A deal between Big Machine Records and a broadcaster, this time Entercom Communications, was announced at the NAB Radio Show giving the record company a royalty on the broadcaster’s revenue from over-the-air broadcasting in exchange for lower royalties on digital operations. This deal follows one announced by Clear Channel back in June. Talking to broadcasters around the country, many seem confused by the deals, not understanding why they were done, how they work, or what they accomplish. More than anything, many broadcasters fear that the deals will lead to a generally applicable royalty payable to sound recording copyright holders (i.e. the record companies) on over-the-air broadcasting. Let’s start with an explanation of how these deals work.
While the details of these deals are not public, a session at the NAB Radio Show shed a little more light on the subject. The session also included a promise from a Clear Channel representative that more deals are on the way. Perhaps the biggest news was at least some indication of the parameters of the financial terms of the agreements, with the President of Big Machine saying, in response to the question of whether the deal was an agreement to pay 1% of over-the-air revenues in exchange for a 3% digital royalty, that these numbers were certainly in the ballpark. If those numbers are in fact accurate, the digital royalty is substantially smaller than that paid by most webcasters, where royalties computed on the usual per song per listener basis can range from 45% of revenue to several times the total revenue of most webcasters.
So just how do these deals work, and what do these percentages mean in real terms? While specific details of the deal have not been disclosed, all indications are that these broadcasters obtained the right to perform on their digital properties recordings from Big Machine artists (including many country artists such as Taylor Swift and Rascal Flatts ), in exchange for a share of the revenues from both the broadcaster’s digital and over-the-air operations. While the royalty on the over-the-air revenues would be a new cost, as digital becomes more popular with consumers and more important to the company, these companies appeared to feel that a reduction in their digital royalties was worth the price. Of course, there may well be other facets to the agreement adding incentives to the parties that we just don’t know.
A deal with a single record company probably doesn’t in reality mean that much economically, but it could be significant if these deals become more wide-spread and include major labels. The percentages agreed to in these deals are, in reality, likely not percentages of either companies’ revenues, but instead a pro rata share of those revenues, computed based on the amount of Big Machine music played by the Clear Channel or Entercom stations. Let’s run some numbers to illustrate the savings. Assuming hypothetically that Big Machine artists comprise 10% of the songs played by a specific country radio station, Big Machine would likely receive one-tenth of one percent of the station’s total over-the-air revenues, and three tenths of the station’s total digital revenue (deriving those figures from the 1%/3% royalty rates mentioned at the Radio Show times the assumption that 10% of the total songs played on the station come from Big Machine artists).
On the digital side, the station would reduce its obligations to SoundExchange for all of the music that it has played by Big Machine artists – no longer having to pay on a per song per listener basis for that music (in effect, the broadcaster has directly licensed that music – see our posts on direct licensing here and here). If that station had been paying SoundExchange 60% of its digital revenues for the use of recorded music, the royalty on the Big Machine artists would have gone from 6% of the digital revenue of the station (10% of the 60%) to just .3%, a dramatic drop providing immediate tangible benefits to the station.
Why would the parties enter into these deals, and what impact will they have on webcasting and over-the-air royalties? More on those issues tomorrow.