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Last week we broke down the details of the Internet Radio Fairness Act, the recently proposed bill that aims to update the compulsory licenses for online radio services. This week we’ll be delving more into the real world impacts of IRFA.
At the end of the day, the proposals in IRFA are a good start toward promoting a healthy, competitive radio marketplace, but there are still a couple of missing pieces that the bill must include to truly be technology-neutral and to fairly balance the interests at stake in the radio marketplace.
As the bill moves forward, it is also crucial to continue seeking more data about the digital music marketplace and to examine the economic incentives and business relationships that affect how much money ends up in the actual artist’s pocket when a fan listens to her songs. And particularly as fans’ music experience become increasingly tied to online distribution in one form or another, any proposal to change the payment systems for online radio must think about the marketplace holistically. In order to accurately predict what effect IRFA will have on the music marketplace we must thoroughly examine the issue from all angles.
A Level Playing Field for Royalty Standards
The most prominent and controversial provisions in IRFA are those that change the standards for online radio from a “willing buyer/willing seller” standard to a set of factors that take into account the interests of the public, artists, and online music services.
The willing buyer/willing seller standard was first used for online radio in the Digital Millennium Copyright Act in 1998, back when traditional AM/FM broadcasters did not seem to fully appreciate their future in online radio and online-only radio services were not yet big industry players.
The willing buyer/willing seller standard focuses on the perceived economic value of the sound recordings. This leaves little room for the judges setting the rates to consider the interests of consumers, musicians, or online platforms in and of themselves.
Moreover, the fact that there was no robust online radio licensing market for sound recordings prior to 1998 meant that the judges charged with setting the compulsory license rates were effectively told to emulate a market that did not exist. The historical reasons for this are best left to a separate blog post, but for now suffice it to say that it is unsurprising that the current standard has led to a disproportionate burden on online-only radio services.
IRFA would instead peg the online radio compulsory license to the same standard used to set licenses for cable and satellite radio services. This would require the Copyright Royalty Judges to aim to maximize the availability of works to the public, give copyright owners and online services a fair return, reflect the relative roles of the copyright owner and online service, and minimize disruptive impact on the structure of the industries involved and general industry practices. As part of interpreting that standard, IRFA also instructs the CRJs to consider the public’s interest in creating new sound recordings and fostering new online music services, and the level of income needed to provide a reasonable return on investment.
There are two main advantages to this standard. First, it allows and requires the CRJs to consider the entire online radio ecosystem when it sets the rates, rather than solely attempting to recreate a market that never existed. Second, there is value in using the same royalty standards for similar services. The use that Pandora makes of sound recordings is the same type of use as those made by Sirius or Music Choice, and so their rates should be set by the same rules.
This does not mean that the actual fees need to be the same for every service, but simply that all similar services will be evaluated by the same standard.
The Continued Need for Parity in AM/FM Radio
For the same reason that online radio’s royalties should be set by the rules as cable or satellite radio, AM/FM radio should also be required to pay sound recording performance royalties.
Terrestrial radio currently only pays royalties to songwriters and publishers. AM/FM radio does not need to pay royalties for the sound recordings themselves because the Copyright Act limits the copyright owner’s public performance right for sound recordings to those public performance made by “digital audio transmission,” and section 114 of the Copyright Act specifically exempts digital audio transmissions made by terrestrial radio broadcasters licensed by the Federal Communications Commission.
The reason why the Copyright Act exempts these broadcasters has more to do with the broadcasters’ historical influence and prominence in the industry than anything else. For an example we need only look at the hierarchy of compulsory sound recording license fees today: online radio--the newest and least powerful market entrants--pay the highest rates, the more well-established cable and satellite operators pay lower rates, and the incumbent, very well-organized AM/FM radio broadcasters pay nothing.
This is the opposite of what copyright policy should be. We should be encouraging new market entrants to reach broader audiences through innovative technologies and to pay a fair price for their use of the works. Disproportionately burdening the most innovative companies in the business is no way to help the music industry find sustainable business models in the digital world.
This is not to say that all terrestrial broadcasters must pay the same rate, or that we could not exempt small or non-commercial broadcasters. But as a general rule, IRFA cannot claim to create a level playing field without addressing the terrestrial elephant in the room.
Give Artists a Bigger Cut
One prominent—and legitimate--concern some have voiced about IRFA is the risk that lowering the rates for online radio will ultimately result in lower overall payments to actual artists without actually encouraging enough new streams to make up the difference.
Part of the answer to this question is collecting better data to answer questions about the marketplace. How many new services would launch if more reasonable royalties lowered the barriers to market entry for new companies? How many more songs would existing services allow their users to stream if they did not need to worry about higher licensing fees? How would a royalty pegged to revenue impact online radio’s incentive and ability to achieve higher profit margins, through ads, subscriptions, or any other source of revenue?
IRFA could also alleviate the risk put upon artists of lower revenues by guaranteeing them a larger piece of the royalty pie. For example, currently the law requires SoundExchange to distribute royalties by giving 50% of the fees to the copyright owner (usually the record label), 45% to the featured artist, 2.5% to the side musicians, and 2.5% to the backup vocalists. IRFA could be amended to adjust these splits, giving 40% to the record label, 50% to the featured artist, and 5% each to side musicians and backup vocalists. This would ensure that more of the royalties being paid by online radio actually go to artists.
This also has the added bonus of increasing the overall payout that goes directly to artists, in a process that is generally more transparent than record labels’ accounting and without withholding the royalties until the artist has recouped all of the label's costs.
As you may know from our summary last week, there are still many more parts of IRFA that will affect radio royalties and how they are set, so stay tuned for more analysis of IRFA and its impact on the music marketplace.