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.