Internet Radio Fairness Act

Pandora shifts royalty focus away from Internet Radio Fairness Act

Tuesday, November 26, 2013 - 12:25pm

According to a report in Billboard, Pandora will no longer lobby for passage of the Internet Radio Fairness Act (IRFA). Instead, according to Billboard’s source, the Internet radio company will concentrate on the upcoming statutory royalty period, the rates for which are set by the Copyright Royalty Board. This shift of focus would re-allocate Pandora’s resources from one part of government to another, abandoning congressional solutions for arbitration and possibly market negotiation.

At stake is the cost of content for Pandora (and all digital music services), and the business conditions in which Internet radio will thrive or not. Royalty rates -- the payments to music owners for the right to broadcast or stream music recordings -- represent the wholesale cost of music. Unlike suppliers in most other industries, labels/artists (owners of recorded masters) and composers/publishers (owners of intellectual property), do not always use market negotiation to determine their prices. In the U.S., laws and arbitration processes form the basis of statutes which determine prices. Private negotiation can occur alongside that basis. 

The Internet Radio Fairness Act was introduced to address unevenness is statutory rates. Kurt Hanson, CEO of AccuRadio and Founding Editor of this site, wrote when the IRFA was introduced, “The current confusing mix of royalty-rate setting standards for digital radio is the result of piecemeal legislation enacted as each new technology was invented. The result is a system significantly out-of-sync with the realities of the 21st century marketplace.”

In the current system, cost of content differs in percentage terms across different distribution mediums. The biggest rate disparity is between broadcast radio and Internet streaming: Broadcast is not required by law to pay labels and recording artists for the use of recordings, but Internet radio is required to. This irregularity has been addressed to a limited extent by private deals between label groups, radio groups, and Internet music services.

By swiveling its spotlight from congress to the Copyright Royalty Board (CRB), Pandora is placing a new bet. Current statutory royalty rates run through 2015. Next year begins a rate-setting process for the following five-year period. For each cycle, the CRB is mandated to determine cost-of-content prices that reflect open-market realities. The difference in the upcoming cycle is that there is a more substantial open market than in previous cycles, and therefore more reference points with which to frame arguments. For example, Apple hammered out the content costs of its iTunes Radio streaming business via negotiated deal-making with music owners. Likewise, Clear Channel’s proprietary agreements with Warner Music and many smaller label groups provide open-market examples. Same with the alliance of the Cumulus radio group with Internet pureplay Rdio.

Pandora might also explore the direct-negotiation path, though it has not made private deals in the past. The company is fairly cash-rich, with about a half-billion dollars in the bank, thanks in part to a secondary stock offering completed this year. When asked about direct music licensing in last week’s earnings call, CEO Brian McAndrews replied, “[The public offering] puts us in a better position to have the right conversations."

Whatever Pandora’s future cost-management strategy, David Oxenford, author of the Broadcast Law Blog, observes that Pandora’s prioritizing is sensible: “It does make sense for all webcasters to start to focus on the CRB proceeding, as the notices of intent to participate in the next webcasting case will probably be due in January.” Oxenford also notes that we are still two years away from a decision regarding new rates, which will be announced in December, 2015, for the 2016-2020 royalty period. 

Musician in HuffPo: Neither Congress nor RIAA wants to tangle with NAB, so webcasters are punished

Thursday, January 24, 2013 - 11:50am

Writing about the Internet Radio Fairness Act, musician David Fagin points squarely at the "one-sided, unfair exemption terrestrial radio currently enjoys" on royalties, and says the solution is to "make them pay their fair share of performance royalties to artists and labels -- just as the rest of the radio-playing world has to do."

Fagin is also a writer and producer and former member of the band The Rosenbergs, and represented independent artists in webcasting copyright hearings in 2001.

In a piece for the Huffington Post, he suggests IRFA foes are really on the same side when it comes to wanting to artists to succeed and get paid, and on the matter of FM radio's royalty exemption. But the music industry and webcasters are stuck fighting each other, because neither has the power to fight broadcasters. 

"Congress is scared to go after big radio and their lobby, and the RIAA is 'just fine' with the status quo. In the meantime, both sides have decided to just kick each other's asses, instead."

(Interestingly, he holds that the current royalty situation is harming the webcasting industry, evidenced by the fact that just a single "brand-name" success exists, Pandora. He also cuts through the music industry anti-Pandora rhetoric: "The 'fleecing of artists'... argument makes no sense, whatsoever. Why would a company, whose main business model consists of promoting independent artists over 60% of the time, and is practically the only place to hear new music on a regular basis, want to destroy the very artists whose careers it's sustaining, and who are sustaining it?")

