Congressional Fight for Internet Radio: Round One Goes to Fairness!  Round Two, Consumers?

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To the average observer Wednesday’s House Judiciary Subcommittee hearing on Internet music royalties may have simply looked like a typical DC fight between large industry interests over how to split up a dollar.  While that may be partly true, it is also important to remember how these decisions can impact what music that we (the consumers) have access to and the choices we have in how we listen to it. Public Knowledge provided that voice of what is important for both consumers and artists through a written statement for the record.  However, the main event on Wednesday was the oral testimony by an industry-dominated panel, so lets get to the blow-by-blow.

If you missed it, the House Judiciary Subcommittee on Intellectual Property, Competition, and the Internet held a hearing on the topic of “Music Licensing Part One: Legislation in the 112th Congress” featuring six witnesses: Joseph Kennedy, CEO of Pandora; Bruce Reese on behalf of the National Association of Broadcasters; David Pakman from venture capital firm Venrock; Michael Huppe, President of SoundExchange; Jimmy Jam, Super Producer/Artist/Chair Emeritus of The Recording Academy; and, Jeffrey Eisenach, an economist from Navigant Economics, American Enterprise Institute, and George Mason University.  The hearing focused on legislation introduced this fall by Rep. Jason Chaffetz (R-UT), H.R. 6480, the Internet Radio Fairness Act, or IRFA.  Chaffetz’ bill (as detailed by PK’s Jodie Griffin here) sets out to balance the royalty rates paid by similar radio services on a variety of technology platforms.  It would in effect likely lower the rate that is paid on Internet radio by setting their royalties under the Section 801(b) standard currently used for cable and satellite radio, and unleash new opportunities for innovative online services that can compete with radio delivered on other platforms.  These royalty rates determine if new radio stations are able to compete for your attention while at the same time, ensure that new artists have an opportunity to profit off of the art that they create. 

The most striking theme of the hearing was the strong interest from the members of the Subcommittee in what IRFA is missing: a right for artists and copyright holders to receive royalties for their works when broadcast on terrestrial radio, AKA tradition AM/FM radio.  If members did not outright assert that AM/FM radio should join satellite, cable, and online radio in paying royalties to artists, they asked pointed questions to the broadcast industry representative Mr. Reese, who testified in favor of IRFA.  Outgoing Rep. Howard Berman (D-CA) and IRFA skeptic commented that, “Broadcasters have to come to terms with [the fact] free doesn’t work anymore.”  At the same time, IRFA cosponsor Rep. Darrell Issa (R-CA) questioned, “Isn’t a rate higher than free fair” for all technologies?

Mr. Reese attempted to draw distinctions between AM/FM radio and satellite or Internet radio but his argument that terrestrial radio provides a greater or distinct promotional value of beyond its digital cousins was not convincing.  In fact, Internet radio providers such as Pandora seem to provide a greater opportunity for promoting artists due to the unlimited permutations in which it can personalize stations to suggest new music most likely to resonate with each listener.  There are only so many stations that you can fit on a radio dial in one location.  Oblivious to his own double standard, Mr. Reese also argued that IRFA (without royalties for AM/FM radio) would help terrestrial broadcast stations provide their broadcasts over the Internet through streaming services.  Somehow the unfairness of paying artists for their work in one medium while at the same time not paying the artist for the exact same use on another medium failed to register with Mr. Reese.  It was encouraging to see that so many members of the Subcommittee agreed with Public Knowledge’s position that in order for IRFA to be truly fair, it must remove copyright law’s exemption for terrestrial radio and set their royalties by the same standard as everyone else.

The other major theme of the hearing was the beating taken by the definition of a healthy and vibrant market.  Dr. Eisenach’s oral testimony described the online market as both “vibrant and growing”.  Both Dr. Eisenach and SoundExchange’s Michael Huppe argued that the current “willing buyer/willing seller” standard for determining Internet radio royalties is preferred because it is based on actual market evidence.  This argument falls on its face when hit with the facts of the current Internet radio marketplace.  There is only one willing seller (SoundExchange) and not one “willing buyer” has been able to turn a profit on the current rates!  Rep. Chaffetz jabbed at this point repeatedly when he challenged Mr. Huppe to name an Internet Radio provider that is currently turning a profit (Mr. Huppe could not name one).  Pandora, for all its popularity, has not been able to turn a profit despite using both subscription and advertising revenue, and competing services started by major companies such as Microsoft and MTV have folded. 

 As Jodie Griffin details in PK’s written testimony, the willing buyer/willing seller standard was placed on Internet radio in 1998 before a market had developed.  A market did not exist upon which to base the royalty rates.  It is no wonder that Congress has repeatedly been asked to recalibrate rates set for Internet Radio based on the willing buyer/willing seller standard, and that even under those lower rates no major service has turned a profit.  The Section 801(b) standard however has proven to provide both a framework for a competitive market in satellite radio while providing fair compensation for the artists who create the music. 

Perhaps the upset of the night was the lack of attention paid to the venture capitalist witness, Mr. Pakman.  Few Subcommittee members tested him when his thoughts may have shed further light on what conditions would lead to a robust sustainable Internet radio market.  Mr. Pakman’s testimony pointed to the importance of a compulsory licensing regime that ensures that the market is not controlled by the three major labels who control two-thirds of all record sales and hold the rights to large catalogues of songs.  Members of the Subcommittee missed their opening to challenge him to describe what would encourage him to invest in Internet radio again.

As the title of Wednesday’s hearing suggests, this was only round one.  One cosponsor, Rep. Issa openly admitted in the hearing that the bill may require changes, but that he put his support behind IRFA-2012 because it provides a path forward.  The Senate has yet to weigh in and Senate Judiciary Chairman Patrick Leahy (D-VT) has been a supporter of the terrestrial radio performance right in the past.  It would not be surprising to see newly selected House Judiciary Committee Chairman Rep. Bob Goodlatte (R-VA) set up hearings part two and part three early in 2013.  When those rounds begin, the consumer’s voice should not be relegated to the undercard.

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