NAB is negotiating a VERY FAIR deal with musicFIRST

Despite what several industry pundits are saying, I believe that the NAB may be on the brink of a superb deal with musicFIRST regarding performance royalties — with a proposed term sheet that should be ratified by the NAB Joint Board today as expeditiously as possible.

NAB President/CEO Gordon Smith is no doubt correct when he says that if the radio industry doesn’t negotiate something with the music industry, it will have no pull in Washington DC on any other issue of concern.

And the proposed terms of the deal seem quite, quite reasonable. Whereas in most countries the radio industry pays about 2% to 4% of revenues to rightholders for the sound recording performance royalty (see chart in 2007 issue of RAIN here), the negotiated deal is essentially only 1% of large-market music station revenues… and comes with benefits.

While the benefit that the NAB negotiators seem to care most about is the legislative mandate of radio chips in cell phones, I suspect that’s not going to be particularly meaningful in the long run to broadcasters.

(By the way, note that if Congress determines that market forces should determine whether manufacturers need to offer radio chips in cell phones, all of a sudden the proposed deal’s royalty rate drops to .25% of large-market music station revenues… and only creeps upwards as FM chip penetration in cell phones increases.)

The big potential upside for broadcasters, in my opinion, is a proposed discount in future streaming rates that could be very significant over time.

Let’s do the math on that point: Currently, not quite 1% of a large-market music station’s AQH is listening to streams provided by that station (i.e., either its simulcast or its B-streams), which would be consistent with a Webcast Metrics Mon-Sun 6a-12m AQH of about 200,000 for all music radio stations’ streams combined.

Let’s say by 2013 or so that audience size doubles or triples. At the currently-negotiated NAB streaming rates ($.0022 per performance in 2013), that’s an industry royalty bill to SoundExchange for streaming of $80 to $120 million. This term sheet envisions a ~15% reduction in those rates, which would save broadcasters $12 to $18 million.

And if broadcasters get serious about streaming — for example, if they start competing aggressively with the likes of Pandora by offering, say, their own national brands — the value of that concession could turn out to be even greater. If streaming ends up comprising 5% of music broadcasters’ audiences, this could be a concession worth $38 million (to be mitigated against that often-described $100 million on the terrestrial broadcast side).

And let me note that the NAB rates for streaming (even today!) are far, far preferable to the “Pureplay” rates available to Internet-only webcasters like Pandora, as they don’t include the clause “…or 25% of gross revenues, whichever is greater.”

Don’t get me wrong. This deal should be good for both sides, as it will allow U.S. copyright holders to start collecting reciprocal royalties from around the world.

But my conclusion? Broadcasters should applaud the NAB’s efforts and would be fools to not try to close this deal.

===

On a related note: There is some controversy going on today about musicFIRST saying that the NAB negotiators had “agreed upon” a deal in July, and some broadcasters feeling betrayed, as if a secret deal had been agreed to.

My read on this is that not that musicFIRST is saying that the NAB negotiators had agreed on a deal (which, of course, the negotiators didn’t have the power to do), but rather that the NAB negotiators had agreed to present that term sheet to their boards. That’s quite different.

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