Interesting read, in Huffington Post, here.

Corker of Tennessee urging opposition to IRFA in Senate

Wednesday, December 5, 2012 - 12:20pm

The Hill reports Republican Sen. Bob Corker of Tennessee is circulating a letter in the Senate strongly critical of the Internet Radio Fairness Act (IRFA), a bill proponents hope will make Internet radio royalty fees more equitable to those of similar forms of radio (read more on the IRFA here).

While the IRFA would simply give Net radio the same royalty-setting standard (known as "801(b)") as cable and satellite radio, Corker's letter says the bill would "force American property owners and creators to provide a subsidy to digital radio services, primarily Pandora." Leading webcaster Pandora currently pays more than half of its revenue for royalties, while cable and satellite radio pay less than 15% of revenue.

The Hill points to the Center for Responsive Politics site (here), which shows "As a senator for Tennessee, Corker's constituents include representatives from the country music hub of Nashville. Corker received $201,241 from the TV, movie and music industries during the 2012 election cycle."

Read more in The Hill here.

Internet Radio Fairness Act would spur innovation

The following first appeared as a Billboard.biz Guest Post I wrote as founder/CEO of AccuRadio and a member of the Small Webcaster Alliance. It appeared on Tuesday, the eve of yesterday's subcommittee hearing.

As an Internet radio broadcaster and member of the Small Webcaster Alliance, I've been involved in the issue of copyright royalty rates for Internet radio for many years. And I've seen vividly that the current royalty rate system threatens to strangle the life out of an industry that is providing both choices for consumers and opportunities for musicians.

Both in 2002 and again in 2009, after the U.S. Copyright Office published rate-setting rulings that would have bankrupted all or most Internet radio providers, Congress had to intervene and ask record labels to negotiate a more-workable rate with webcasters.

The resulting rates are still wildly higher than those paid by other forms of digital radio (i.e., satellite radio and cable radio) and have been barely survivable for most webcasters - with many forced to exit the business entirely. Meanwhile, other companies who could spur innovation in Internet radio remain on the sidelines due to concerns over unsustainable royalty rates.

The problem with the current "willing buyer/willing seller" Internet radio standard for rate-setting is that while it is intended to lead to a market-based rate, the fact that the large record labels negotiate as a group means that a true market rate has never actually been determined.

The result has been a nightmare for our industry ever since. Copyright Office decisions have forced webcasters - the ones that were able to remain in business - to pay unreasonably high royalty rates, hindering innovation and growth.

Last year, for example, Pandora paid more than 50% of its revenue in royalty payments and as a result, as seen in their SEC filings, the company has yet to make a profit. And if the leading firm in an industry has trouble breaking even, you may reasonably (and correctly) assume that most other webcasters are struggling even more. (Note that if my Small Webcaster colleagues and I had to pay royalties at the rates determined by the Copyright Royalty Board, most of us would have to pay more than 100% of our revenues in royalties!)

That's why we support the Internet Radio Fairness Act (IRFA). It doesn't set or change royalty rates for Internet radio - it simply modernizes the rate-setting structure in a way that will help create a more viable digital music business for everyone.

To do so, the IRFA would move webcasting to the more-traditional "801(b)" rate-setting standard, which balances the interests of the copyright owners, the copyright users, and the general public. It has been used successfully for decades in most rate-setting determinations, including for other forms of digital radio like satellite radio, cable radio, and even by record labels in cases where they are the copyright users.

The "801(b)" standard is a set of four criteria that Congress typically tells the Copyright Office to use in determining a royalty rate: (1) Maximize the availability of creative works to the public. (2) Insure a fair return for copyright owners and a fair income for copyright users. (3) Reflect relative roles of capital investment, cost, and risk. (4) Minimize the disruptive impact on the industries involved.

The current confusing mix of royalty-rate setting standards for digital radio is result of piecemeal legislation enacted as each new technology was invented. The result is a system significantly out-of-sync with the realities of the 21st century marketplace. It substantially hinders the growth of Internet radio businesses and platforms - and thus hurts consumers, musicians, and innovators.

For the music industry particularly, I believe that a thriving Internet radio industry could be a godsend. Webcasters like Pandora, AccuRadio, and others are already giving significant and valuable amounts of airplay to dozens of genres of music (ranging from bluegrass to EDM), hundreds of independent record labels, and tens of thousands of artists that otherwise would be unable to use the power of radio exposure to build their fan bases.

