The following guest post comes from Kristelia Garcia, a Visiting Fellow at Yale Law School, and a Visiting Associate Professor at George Washington Law School. She’s also a former executive at both MySpace Music and Universal Music Group.
[DMN Update: US Federal Court judge Denise Cote has just ruled that Pandora direct licensing deals are a violation of law. More on that here.]
In June 2012, DMN reported a new, private licensing deal between Clear Channel and Big Machine. That deal shook up the industry by doing two significant and unprecedented things: first, it circumvented the statutory license, and SoundExchange, for the first time ever. Second, it established a terrestrial performance right – a right that not only doesn’t exist under the current copyright laws, but which has been hotly contested in the music industry for decades.
DMN has reported on a series of copycat deals since that initial deal, all with smaller, independent labels like Glassnote and Fearless.
Then last week, the first major label deal came down when Warner Music Group and Clear Channel announced a “wide-ranging strategic alliance” in which Warner “will share in revenue from all platforms.” The deal covers all Warner artists across all Clear Channel platforms, including all of its broadcast radio stations and its iHeartRadio digital service.
The fact that these private deals are happening at all points to serious problems with the statutory regime, originally put in place by Congress to make content licensing easier and more efficient.
To the contrary, broadcasters and record labels have demonstrated that they can do better on their own, both in terms of cost savings and promotional advantage.
First, the cost savings: Under the terms of the private deals, both performance royalties – digital and terrestrial (the latter of which doesn’t even exist under the statutory license) – are paid directly from the broadcaster to the record label. This potentially saves the parties money on two simultaneous fronts:
(1) they save on SoundExchange’s administrative fee; and
(2) they save on the statutory license’s direct-to-artist payment requirement.
(The statutory license requires a portion of royalties collected be paid directly to songwriters, recording artists, musicians and vocalists. Private deals avoid this payment altogether).
As for promotion, record labels stand to gain a potential promotional advantage for their artists in the form of increased feature opportunities on the platform, while broadcasters may benefit from early and exclusive content.
So to recap: we’re seeing cost savings for broadcasters and labels, and better promotion for artists – so what’s the problem?
Unfortunately, there are several, and they affect the very parties the system is intended to protect: artists and the small guy.
For one thing, payments that go directly from broadcaster to record label bypass artists, leaving them to collect solely under the terms of their recording agreements (which often leave unrecouped artists with nothing). Under the statutory license, artists are paid directly, regardless of recoup status.
In a rare moment of clarity, Congress recognized the divergence of interests between labels and artists, and put these protections in place specifically to keep artists from getting cheated out of their cut, but now the private deals are cutting them out anyway.
Another problem with these private deals has to do with rate setting. Because terrestrial performance rights do not yet exist, there is no statutory rate for them. By being “first to market” with a rate, Clear Channel and Big Machine (and the other private dealmakers) can significantly influence the future rate by presenting their private valuation as a “market” rate (after all, theirs is the only terrestrial performance rate for the CRB to look to).
Next, as more and more parties opt out of the statutory license (and, by extension, SoundExchange), the parties left behind suffer under a SoundExchange that is both poorer (since it is now both collecting fewer revenues in the form of admin fees), and weaker (since it now represents less content, and so presents less value to potential licensees).
Is it worth it for a broadcaster to do a blanket deal with SoundExchange if they’re going to have to do a separate deal with Warner, and Big Machine, and Glassnote, and so on?
Finally, as more and more players opt into private deals, the value of those deals themselves is diminished – think about the Big Machine artists who have given up their direct royalty payments in anticipation of getting special promotional treatment from Clear Channel, only to now find the full roster of Warner artists join the fray? And now that the full Warner roster is on board, how valuable is it for another label to join up? How many artists can Clear Channel “feature” before the privilege loses its value?
This is the problem with the bandwagon effect – you’re damned if you do, and damned if you don’t.
This doesn’t mean all hope is lost. A couple of modestamendments could allow private dealmaking – and the efficiency it brings for some parties – to continue, without harming artists or misrepresenting market rates. With Register of Copyrights Maria Pallante calling for a full rewrite of the copyright laws, the time to push for these artist protections is now.