Post by FMC’s Casey Rae

Who gets paid, how much and under what terms when music is played on digital and AM/FM radio? Answering those questions isn’t easy, even for experts. But one thing is clear: 2014 has been a big year for the laws and policies that determine royalty rates for all forms of radio, and the intrigue will likely continue into 2015.

There are a few proceedings and court cases currently underway that will impact radio and creators—from legal questions around recordings made before 1972 to the rules that govern the public performances of musical works to royalty rates for sound recordings played on Internet and satellite radio.

Today, we’re going to take a look at the latter, as stakeholders from across the industry make their case to a trio of government judges who are tasked with setting rates for digital radio. (Bear with me, because there’s no simple way to explain all this.)

As a quick refresher, keep in mind that there are two copyrights in a piece of music: the sound recording (think music captured on tape or hard drive) and the musical work (think notes on paper or lyrics). Labels typically own sound recordings (though sometimes it’s the artist). Musical works are owned by publishers and composers.

When a song is played (or “performed”) via webcast or on satellite radio, it generates a royalty that is paid to performers and labels for the sound recording, and also to the publishers and songwriters for the musical work. (AM/FM radio in the US only pays the publishers and songwriters—something that FMC and our allies have been working to fix).

Right now, the aforementioned trio of judges—the Copyright Royalty Board, or CRB—is hearing from radio services and rightsholders as they decide upon digital radio royalty rates for 2016-2020. These proceedings can be contentious; the last round in 2008 ended up with many dissatisfied parties and a Congressionally brokered solution. It remains to be seen where things will end up in the current process.

As expected, the labels, performers, publishers and songwriters want more money, and the services want to pay less. The CRB has the unenviable job of considering all the reasons why each side thinks it’s right.

Digital radio services exist under what’s called a statutory licensing framework. Basically, the government says, “hey, newer forms of radio, you can play whatever music you want without seeking individual permission, so long as you pay a set rate.” Compare that to downloads or on-demand services like Spotify, which require direct negotiation with the rightsholders to get permission to use the music. That can be a costly and time-consuming process with no guarantee of obtaining catalog. Some—like the major labels and a few artists—prefer this form of licensing, but it can come at the expense of growing a legitimate digital music marketplace as an alternative to piracy.

In its original form, radio was not meant to be a substitute for sales. (In fact, AM/FM broadcasters have historically argued that radio drives sales, which is an excuse they use to justify not paying performers and labels). These days, music sales aren’t an area of growth in the industry; in fact, they continue to decline. Part of the reason is due to the advent of streaming on-demand services like Spotify, which operate under a direct licensing framework. (Payment also differs; signed artists are paid under contract, and unsigned artists are paid by “aggregators” like CD Baby or TuneCore under the terms of service.) It is now becoming evident that on-demand services—where users can choose the song or album they want to hear, create playlists and even download and cache music for offline listening—are cutting into download sales, to say nothing of CDs. This puts pressure on digital radio to make up the difference, which doesn’t seem entirely fair.

Another area of controversy is what evidence is allowed to be considered or should carry weight in the CRB rate-setting process. The current law provides for rate determinations to be calculated under a “willing seller, willing buyer” standard, which is meant to emulate the terms parties would have arrived at if negotiating directly. The labels and SoundExchange (the nonprofit that collects and distributes royalties for the digital public performance of sound recordings) often point to the on-demand, or “interactive” streaming marketplace as evidence of negotiated rates. But that can lead to some tortured arithmetic, because the services are fundamentally not the same—remember, one is radio (even if it’s customizable), and the other more like Netflix or Hulu, where you either pay a subscription fee or tolerate ads in exchange for the ability to watch or listen to the catalog available on the service.

A handful of weeks ago, the webcaster Pandora entered into a direct deal with an organization called Merlin, which administers the rights for some of the biggest independent labels. We appreciate it when services recognize the tremendous value that independent music brings. But we had some questions about the deal, as key details were not revealed. Well, the terms remain undisclosed, but some information has come to light in the evidence that Pandora has submitted to the CRB. One of the revelations (and an area that we previously flagged for concern) is that Pandora is “steering” its algorithms to perform more music from the Merlin catalog in exchange for lowered rates. That sounds uncomfortably like the age-old practice of payola, where major labels would entice AM/FM broadcasters to play their music in exchange for money and other considerations. We stood with the independent labels many times over the years to combat structural payola, and their trade organization, the American Association of Independent Music (A2IM), relied heavily on FMC research to make their anti-payola case to the FCC. And we criticized the majors for their direct deals with Clear Channel, because the implication is increased rotation in exchange for lowered digital rates. So it’s disappointing to see a group that negotiates on independent labels’ behalf behave like major labels for their own competitive advantage.

We get why. But we also understand that what makes Pandora awesome is that it has always played music by a broad range of independent artists (myself included), many of whom aren’t signed to Merlin labels.

Here’s another thing that’s easy to understand. Pandora is using this deal—arrived at under actual “willing seller, willing buyer” conditions—to justify lowering the royalties it pays to SoundExchange (which are then distributed to performers and labels under a roughly 50/50 split). This has pissed some folks off, including observers at the Trichordist blog. While we might disagree with the proposal, we don’t see the posturing as unusal, as the “other side” always pushes for higher rates, which the services claim would put them out of business. Neither is likely to get exactly what they want, and this is only the start of the process. So let’s not hit the panic button just yet.

Remember, there are other players involved, too. The National Association of Broadcasters has its proposal for the digital simulcasts of over-the-air stations, and SiriusXM is also making its case. It is true that Pandora’s proposed rate is around half that put forward by SoundExchange, so the judges have their work cut out for themselves in achieving compromise. But what’s the alternative? Pandora shuts down and everyone is at the mercy of Apple’s iTunes Radio and the major labels? Or artists take a haircut based on the undisclosed terms of a private deal that many of us weren’t a part of?

I’d like to think that there’s a middle ground. And my job is to remind people that artists are the ones who occupy it. We want our music performed so that more people can discover our awesomeness. And we want to be paid fairly for the use of our work on services whose success depends in part on our sweat equity. It’s not crazy to think that these basic values can be reflected in the eventual rates. As the market continues to transition from a purely sales-based environment, we need to watch out for our interests. But it would be naïve and short sighted to expect that radio alone can solve all of our revenue concerns.

Here’s the message to all parties (including the judges): work with us, not against us, and you’ll get a better result.

(PS: if you’re into micropenny math, RAIN and Broadcast Law Blog both have more info on the specifics of each proposal.)