The Internet radio world is buzzing with talk of new legislation just proposed that would change the standard for determining performance royalties. If it passes, it would likely set the stage for lower rates, which would create a far more attractive playing field for Pandora and others. The services that would be affected are those that qualify as webcasters – services that play a programmed stream of music, but not those which play any specific song or artist on demand.
I’m not going to dissect the proposed bill here – there are places where you can read the technical nuances. But I do think that a general understanding of the issue is important to industry watchers and business folks. So here are the basics, at least as I see them..
The Copyright Act is the law of the land for setting rates for most royalties. In it, section 801(b) uses a “fair market value” assessment to evaluate and determine rates paid for the use of copyrighted works, such as an artist’s song.
801(b) is the law of the land for satellite music, which is similar to webcast services in many ways but different in the technological delivery of the audio because it is delivered via satellite rather than stream.
Webcasting services were specifically excepted from using the “fair market value” standard for their rate setting negotiations with license holders (recording services). Instead, they must use a “willing buyer, willing seller” standard.
This has resulted in enormous royalty obligations for webcasting services where Pandora has in recent history paid about 70% of its revenue in royalties, while Sirius XM pays 8%.
My colleague Kurt Hanson, Publisher of RAIN: Radio and Internet Newsletter, gave an excellent example of the reason why “willing buyer/willing seller” is a bad standard during his State of the Industry talk at RAIN Summit Dallas. Kurt’s cat is old and tired, and not very pretty. But he loves that cat and wouldn’t sell it for any price. For the purpose of the example, let’s say he would sell it for $2000. But, after seeing the pathetic picture of the cat that Kurt put up on the screen, there’s not a sane person in the world that would pay even $5 bucks for that cat. It’s an excellent example! Artists can’t be objective about their art – of course each song is just like Kurt’s cat. Forcing webcasters to keep offering $5 bucks when they think they’re worth $2000 is like continually rubbing salt in the wound…
Over the weekend, Pandora Founder Tim Westergren sent out an email to Pandora listeners. “This bipartisan bill will correct the incredible inequity in how different digital radio formats are treated under the law when it comes to setting royalties…In 2011, Pandora paid over 50% of our revenues in performance royalties, while SiriusXM paid less than 10%.”
It seems simple, right? MusicFirst Coalition, which represents artists, is already against the bill, preferring the existing standard. Record labels will oppose it as well. But the proposed legislation has some strong support as well – the Consumer Electronics Association, and the National Association of Broadcasters have already come out in support of the bill.