The trade press in the last few days has been full of news about a letter of inquiry from two Congressmen to Spotify asking for details about Spotify’s promotional royalty rates where, in exchange for lowered royalties, songs to which these rates apply may be played more frequently, as Spotify factors in lower costs into its music selection algorithms. The Congressional letter asks whether this promotional approach is already in operation, and if it will lead to a “race to the bottom” forcing lower royalties on artists, resulting in economic losses to these artists. While the implication is that negotiation over royalty rates is a new phenomenon, in fact such negotiations are common in the digital music marketplace and, based on the way that Congress itself established the royalties for music services, they are inherent in that system. In effect, this Congressional letter seems to be asking for Spotify to forego a private business transaction by which it lowers its costs of doing business through providing its business partners something that they want – more exposure for certain music.
Indeed, as we have written before, these negotiations over royalty rates are required to operate in the digital music marketplace. Royalties paid to performers and record labels for the use of music by an interactive music service like Spotify are not set by governmental decision (there is no Copyright Royalty Board setting a default rate as there is for noninteractive music services – see our article here). Instead, the rates are set by private business negotiations where there is a give-and-take between the parties over various considerations – including the promotional benefits when songs are featured on certain playlists provided by services like Spotify. Certainly, there are counterweights to any downward pressure on all royalty rates, as listeners to an on-demand service like Spotify want to hear the hits. So Spotify needs to pay for those hits to attract and retain its listeners. In some cases, artists have determined that there is insufficient promotional value to the playing of their music on an interactive service and that no royalty would be enough to compensate them for perceived lost sales of their music when it is featured on an interactive service. As we wrote here, these artists may deny an interactive service the use of all their music, or portions of their catalog. In other cases, as in the instances that apparently gave rise to the Congressional letter, record companies or artists may feel that it is important that their music get exposure, so they will be willing to accept lower royalties in exchange for wider exposure to their music to consumers that such plays deliver. In other cases, other promotional benefits may be given to the copyright holders for lower royalties (in fact, initially, the record companies received equity positions in Spotify, presumably to help convince them to make their music available at rates that Spotify thought it could afford). Royalties in the interactive music marketplace are simply the result of a marketplace negotiation, as Congress intended when they adopted Section 114 of the Copyright Act providing for digital performance rights for sound recordings.
Even in the noninteractive marketplace, it has long been recognized that negotiations for lower royalties exist at least partially in exchange for suggestions that music with lower royalties will be played more. Even SoundExchange, which collects noninteractive royalties for copyright holders and artists, recognized in early CRB cases that negotiations for lower royalties were to be expected (see our article here). In the last Copyright Royalty Board case decided in 2015, the CRB recognized that Pandora and certain broadcast companies had negotiated royalties with certain copyright holders that were lower than the standard CRB rate, in exchange for certain promotional incentives (see our articles here and here, including the discussion of “steering” listeners to music with lower rates). In fact, these negotiated rates formed a benchmark used by the CRB to determine its estimate of the market rate that would be paid by a willing buyer and a willing seller when it set the webcasting royalty rates for 2016-2020.
The urge to reduce music royalties is at least partially behind the push by Spotify and other digital music services to promote podcasts and other talk formats – as the cost of talk content is lower than music royalty costs. If Congress is concerned about differing royalties for different music, will they also investigate the different rates between talk and music programming? It seems strange to think that Congress would interfere with free market negotiations, where businesses are making pricing decisions for the “products” that they offer, yet the questions asked by this Congressional letter seem to be suggesting that some members of Congress want to do just that.
Many of the trade press articles suggest that a concern about “payola” is behind the Congressional inquiry – even though that is not mentioned in the letter. But, as we have written before, merely trying to lower content costs should not be seen as “payola” but instead merely as an aspect of operating a business. A TV station may be looking to fill a block of program time, and may be offered two programs that would be expected to deliver a similar audience, and the government would not get involved if that station decided to buy the least expensive program. Is music really any different? A service has to pay for the hits, but it does not play only hits, and where there are comparable songs that can be played to fill the rest of the time, isn’t it just a normal business practice to play the ones that are less expensive?
Moreover, as we wrote here, even on broadcast radio, it is not the payment for playing music that is illegal, it is the failure to disclose that payment is being received that is the problem – and most music services already disclose in their terms of service that the music a consumer hears is determined by many factors – including financial considerations.
So what is the Congressional letter about? It could be simply that the context provided to these members of Congress when they were urged to write the letter did not fully explain that what is being done is a fundamental part of the music marketplace. It may be that political issues drive complaints about certain music service practices. But these practices seem to be simply the free market at work. So, while this Congressional letter has received wide coverage, we expect in the long term it will turn out to be much ado about nothing.