsletter (RAIN) will be holding its RAIN Summit West, where I will be moderating a panel called The Song Plays On – which will focus on the music royalties paid by Internet Radio and other digital music services. We’ll not focus on what the current royalties are, but instead to try to explore what they could be in the future. This is really one of the most difficult issues in the industry, as the two sides (and really there are many more than two sides to this issue) come at the issue from far different perspectives. We will try to bridge those differences and explore where there might be common ground for music users and copyright holders to come together to arrive at mutually beneficial solutions to this thorny issue.
The Internet Radio Fairness Act introduced in Congress last year brought this issue into sharp focus. That Act sought to bring about a number of reforms in the way that the Copyright Royalty Board sets various music royalties – particularly the rates that apply to Internet radio stations. We wrote about the provisions of the bill dealing with Internet radio royalties soon after the bill was introduced. After that article, there was a Congressional hearing on the issue, and lots of debate before the bill died at the end of the year as the session of Congress expired. This year, the Chair of the House Judiciary Committee has promised a number of hearings on all aspects of music and audio copyright issues, though none have yet been scheduled. But the debate about IRFA last year illustrated the divide between the various sides in the music royalty debate.
As soon as IRFA was introduced, DC players started to choose up sides – with Internet radio operators, the Consumer Electronic Association, and others supporting the Act, and most record labels and artists opposing it. The opposition also recruited some unlikely supporters, including the NAACP, the National Music Publishers Association and Grover Norquist of the "no tax increase" pledge fame. Why do these groups oppose the act – whose principal purpose is to make the decisions as to royalties for Internet radio the same standard (the 801b standard about which we wrote here) as that used to determine the royalties for other digital music services (such as Sirius XM) subject to a statutory royalty?
As noted in these pages before, I represent Internet radio companies on royalty issues, so I want that potential bias to be on the table as I explore the differences in positions in this article. But, from my perspective, the real issue is the differing perception of the value of music, and the relative contribution to the value of digital media companies. Musicians, seeing music as the backbone of many digital entertainment services, feel that it is their content that is the reason that a service even exists, much less is successful. Services, on the other hand, believe that there is much more that governs success in the media universe, and that presentation, technology, promotion and many other factors lead to that success. Where that value lies, and what the relative contributions of the parties are, is at the heart of the disagreement over royalties.
In the last year, there have been more and more stories about musicians claiming that the payouts that they get from digital music services – even the interactive services that pay rates negotiated with the copyright holders at levels substantially higher than those paid by webcasters - are not sufficient. Sometime, the argument seems to be based on the belief that the royalties are not sufficient to compensate them for the loss of revenue that they expected to get from the sale of music. Other times, the concern seems to be grounded in a belief that the royalties don’t allow more musicians to achieve musical success – the elusive “musical middle class” – where musicians can make enough money from their art to support themselves and their families without resorting to holding two or three jobs. And there seem to be yet other times that musicians see the apparent success of certain Internet entrepeneurs, and wonder why they can’t make substantial money off the Internet too.
On the other hand, supporters of change in the royalty system point to the fact that there simply has not been a long-term successful, profitable music service developed under the current royalties. The world of interactive music services is littered with the remnants of abandoned services. Last year, Last FM, which had been a "success" story as it was sold to CBS for about $270 million about 5 years ago, is almost invisible in the US music universe, and is now cutting back on its services because of royalty demands. Pandora, by far the most successful of the noninteractive services, still has not announced a profitable year, or even any sustained profitable quarters, as the “content acquisition costs” (i.e. royalties) continue to eat up a more than half of their revenues. And, under the Pureplay Settlement Act, Pandora pays royalties at half the rate that most other webcasters do. In recent months, we’ve seen stories of other web giants – including Apple – delay the start of their music services while, thus far unsuccessfully, trying to negotiate a smaller royalty than they would otherwise pay – perhaps even lower than that paid under the Pureplay Settlement. Seemingly, these established Internet companies see a streaming music service as a losing proposition unless they can get lower royalties.
For webcasting companies, what is perhaps most frustrating is that the statutory royalties on noninteractive webcasting rise each year under the rates set by the CRB and under the various settlement acts, while revenues have not risen at the same rate. At the same time, the performing rights organizations (PROs) who collect on behalf of the publishing companies for the public performance of musical compositions, have traditionally been paid based on a percentage of revenue. They are watching digital royalties for sound recordings being paid on a per song per listener basis, and have started asking why they can’t be paid in the same manner. And some new agreements seem to propose that royalty basis, at the same time as other publishers start to pull their music from the PROs to negotiate separately, making the already difficult process of royalty negotiation that much harder.
While some services, most notably the Clear Channel properties, have managed to directly license music, lowering digital royalties substantially in exchange for a share of over-the-air broadcast revenues, this is not an option for pureplay webcasters or most other digital services. And, even for small broadcasters, the potential for them to have the leverage to negotiate such deals is small. So the royalty universe simply gets more complicated, with no easy solution in sight.
So our discussion at the RAIN Summit next Sunday should be a most interesting one. If you can’t be there, there will be an audio feed. But if you are in Las Vegas, this is but one of the many interesting sessions at the summit, and one of many that will be held at the greater NAB Show itself. The place to be next week