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The Internet Radio Fairness Act, Explained... Sort Of

Wednesday, November 21, 2012 - 04:13 PM

Spotify (flickr/zenra)

For many years, my other show here at WNYC, New Sounds, was distributed nationally by NPR. And I would occasionally hear from musicians that they knew when I had played their music because they’d get a royalty check. Some of them were not getting airplay anywhere else (New Sounds focuses on musicians working in the cracks between the usual genres), so they knew just what an appearance on a nationally-syndicated show was worth. 

Eighteen cents.

Give or take a few pennies, that was the amount these folks would get in their royalty checks. But that’s okay, because radio play was never meant to be how a musician earned a living: it was meant to promote the music so people would buy the record and/or go to the concert. That’s how you earned a living. 

I’ve been thinking of this a lot this week because of a bill before Congress called the Internet Radio Fairness Act.  A lot of people are writing about the IRFA, and you’ll find that reading about it is a surefire cure for insomnia.

So let’s see if we can answer a few basic questions about the IRFA.

Who’s in favor of this Act?

Spotify and Pandora and other internet radio providers. 

Who’s opposed?

Many musicians and most record companies – an unholy alliance formed around this one issue. 

Okay, you can stop now. I hate big corporations like Pandora and Spotify, even if I use their services. I love music and musicians. So I know whose side I’m on. 

Not so fast, Sherlock.  The group representing those musicians, and the record companies who usually skim 50% (yes, half) of all royalty payments for themselves, is SoundExchange, which was started as an “unincorporated division” of the RIAA.  You remember the RIAA, right?  Bringing six-figure lawsuits to a grandmother near you?  Now, as one commenter below has pointed out, they’ve been independent since 2003.  But this is still not a simple good-vs-evil thing.

Oh. Well, does Internet Radio need a Fairness Act? 

The internet radio folks say they do.  They say that they are currently not able to turn a profit because so much of their revenue has to be paid to artists and record companies.  They say this is unfair because terrestrial radio (real live old-school stations like us) and satellite or cable radio stations pay way less than they do, making it harder for them to compete.

Is that true? 

Well, the Electronic Frontier Foundation, which sides with Pandora and Spotify, reports that “internet radio services like Pandora pay about 50% of their revenues to record labels and artists, while satellite radio pays only about 10% and traditional AM/FM stations pay nothing.”

Those numbers might be open to interpretation – we do in fact pay an annual blanket license fee that allows us to play music on the air, and which provides musicians with those welcome $0.18 checks on occasion.  But yes, internet radio does have a tougher path to a break-even point.

So why don’t we just make regular radio and satellite radio pay more?  Wouldn’t that be fair?

Whoa, let’s not hop on the express train to Crazy Town here! Now you’re sounding like one of those record company types who believe they gave away the store back in the 30s when they agreed to let radio play a promotional role for the music and now want to revisit how that works. 

Seriously, you know what would happen if radio stations had to pay Pandora-type royalties to the music industry?  There’d be even less music on the radio than there is now.  Way less. And let’s not forget that radio did a superb job over the past century of spreading music far and wide; careers – a whole industry, in fact – came to depend on it. That relationship has had its ups and downs, but that kind of thinking would effectively kill it.  

Sounds like Internet Radio is getting a raw deal. I’m beginning to hate musicians. 

The feeling is mutual. Musicians used to love you. When you liked their music, you would buy it. They might even have made a living from carefully creating the sounds you heard on those singles, discs, and tapes. Now, you’ve got that damn app on your smartphone, so when you like their music, all you have to do is ask your internet radio station to play it.  And since it’s completely mobile, you can listen almost anywhere, almost anytime.  Where’s the incentive to buy the songs when they are there whenever you want them, on demand?  That’s way different from spending hours listening to the radio hoping to hear a favorite song – and accidentally discovering a bunch of new ones along the way. 

So internet radio is a completely different animal.

Bingo.  It is NOT a publicity or promotional tool.  These are heavily capitalized companies and their business is not selling music but making money.  That they make money by bringing music to you is a truly great thing – just not necessarily for the musicians.  The musicians’ argument, and it’s a compelling one, is that Pandora and Spotify pay such laughably small royalties (Spotify is less than half a penny per play, Pandora even less), that musicians are essentially propping up a major, multi-billion dollar capital venture and getting literal pennies in return. 

The musicians’ argument is cogently made by Damon Krukowski (of the band Galaxie 500) in a recent Pitchfork blog post, where he talks about these behemoth companies and their inability to turn a profit and asks, “why are they in business at all?”  He knows the answer of course: capital.  But we can’t unmake internet radio, any more than we can unsplit the atom.  It’s here, it’s queer (in the sense of being unusual), and we’ve got to deal with it.

Alright I’m taking a nap now.  My brain hurts. 

Mine too, especially since the digital landscape is still evolving. 

