[this post by Communications Associate Kevin Erickson and Communications Intern Oliva Brown]

There were several surprises in store at the November 27, 2012 House Judiciary Subcommittee on Intellectual Property, Competition and the Internet hearing “Music Licensing Part One: Legislation in the 112th Congress.” The first surprise was that the main bill under question — the Internet Radio Fairness Act, introduced by Jason Chaffetz (R-UT) — had been renamed. IRFA, which argues that royalty rates for webcasters should be calculated using the same standard that is currently applied to satellite radio, was now rechristened “Internet Radio Freedom Act.” While slapping the word “freedom” on anything and everything is a longstanding Washington tradition, it also had the unfortunate side-effect of underscoring a key criticism of IRFA: that the bill would almost certainly result in a steep cut to artist payouts from services such as Pandora, something many artists see as anything but fair.

But the biggest surprise was that the topic du jour turned out to be another longstanding point of contention in the broadcasting realm: the lack of a terrestrial radio performance right in the United States. Meaning, good-old fashioned radio still does not compensate performers and sound copyright owners even though digital broadcasters do. (So does the rest of the industrialized world; for more information, check out our Public Performance Right fact sheet.)

Six witnesses representing diverse interests and a stake in the debate offered testimony prior to the the floor being opened for committee members to ask questions. Joseph Kennedy (CEO, Pandora), Bruce Reese (CEO, Hubbard Radio, representing the National Association of Broadcasters) and David Pakman (Venrock, a venture capital firm) spoke in favor of lowering webcasting fees, while Jimmy Jam (producer, writer, recording artist, The Recording Academy), Jeffrey Eisenach (Navigant Economics) and Michael Huppe (President, SoundExchange) presenting opposing views. Their written testimonies are available on the House Committee on the Judiciary website.

Representative John Conyers (D-MI), emphasized the lack of a terrestrial royalty in his questions for the witnesses and pointed out that many older, non-touring artists (including those from his home district in music mecca Detroit) rely on royalties for their livelihood. Michael Huppe argued that American music is one of the world’s greatest cultural assets, and pointed out that American artists don’t receive the international radio royalties that they should be earning because there is no reciprocity from American radio. Jimmy Jam called for Congress to “close the corporate radio loophole,” pointing to the relatively recent deal that Big Machine Records hashed out with Clear Channel as a step in the right direction. However, he also affirmed that an industry-wide solution can really only be provided by Congress at this point. “Mr. Jam,” as the representatives called him, cited a letter from a Big Machine executive lamenting the fact that that the United States keeps company with the likes of North Korea with our lack of a performance royalty for terrestrial radio. Both Jam and Huppe argued that the United States would do well to catch up with the rest of the free world in this area.

In contrast, Pandora’s Joseph Kennedy referred to a study by Washington and Lee University professor David Touve which found that, were performance royalty for terrestrial radio instated at the same rate Pandora pays, it would generate an additional $4 billion in royalties each year. 

Representative Howard Berman (D-CA) predicted that the royalty standards would not change, but that the bills would be an important exercise in discussing true parity with respect to the the fact that over-the-air broadcasters pay nada. He referred to the issue as an “albatross” that must not be ignored in any discussion of royalties and fairness.

When the discussion did veer towards the actual bill, several committee members expressed concern about various aspects of IRFA. Representative Darrell Issa (R-CA) stated that he cosponsored the bill not because he specifically supports it, but because he believes that the discussion about music royalties is one that needs to be had. He questioned Bruce Reese about the lack of a terrestrial radio performance royalty, asking if he thought that Pandora should also be able to pay nothing to recording artists when their songs are played. Representative Judy Chu (D-CA) raised concerns about the proposed changes to the makeup of the Copyright Royalty Board, to which Huppe and Eisenach replied that the process of determining royalty rates should remain objective and un-politicized. Representative Ted Deutch (D-FL) questioned the large proposed royalty rate reduction and also brought up the discrepancy between paying syndicated talk hosts but not recording artists on terrestrial radio. Representative Jerrold Nadler (D-NY) questioned Kennedy as to why Pandora was asking for another rate reduction when, during the last rate renegotiation, the company was happy to have their rates lowered to what they called a “survivable” level. Representative Mel Watt (D-NC) questioned whether or not there were potential additional ways for Pandora to increase their net earnings, a tough question for Pandora to answer without implicating that they either have all of their eggs in one basket, or are not actually in need of a rate cut.

It seemed as though the only subcommittee member squarely in favor of IRFA at this point is Representative Jason Chaffetz (R-UT), one of the bill’s original sponsors. He questioned Huppe and Jam about the percentage of internet radio royalties that come to SoundExchange from Pandora and the fairness of the current royalty split for performers and sound recording owners, respectively. 

It appears that the main points of discussion and contention as well as some key questions that will have to be addressed in the new year are already starting to emerge. Even if there is ultimately no viable legislation with regard to royalty rate changes for digital broadcasters, it is clear that the committee recognizes that times are changing and that the discussion is one that should happen either way. So now is the time to get informed and stay engaged.

As debates rage about payouts on online services, it’s important for artists to educate themselves about the processes by which royalty rates are negotiated and calculated, as well as where artists do and do not have leverage. Earlier this month, FMC Director of Programs Jean Cook presented information on this topic at the Future of Music Summit; you can read her data-rich explanation of this important topic on our Artist Revenue Streams site.

[photo by Dave Newman, used under a Creative Commons license]