Why We're Fighting About Internet Radio

A traditional broadcast tower. Photo: Peter Lyons


Any time you hear a song on the radio, you're experiencing two distinct things: a composition and a performance. These are protected by separate copyrights, and sometimes they involve completely different people. In general, it's illegal to profit off of someone else's copyrighted work without their permission.

Based on these simple facts, it's pretty easy to imagine how the process of getting a song onto the radio would work: The radio station would come to an agreement with the holders of both copyrights. If no agreement could be reached, the radio station couldn't play the song, and both sides would miss out on a profit opportunity. By and large, the parties' desire to make money -- and the musicians' desire to use radio to advertise their records and concerts -- would prevent that from happening.

That's almost the way it works for songwriting copyrights -- rates are negotiated, though in most cases they're tightly regulated and courts can intervene if negotiations falter. But the government is in the habit of deciding how much radio stations should pay performers, and its decisions have left both the music industry and Internet-based radio providers feeling cheated. That's why there's a sustained public fight over what rates one private business will pay another for the use of its products.

For traditional AM/FM stations, the rate is zero -- performers get no money at all when their music is heard on the radio. This has been the law for decades; the rationale is that radio play is a form of advertising for performers that does not require payment, regardless of whether any given performer sees it that way. The music industry notes that this is unusual among industrialized nations.

In the late 1990s new rules were set for cable, satellite, and Internet stations. The Copyright Royalty Board, which consists of three appointed judges, sets "statutory rates" for music on these platforms. Labels and radio providers are free to come to their own agreements instead, but obviously such deals are constrained by the fact that they must be better than the statutory agreement for both parties.

By law, however, the board applies different rules to different platforms. Cable and satellite rates are set according to the subjective and convoluted "801b" rule, which primarily entails giving copyright owners a fair return, allowing radio providers to remain profitable, and maximizing the availability of works to the public. Meanwhile, for Internet radio, the board tries to approximate the rate that a "willing buyer" and a "willing seller" would come to in an open market -- also a subjective process because, as the Electronic Frontier Foundation pointedly put it, "there is no open market." 

It gets even more complicated than that. A few years back the board's Internet rates were so high that Congress gave SoundExchange, the music-industry organization that distributes performance revenue to artists, the authority to renegotiate the rates itself on behalf of all copyright owners, with the board's ultra-high rates looming in the background. SoundExchange conceded lower rates -- to do otherwise likely would have killed Internet radio -- and the deal doesn't expire until the end of 2015, at which point either a new deal or new government-set rates will have to go into effect.

In practice, cable and satellite providers pay something like 10 percent of their revenues in royalties, while Internet providers pay more like 50 percent. Or at least that's the way you put it if you're an Internet radio provider. Other interested parties might prefer to cut the numbers the way Businessweek did, emphasizing how little revenue there is in Internet radio to begin with:

For the 14 billion hours of music played by [Internet radio provider Pandora's] 175 million registered users in 2012, it paid $258.7 million in royalties. That works out to about $1.48 per user. That's pretty cheap. (For comparison, [satellite radio provider] Sirius paid $272 million in royalties and has 24 million subscribers, so that's $11.33 in royalties per subscriber.)

Anyhow, for obvious reasons, this arrangement leaves a lot of people unhappy. Performers don't like that broadcast radio stations profit from their work but don't pay for it. Internet radio companies, meanwhile, see no good reason that they should be paying royalties under a more demanding standard than that applied to satellite and cable providers (to say nothing of broadcast stations). So, performers back measures like the Interim FIRST Act, a bill from last year that would have increased royalty payments for broadcast, cable, and satellite stations, while Internet companies are pushing the Internet Radio Fairness Act, which would let them pay under the cable/satellite standard without changing the rules for broadcast. A new version of the latter is likely to be introduced later in this Congress.

Needless to say, this is a mess and the status quo makes approximately zero sense. What remains to be seen is whose side the government will take -- and to what extent the parties can work things out amongst themselves.

Robert VerBruggen is editor of RealClearPolicy. Twitter: @RAVerBruggen

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