In 2007, the Copyright Royalty Board, a panel of judges who decide what the royalty rates will be, was convinced by Pandora to temporarily discount internet rates until 2015.  The IRFA is meant to give stability by providing a permanent fix. 

But a permanent fix may be premature.  Musicians don’t want their eighteen cent checks to turn into nine cent checks; on the other hand, how much can they reasonably hope to increase the royalties by?  Even if you double them, you’re still talking chump change.  Unless you’re Adele or Coldplay, both of whom, Pandora says, got a million bucks in royalties last year.  (Meaning they got 45% of that; their labels got 50% and their musicians the remaining 5%.)

No one knows what’s coming down the pike, so to try to legislate today for something that’s likely to be around in a very different form in a relatively few years is a fool’s errand.  One approach would be to just continue with the current system for a while, see if the internet radio companies can make a go of it, and then look at ways of tying royalty rates to the profits of those companies – almost like making the musicians shareholders instead of unpaid interns. 

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Comments [11]

I find it astounding that only one commenter (Angry Artist) has picked up on SoundExchange, which pockets 50% of all royalties. That sounds like a true monopolist. A 50% commission on all royalties for being a mere clearing house? Do their expenses justify that? If so, they need to get a different business model. Imagine if my stock broker charged a 50% commission on my stock trades; if my real estate broke charged a 50% commission on the sale of my home; if a performer's agent charged 50% of the performance fee!

Why isn't there further discussion in an article like this of the fairness of how royalties are split by SoundExchange. If Sound Exchange had to face competition, I might even get into that business and only charge a 40% commission. If IRFA is trying to legislate fair payments for the artists, surely SoundExchange's monopolistic ability to rip royalty fees out of the artists' pockets should certainly face scrutiny.

Mar. 15 2014 09:53 PM
Stephen Hill from San Francisco

To put this discussion in perspective, remember that musicians have only been able to make money from recordings of their music for under 100 years, and it was only a significant fraction of the income of successful musicians since after WW2.
Moreover, even at the height of the 'music as recorded product' era, only the top 2 or 3 percent of recording artists could ever make a living from sales of their recordings.

We are still in the messy transition from music as a product to music as a service — which was the traditional business model. This not only means marquee services like Pandora, Spotify, MOG, Rdio, Rhapsody et al, but a greater focus on live performances by musicians as their main source of income. Even so, the vast majority of musicians will depend on multiple income streams — licensing, commissions, work for hire, teaching, producing, etc. to sustain a professional career. The focus on fair rates for digital streaming is therefore a battle that needs to be fought, but only a small part of the overall picture for independent musicians.

Dec. 31 2012 01:36 PM
John Schaefer from The Soundcheck studio

@derf and anon - first, anon, thanks for saving me the task of responding to commenter Brian; I was pointing out in this blog that we (terrestrial or traditional radio) pay nothing for using the recordings, though as Brian wrote, we do pay royalties for compositions. One of things I'm trying to get at here is that Pandora and Spotify are NOT similar to radio. The term "internet radio" is actually a troublesome misnomer, and commenter Dave sums it up well. There ARE internet radio streams (like our own Q2music.org) that genuinely operate like radio stations - you can't hear anything anytime anywhere; it is programmed and curated - and those have been hit hard by the royalty fees. That's why many independent streams folded, and others that were associated with record companies, radio stations, or other media that could afford the fees stayed around. But Pandora and Spotify are different. (Yes, they are different from each other, but in terms of scale, they are the center of attention here - especially for musicians.) In their distinct ways, they cater to your immediate desire for a specific piece or type of music. Even the most restrictive playlist on a Clear Channel commercial radio station doesn't do that. Decades of experience show that radio play translates to sales. The thought with on-demand, portable music services is that if you CAN listen on-demand, wherever you are, you have no reason to buy that song. It may sound like I'm splitting hairs, but that's a big difference to musicians.

Nov. 29 2012 05:05 PM
DavidB

So making American radio stations pay royalties for music would put them out of business?

Small problem: in nearly every other country in the world, radio stations DO pay royalties. Of course many of them are publicly owned, like the BBC in the UK, but there are also many commercial stations. See the long list of commercial stations in the UK here http://en.wikipedia.org/wiki/List_of_radio_stations_in_the_United_Kingdom#Local_Commercial_Radio Some of these are mainly news and talk, some of them are mainly music, some are mixed. Evidently it is possible for them to pay music royalties AND stay in business.

The exemption of US broadcast radio from the normal copyright laws for music was, as I understand it, based on the assumption that record labels and artists would benefit from increased sales generated by radio play. That was always a morally dubious argument, because it meant that radio was able to profit from using a product which they could take from its producers without paying for it. Outrageous, really. And the basis for the underlying assumption is increasingly weakened as music consumption shifts from buying records to listening to streams. (Not to mention illegal downloading.)