Passage of the Internet Radio Fairness Act will foster innovation in the industry. It will create jobs, benefit artists by giving them more opportunities to be paid for their work, and benefit consumers by giving them more listening choices.

It's a piece of legislation that every innovator in the music industry should support.

You can see this Guest Post in Billboard.biz here:

http://www.billboard.biz/bbbiz/industry/digital-and-mobile/internet-radi...

Public interest policy group suggests IRFA could give performers bigger royalty share

Wednesday, November 7, 2012 - 1:35pm

Washington, D.C.-based public policy organization Public Knowledge supports the proposed standard-change for Internet radio royalty proceedings, with the ultimate goal of robust and sustainable business models for all players in the digital music marketplace. This week the group has published an essay to explain its support, and suggest a few key improvements to the relevant bill now in Congress.

Public Knowledge staff attorney Jodie Griffin wrote the piece, the follow-up on an introductory essay we covered last week in RAIN here.

First-and-foremost, Public Knowledge advocates the use of the Copyright Act's 801(b) standard for determining Internet radio royalties, the focal point of the Internet Radio Fairness Act.

The IRFA, a bill now in both the U.S. House and Senate, would change the legal standard by which judges determine the statutory rate for streaming radio. The royalty rates for most other, related uses of copyright sound recordings use the standards set in section 801(b) of the Copyright Act. The 1998 Digital Millennium Copyright Act made an exception for Internet radio, requiring rates to be set to what the judges felt a hypothetical "willing buyer and willing seller" would agree.

"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," Griffin reasons. "It is unsurprising that the current standard has led to a disproportionate burden on online-only radio services."

By requiring use of the 801(b) standard for Internet radio, the IRFA would bring it in line with other forms of digital radio, like satellite and cable. Read more in RAIN here. Setting webcasting royalty rates using 801(b), writes Griffin, "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."

What's more, since webcasters like Pandora make the "same type of use" of music as satellite- and cable-radio (that is, it's "performed" on a non-interactive platform -- it's not "on-demand," nor do webcasters sell downloads, etc.), rates should be set by the same standard. Answering critics of the IRFA, she writes, "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."

Griffin suggests, however, that the IRFA should be amended "to truly be technology-neutral and to fairly balance the interests at stake in the radio marketplace."

One interesting measure would allow the adjustment of the "50/45/5%" split of statutory royalties.

[NOTE: Currently, half of the money webcasters pay in statutory royalties (after SoundExchange's vig) goes to the copyright owner of the sound recording (most usually, the record label). The other half is split between a recording's "featured performer," who gets 45%, and back-up musicians and vocalists (through their unions), who split the remaining 5%.]

Griffin argues an amended IRFA should allow for an adjusted split, for example, giving the label 40%, then 50% to the featured artist, and 10% for side musicians and backup vocalists. This would "alleviate the risk put upon artists of lower revenues by guaranteeing them a larger piece of the royalty pie."

Another way to improve the IRFA, Griffin says, would be to include a sound recording performance royalty requirement for AM/FM radio.

The fact that legacy radio broadcasters do not pay labels and performers, and services that were existing at the time of the DMCA (satellite and cable) pay a small percentage of revenue, while webcasters pay such weighty rates "is the opposite of what copyright policy should be," the piece reads. "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."

For all of this, however, the Public Knowledge piece stresses how important it is to gather ample data on the marketplace, study "the economic incentives and business relationships that affect how much money ends up in the actual artist’s pocket," and monitor how changes to royalty schemes affect performers, copyright owners, and services alike.

Read the Public Knowledge piece here.

House subcommittee Internet Radio Fairness Act hearing reportedly this month

Tuesday, November 6, 2012 - 2:00pm

Late last month we heard (our report here) the House Judiciary's Subcommittee on Intellectual Property, Competition, and the Internet would hold a hearing on Internet radio royalties. Billboard.biz now reports its sources say a hearing will likely take place at the end of this month, "on or around November 27, 28 or 29."

Lawmakers will hear testimony regarding on the Internet Radio Fairness Act, recently introduced to both chambers of Congress. The IRFA would require copyright judges to use the same "801(b)" standard in setting the royalty rates for Internet radio it uses for other forms of digital radio, like cable and satellite. Read more here. Billboard's sources say Pandora and a broadcaster will likely testify in favor of the bill, and SoundExchange and a recording artist will likely testify against.

The House bill, H.R.6480, is co-sponsored by subcommittee members Jason Chaffetz (R-UT), Darrell Issa (R-CA), and Zoe Lofgren (D-CA).

Read Billboard.biz here.

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