Once again, the extension of the sound recording performance royalty to broadcasters has become a hot topic in Washington. The subcommittee on Courts, the Internet and Intellectual Property of the  House Judiciary Committee yesterday approved the bill introduced by Congressman Berman (about which we first reported here).  That bill would include broadcasters in the Section 114 sound recoding royalty currently applicable to digital music users including Internet radio, satellite radio and cable radio. Under the bill, the Copyright Royalty Board would be charged with the responsibility of determining what a royalty would be using the "willing buyer, willing seller" standard. Following this subcommittee approval, the bill would next be considered by the full committee. To become law, the Committee and the full House of Representatives would have to approve it, and similar legislation would need to be enacted by the Senate. As the NAB has garnered the support of a majority of the members of the House on a non-binding resolution opposing the imposition of the royalty on broadcasters, and as there is not much time remaining in the legislative session before the election and the end of this Congress, the whole process may well have to start fresh in 2009 (bills have to be reintroduced after the end of each two-year Congressional session). Yet, with all of the controversy over the issue in recent weeks, it appears certain that the issue will arise again, so it is important to look at some of the recent action.

Two weeks ago, the House subcommittee held a hearing on the issue. Prior to the hearing, the MusicFirst Coalition (principally supported by the RIAA and the affiliated record companies as 50% of any royalty goes to the copyright holders who are usually the labels) had Nancy Sinatra and the Nitty Gritty Dirt Band making the rounds on Capitol Hill in support of the royalty. These appearances follow the precedent set in earlier Capitol Hill proceedings, where the Coalition has brought in niche or oldies artists to address Congress – not major popular current acts. The artists who have testified (who have included Judy Collins, Sam Moore, Lyle Lovett, and Alice Peacock) have argued that the additional income that they would receive from a performance royalty would supplement their incomes which, in some cases, has either never been great or has declined as the demand or ability to tour has declined. The argument is always made that the royalty will encourage musicians to produce their music – though it is rarely if ever claimed that music wouldn’t be made if the royalty is not adopted, as songs have been written and sung for time immemorial, well before any royalty existed, merely for the pleasure or to fulfill the need for self-expression. The question is not one of ensuring the availability of music, but instead it is one about who should get how much of whatever money is made, directly or indirectly, from the use of that music. 

One question that, to me, looms large is whether most artists would in fact be better off with a performance royalty. In many cases, the very artists who are testifying in support of the royalties would receive minimal revenue from the royalty, and that royalty may well end up hurting many of these same acts. How many times are Nitty Gritty Dirt Band songs played on the radio? When was the last time that you heard “These Boots Are Made for Walking” on the radio?  The imposition of a performance royalty (or performance tax, as the NAB has called it) could encourage stations with niche music formats to abandon those formats. Already stations are abandoning 60s and even 70s based oldies formats (less airplay for Nancy Sinatra), and if they have to pay more for the use of those recordings, will these stations keep playing them? Similarly, there are few bluegrass stations, and the likelihood of more developing will not be helped by the introduction of a performance royalty. If a station could make roughly equivalent amounts from airing news-talk programming and not paying a royalty or some niche format where a royalty would be due, which choice do you think a station will make? Instead, it seems that stations will play the music that their audience may demand – the most popular and safest music – or abandon or severely limit the playing of music to avoid the royalty.

While the proponents of the royalty have downplayed the promotional benefits of radio airplay, even arguing that airplay harms artists as listeners substitute radio listening for the need to buy a CD or download, even the music industry’s own expert testified before the Copyright Royalty Board that the net promotional value was probably greatest for up and coming bands, while that negative impact might only occur for well-known acts who have other avenues through which to promote their music. Thus, the imposition of the royalty would seemingly make the rich get richer, while limiting the avenues for promotion for lesser known acts.

SoundExchange, which collects the digital royalties, has itself suggested in a recent press release that the fees that the royalties they seek, like those imposed on Internet Radio, are reasonable. SoundExchange points to predictions as to the revenue that Internet radio will received by 2020 and claims that more and more services are signing up to provide Internet radio service under the royalties set by the CRB.. They make much of the “AOL-CBS partnership”, when instead what appears to have happened is that one of the biggest Internet radio companies has essentially left the business, surrendering their service to CBS. As we just wrote, MSN has also abandoned the business, Yahoo has been decreasing their listening hours, and Pandora has been repeatedly been stating that they cannot operate under the current royalties. The Internet radio-like services that have been getting the most recent promotion and press coverage – services like Last.FM and Imeem, have negotiated their own private deals as they provide interactive services not subject to the royalty. If not for small webcasters paying under the special terms for those stations, or for larger broadcasters who may have different on-line economics (i.e. they essentially have no programming costs as they repurpose their existing content on the web, though even there most small broadcasters are petrified of developing a large on-line audience that could bankrupt them), the Internet radio industry would be crashing.

The recent discussion has also turned to parity in royalties. The record labels argue that broadcasters don’t pay a royalty as other digital services do because of an historical "loophole" in the Copyright Act. But this argument could just as easily be reversed.   The record companies only get the royalty because of the provisions of the Copyright Act created only in the late 1990s, for the first time creating a public performance right in a sound recording. If the RIAA/SoundExchange position were to be accepted, it would seem clear that the same “loophole” would also apply to other public performances of sound recordings – like the playing of records in bars and restaurants, stores, stadiums, and in other public places. While the current bill does not provide for such an extension, isn’t that the logical extension? The performance royalty paid to composers is paid by these venues so, using the Music First logic that there should be "parity", wouldn’t these venues be next?

The argument of parity simply does not ring true  As we have written, here, the SoundExchange proposal embodied in the initial bill for small broadcasters is a flat fee of $5000 per year if the broadcaster has less than $1.25 million in revenue. Yet under SoundExchange’s special deal for small webcasters, a webcaster making $1.25 million would be paying over $150,000 in royalties. Where is the fairness and parity there? Is SoundExchange wiling to support a similar limitation in the royalties paid by small webcasters?  Similarly, if SoundExchange is seeking the same royalty as has been determined “fair” by earlier CRB proceedings, the royalty on broadcasters could exceed 20% of their gross revenues for a music station (see our computations here). In this day of declining radio profits, such a royalty would be crushing for most stations, perhaps ensuring the demise of over-the-air broadcasting (as reportedly predicted by Steve Ballmer of Microsoft), making issues of the digital divide incredibly acute. The news, information and entertainment provided by radio broadcaster would disappear, and music entertainment would be available only to those who have access to wireless high-speed Internet connections. That will not be the same as the ubiquitous service offered by free over the air radio currently.

While the subcommittee reportedly wanted to make some changes in the bill before it advances to the full Committee, these fundamental issues need to be considered. Essentially, while it is very easy to say that musicians should be compensated for the use of their work, the unintended consequences of the royalty are great. Congress and even the artists and labels need to carefully consider these issues before moving on the enactment of any performance royalty.