Why SoundExchange Will Soon be Forced to Play Fair

The following guest post comes from music industry attorney Steve Gordon, with assistance from Emily Borich and Ariel Greenberg.

Never before has a terrestrial radio station in the United States paid for the public performance of a musical recording. Yet on June 5th, Clear Channel, the nation’s biggest radio network, delivered some incredibly shocking news.  But this wasn’t an act of altruism: frankly, Clear Channel couldn’t care less if a label gets paid, but they’ve decided to take a lead in challenging the steep fees demanded by the CRB (Copyright Royalty Board) and SoundExchange.  And most likely, they’ll win.

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That’s the game here.  And make no mistake, this is a huge detour from the policy of NAB and the radio industry, which has always fought against paying anything for the standard radio transmission of music.

Just look at the long history, which is almost as long as radio itself.  For decades, radio stations have been heavily lobbying Congress to deny record companies the right to charge them for the performance of their records. They argued that the labels actually wanted them to play their records to promote physical sales and so they should not have to pay them.  In fact, the record companies notoriously gave radio station DJs and managers cash, gifts, free vacations, women and drugs to ‘persuade’ them to play their artists’ records.

In other words, textbook payola.  Technically it’s against the law, and as recently as a few years ago, the labels had to pay millions of dollars in fines to the government for continuing this practice.  But you tell me if it’s really stopped, either through more creative gifts to stations or shady Capitol Hill contributions.

And the peddling continued in Washington.  When the Copyright Act was amended in 1976, radio stations succeeded in getting Congress to agree that they should not have to pay the record companies.  Perhaps because Congress is made up of politicians who need radio stations for their next re-election campaign.   Or maybe there was enough cash flowing through back channels to secure the loophole.

Whatever the shady reason, the last incarnation of the Copyright Act, known as the Copyright Act of 1976, specifically excludes public performance as an exclusive right of the owners of sound recordings.

The rest is a history lesson in clawing back history.  In 1995, the record companies, alarmed by the rise of digital audio transmission – particularly by a startup based in Hershey, Pennsylvania called Music Choice – successfully lobbied Congress for an amendment to the Copyright Law called the Digital Performance Right in Sound Recordings Act (DPRA).  They argued that companies such as Music Choice were transmitting perfect digital copies of their recordings that listeners could copy and illicitly distribute to consumers.  Unlike normal radio, which is analogue, a listener could make perfect copies of recordings using these new digital services.  Since the record labels’ only opposition was powerless Music Choice, Congress was not afraid to reward the record companies for their lobbying efforts and declared that the labels have the exclusive right to publicly perform their records over digital services such as Music Choice.

Oh, but this fight was far from over, and the seeds of an entirely new mess were getting planted.   As the internet exploded and new digital services such as Yahoo and AOL began to digitally transmit music, these new digital services faced a rough negotiation with the labels over how much to pay them for the use of their records.  Of course, the labels wanted exorbitant amounts.  But facing huge pressure exerted by these new and more powerful internet companies, Congress reacted by passing a bill known as the Digital Millennium Copyright Act of 1998.  The DMCA, among other things, granted the right to digital music services to perform recorded music in exchange for a ‘compulsory license’ under which they would pay the record companies and artists for the use of their records. Under this compulsory license, digital music providers were to pay a set rate to the record companies and the artists.

That’s about when things started getting outrageous.

 A three judge panel called the Copyright Royalty Board (CRB) was eventually set up  to set the rate, and a not-for-profit organization representing labels and songwriters called SoundExchange was  organized  to collect the money and distribute it to artists and record companies.  But the digital broadcasters such as Pandora complained that the rates proclaimed by the CRB were too high.

Although those rates were somewhat reduced in negotiations between SoundExchange and the digital service providers in 2010, Pandora was right then, and they’re right now.  It’s simple math, and it worked against the streaming startup.  The CRB  demanded that the digital broadcasters pay for use of recorded music per stream, and SoundExchange insisted on maintaining the per stream rate rather than a percentage of income except for very small webcasters (those earning less than 1.25 million dollars).  Although internet radio stations have to pay only a fraction of a penny for each stream that they transmit, the fraction of a penny adds up to a huge percentage of their income as they became more successful, and more and more people listened to their streams.

It’s ridiculous: Pandora has to pay over almost half of its income to the labels and artists to play their records. But Pandora only has to pay less than five percent of its income to ASCAP, BMI, and SASAC, collectively, for the use of the songs.  See the problem here?

In the meantime, regular terrestrial radio stations pay absolutely nothing for the use of recorded music. Their chief lobbying arm, the National Association of Broadcast (NAB) has continually stonewalled the labels’ attempt to get paid by the radio stations.

Meanwhile, the gradual erosion towards digital presents a royalty problem of avalanche-like proportions.  Clear Channel broadcasts its stations primarily through standard radio, and 98 percent of its listeners come through their stations on standard broadcast radio. But a growing number of listeners now listen via Clear Channel’s digital feeds and that percentage is expected to increase sharply in the coming years.  And when a terrestrial broadcaster like Clear Channel simulcasts its content via the internet or smartphone, they have to pay the same, alarmingly-high fees to SoundExchange that Pandora is forced to pay.

