As reported in Digital Music News and other publications on Friday, Clear Channel Communications dropped its waiver of music royalties from its on-line agreement signed by musicians submitting songs to the Company in hopes that their music would be played on the Company’s radio stations.  In writing about this decision, most publications attribute the decision to the petition filed with the FCC by the Future of Music Coalition and other public interest groups arguing that the waiver requests constituted a form of payola – the giving of something of value (the waiver of the right to receive a royalty) in exchange for the playing of music.  However, on close inspection, that would appear to be a misunderstanding of the royalty, as there would seem to be no royalty that would be affected by the waiver in connection with the playing of this music by radio stations, and therefore there would be no payola over which the FCC has any jurisdiction.

According to the Future of Music petition, Clear Channel’s promise to play new music was made in connection with the payola settlement that it and other companies entered into with the FCC, and was apparently contained in a side letter filed with the FCC, as it was not spelled out in the settlement agreements themselves. See our analysis of the settlement agreements, here.  The side letter promised that the Company would dedicate a certain amount of radio airplay on the Company’s radio stations to new local music.  However, such play would not implicate any music royalties – so a waiver of royalties would not confer any benefit on the Company.  Broadcast stations pay no royalty for the use of a sound recording – thus the waiver that Clear Channel requested was without any value as there was no royalty to waive.  While broadcast stations do pay a royalty for the composition (the underlying words and music of a song), stations play flat fees to ASCAP and BMI that are a function of the station’s market size and power – not a function of how many songs are played.  Thus, as there is no sound recording royalty and a flat fee for the composition royalty unaffected by any waivers, the waiver did not confer any benefit to the Company in connection with its broadcast operations.  Thus, there where would appear to be no payola issue over which the FCC would have any jurisdiction.

As we wrote, the royalty waiver only confers a benefit in the on-line world, especially in on-demand services such as downloads and podcasts, not subject to the statutory royalty set by the Copyright Royalty Board.  Over these services, the FCC has no jurisdiction.  Moreover, the impact of any proposal to limit these waivers, as suggested by the Future of Music petition and by a letter written to the parties to the payola settlement by Senator Russ Feingold investigating how the settlement was being implemented, presents some real issues in for services such as Internet Radio that are looking to these waivers as a possible means of reducing their royalties.

Since the decision of the Copyright Royalty Board on Internet Radio, it has always been assumed that one way some services could reduce their royalties was to get direct licenses from musicians.  SoundExchange has made much of the fact that artists were free to waive the collection of royalties if they felt that this was in their best interest by encouraging Internet Radio stations to play their music.  There have even been discussions by several parties of setting up  clearinghouses for music that could be played royalty-free as a way of encouraging the use of that music – and allowing Internet Radio stations to reduce their obligations and survive under the new royalties.  For instance, see a report, here, that Polka musicians are setting up their own system for giving Internet Radio stations rights to play their music without royalties.  If providing royalty-free music to Internet Radio stations constitutes some sort of legal issue, such exchanges could be imperiled.

While the Future of Music Coalition has suggested that the FCC petition continue even though Clear Channel has withdrawn their waiver, some consideration should be given as to whether the waiver policy is really contrary to the public interest  – or if such waivers may actually promote the widespread use of new and otherwise underexposed new music.  And for more than just polka music….