I dare say that some US radio stations would be in difficulty if they had to pay royalties, but hey, they should update their business model! Maybe they could sell T-shirts?

Nov. 29 2012 01:05 PM
Angry Artist from Nashville, TN

I have been battling the mafia-like thieves at SoundExchange for the past 2 years, attempting to be paid for my songs. They refuse to pay me unless I agree to give a percentage of my royalties to a bunch of retards in a union, who had absolutely NOTHING to do with recording, writing, performing, selling, marketing, creating, producing, buying, renting, leasing, stealing etc 'my' music, which 'I' wrote, recorded, paid for, created, worked like a slave while trying to pay for... produced, marketed, sold, performed etc... 'myself'. I had no studio musicians play my songs. I had no studio musicians record my songs. I had no record label pay for my songs. I had no producer produce my songs... I did it all. It was me. Not you or your bullshit union. I will oppose anything SoundExchange is in favor of, simply because they are the thieves and pimps Mr H.S Thompson wrote of...

Nov. 27 2012 05:32 PM
Kevin Erickson from Washington DC

Important correction: SoundExchange is certainly not an arm of the RIAA. It's a non-profit and its board of directors is a balanced cross-section of the music industry--including artists, managers, major & indie labels, etc.

Nov. 26 2012 03:31 PM
Anonymous

Comparing Spotify to Pandora is comparing apples to oranges.

Spotify acts as a service that replaces your library composed of music you already know. Pandora acts more like radio station playing music you likely do not know. Even selecting your 'favorite song' as a Pandora station will play your 'favorite song' maybe 1 out of 100 plays, not exactly the panacea for a music collection.

Spotify is on demand while Pandora is not.

Nov. 26 2012 11:50 AM
Dan

There's a big difference between services like Spotify and your radio show. Spotify isn't really 'internet radio': it's leasing a record collection.

Sure there's some curation on Spotify, but basically I can play tracks however I want, skip or pause tracks, write my own playlists. Your radio show can't replace my record collection, but 'internet radio' does. You know how many tracks I have actually stored on my laptop? One. That's a lot of convenience, and I think it justifies internet companies paying a bit more. It's the difference between the cost of a film on TV (price per viewer: peanuts) and renting a film from Blockbuster.

Nov. 26 2012 05:42 AM
derf

For the record, I have discovered far more music on Pandora and subsequently purchased it due to this discovery, than I have from traditional radio.

I love the 'New Sounds' music you profile, but on local community radio I'll hear a song and just not know who it was. If anything I would argue Pandora further facilitates discovery. For instance, you can pick an artist that is on the fringe of a genre and fits into one of these cracks and listen to very similar music. Furthermore, you can purchase song directly from Pandora. I think it's hard to justify Pandora doesn't facilitate discovery and music sales.

"It is NOT a publicity or promotional tool. These are heavily capitalized companies and their business is not selling music but making money."
And traditional radio is not? How many radio channels are owned by one corporation, clear channel? On top of that, you even make the point that this is likely not even a battle between the artists and Pandora, but the large corporations. "Meaning they got 45% of that; their labels got 50% and their musicians the remaining 5%."

There is a tone of conflict of interest in this piece, which Anon aptly points out. This blog attempts to justify the unequal treatment of very similar products.

Brian, just a side note. Should the government legislated higher charges for Netflix and Redbox as they put Blockbuster out of business?

Nov. 22 2012 12:52 PM
Anon

One clarification: AM/FM stations pay royalties for the musical compositions, but they nothing for the use of the sound recordings (section 106 of the Copyright Act restricts the sound recording right to digital audio transmission, and section 114 exempts AM/FM broadcasters licensed by the FCC). In contrast, satellite, cable, and online radio companies pay for both the composition and the sound recording. The IRFA debate is only about the sound recording side of things--not the composition royalties.

Also, you note that making AM/FM stations pay royalties would only make them go out of business, so less music would reach the market. As I understand it, webcasters are making a similar argument to support lowering online radio royalties, and point to the facts that they have operated in the red for years and many have gone out of business as support. Do you think the same logic you use for AM/FM applies to online radio, and if not, why not?

Nov. 22 2012 09:15 AM
Brian from Littleton NH

One big inaccuracy is that radio stations pay nothing. I own a group of stations in northern NH. We ARE PAYING ROYALTIES FOR MUSIC. It is almost 10 percent on our stations that do well and much more on our stations that have lower income. We provide local programing. In a local office. With local employees. None of those things that Pandora has to finance. But we still have to compete with them for market share. And they have already started selling local advertising in larger markets. So I am sure that they will be selling in my smaller market before long. It would be unfair for us for them to pay less because they already have an unfair advantage in our markets. And remember radio is completely free to the consumer. Yes it is free to have Pandora but you still have to buy an internet connection and if it is mobile it is not unlimited.

Nov. 21 2012 10:59 PM

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