IRFA critics accuse Pandora of asking for an "unfair subsidy"

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Issue Date: 
Nov 15 2012 - 12:25pm

From Issue:

A group of 125 of the recording industry's biggest names are throwing their star power behind major record label efforts to oppose Net radio royalty reform.

"That's not fair and that's not how partners work together," reads the two-page "open letter" to leading webcaster Pandora in this weekend's Billboard magazine, signed by stars like Sheryl Crow, Pink Floyd, Billy Joel, and Katy Perry. The ad was placed by recording industry lobby musicFIRST and digital royalty group and industry advocate SoundExchange (below, click the image to read it).

Pandora supports the "Internet Radio Fairness Act" -- proposed legislation that would require copyright judges who determine the royalties webcasters pay for the use copyright sound recordings to use the same legal standard they use when determining the same royalties of satellite and cable radio (we have lots of coverage here). Major recording labels have come out in staunch opposition to the bill.

The ad accuses Pandora of enjoying "phenomenal success as a Wall Street company" yet of asking Congress to "gut the royalties thousands of musicians rely upon." A musicFIRST/SoundExchange joint press release from Wednesday calls the Internet Radio Fairness Act a "subsidy," which "could slash by 85% royalties paid to musicians and artists when their songs are played over Internet radio." 

Speaking in support of the bill on Tuesday (RAIN coverage here), Sen. Ron Wyden (D-OR) said, "Music is still dominated and controlled by a couple of multi-national corporations (which) act like a duopoly to maximize their profits, and not maximize the compensation of artists and not maximize musical choice... They are the people that made 'payola' a household word." Wyden himself introduced the Internet Radio Fairness Act in the Senate in September.

Last month, Pandora founder Tim Westergren (in RAIN here) revealed that in 2012 alone his service will pay nearly $3 million each in royalties to play the music of performers Drake and Lil Wayne -- half of which goes directly to the songs' performers. The music of Coldplay, Adele, Wiz Khalifa, and Jason Aldean will generate from Pandora more than a million dollars each this year.

The musicFIRST/SoundExchange press release is here.

RAIN Analysis: It’s ironic that the organizations are making an appeal for "fairness" when, in fact, what they’re fighting for is specifically to keep the concept of "fairness" out of the rate-setting standard for Internet radio.

The "801(b) standard" is the set of four criteria that Congress has historically typically instructed the U.S. Copyright Office to use to determine 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 disruptive impact on the industries involved.

801(b) is the standard used in other forms of digital radio, like satellite radio and cable radio, and it accurately reflects the public policy goal of copyright law, which is to maximize the availability of creative works to the public, using the concept of "fairness" for both creators and distributors.

By prevailing upon Congress in 1998 to change the rate-setting standard for Internet radio to the rate "which a willing buyer and a willing seller would agree to," the music industry has introduced confusion that has hamstrung the growth of Internet radio ever since. Because of the difficulty of applying this standard – since this is a marketplace in which a "willing buyer/willing seller" rate has never been determined – the judges in both rate-setting cases so far (2002 and 2009) ended up setting rates that were, for the majority of webcasters, greater than 100% of their revenues. Such a rate is far higher than the 7% to 15% rates that other forms of digital radio pay under the 801(b) standard, and it’s far higher than any "willing buyer" could actually afford to pay. -- KH

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