Clear Channel doesn’t want to see that bill.  Which means that instead of screaming bloody murder into the wind, Pandora now has the biggest ally imaginable.  Which also means this little side deal with Big Machine could change history again – this time, in the direction of fair streaming royalty rates and a more rational royalty landscape for labels, artists, and big stations alike.

That’s the hopeful version, at least.

11 Responses

  1. Jason

    This article has many incorrect facts. The CRB did not organize Sound Exchange. Prior to the CRB(2005) was CARP, prior to that was the CRT. Sound Exchange came prior to the CRB, and was created by the RIAA, not the Copyright Office.

    You say there is a problem with labels and artists getting most revenue from digital performances(sure, in the past 10 years), where writers get nothing, but you forget that for decades, only writers receive royalties from terrestrial radio, where artists and labels have received nothing.

    • Visitor

      Steve has a perfect partner in DigitalMusicNews where getting facts right is far less important than self-promotion. I know Steve. I know Paul. And I know that the closer I am to anything they write or talk about the more evidence I get that being correct about what they say isn’t what they’re interested in. They’re only interested in getting attention (Steve so he can get another book deal and Paul so he can draw eyes to DMN so that he can sell ads).

      I can’t be mad at either but I do hope that everyone who reads anything from either of these guys understands that they’re reading half informed opinion, certainly not news.

      • Myles na Gopaleen

        Indeed. What you say may be true, and I am sure your anonymous comment is not self serving in the least but at least Steve and Paul put their names on their comments.

        And yes we are all clever enough to realize that every opinion is just that. Finally, the news and legal business have never been about revealing the truth or facts but about revealing the truth and facts in such a way to support your opinion/argument.

      • benny

        This article is merely a strong opinion. Yours is a merely ad hominem attack.

  2. David

    This article seems totally misconceived. We are supposed to find it self-evidently wrong that digital radio stations are paying half their revenue to record makers (labels or artists). Why? Music is what they are distributing. Would it be considered wrong for a butcher to spend half his revenue on meat? As for the comparison between the payments to record makers and songwriters, a ratio of 50:10 is similar to that for record or download sales, where the songwriter gets about a 10% royalty.

    As for the point about payola, that is only relevant to the promotion of new records. Records may be played on radio for many years, and at present record makers in the USA get no payment for this from broadcast radio. The USA is out of step with the rest of the world on this issue. In nearly every other country record makers have long received royalties for airplay.

    • Reality Check

      I am not in the retail business so this is just a guess but if you are spending half your revenue to purchase product for resale or distribution then you have a failing business model. Am I wrong?

      • David

        The size of a retailer’s mark-up varies considerably with the product area, e.g. with luxury goods manufactured by cheap labor in the far east the distribution cost may be far more then the manufacturing cost, whereas for mass turnover groceries it may only be 16 or 20%. But as a general rule, if the cost of distribution is more than that of production, you should suspect some inefficiency or monopolistic profiteering.

  3. Visitor

    Wow. Almost every single “fact” in this articly about the legislative history of the sound recording performance right, the DPRA, the DMCA and the compulsory license is completely wrong. The compulsory license was created in the DPRA, in 1995, at exactly the same time as the digital performance right, not as part of the DMCA in 1998. And the legislative history indicates that one of the very purposes of the compulsory license, and it policy-based rate-setting standard, was to protect the services like Music Choice that had already developed and operated the first digital music services before there was any sound recording performance copyright. And cable subscribers have never been able to make perfect digital copies from Music Choice or any other cable radio service. No point going through all of the other inaccuracies because there are too many.

    Sheesh.

  4. dangude

    Is the legal bickering between radio and copyright holders just an indication that ad based radio in both forms (terrestrial and digital) may soon be dead and replaced entirely by subscription services controlled by free market principles and not political policy?

  5. Steve Gordon

    The brief summary of the legislative history surrounding SoundExchange and webcasting rates in my article was intended to provide context for my arguments that:

    1. Webcasting rates are too high, and

    2. Clear Channel’s resolution to pay for performance of recorded music on their broadcast stations in return for paying less for recorded music on their digital channels is a very progressive move that may result in decreasing the financial burden imposed on Internet Radio.

    It is true that I simplified the legislative history. That’s because it is extremely complex, and was incidental to the opinions set forth in the article. For those who want to know more about the creation of the CRB, SoundExchange and the very complicated history of webcasting rates, I recommend reading my book The Future of the Music Business which goes into depth on these issues. These issues, though, were not the focus of the article. Yet I’ve corrected the factual inaccuracy that the Audio Home Recording Act granted sound recording copyright owners the exclusive right to perform their works publicly by means of digital audio transmissions. Actually, The Digital Performance Right in Sound Recordings Act of 1995 created that new right.

    In addition, I look forward to hearing what Clear Channel CEO Bob Pittman may have to say on the deal between Clear Channel and Big Machine at the New Music Seminar tomorrow. If he does address the issue in his keynote, I will share those announcements here. As far as the accusation that I want another book deal, I stand guilty as charged.

    – Steve

    • Visitor

      The context (sic) provided here does nothing to support the contention that webcasting royalty rates are too high.

      I really get tired of reading arguments that the distributors of music are entitled to make more from it than those who create it.