Protesting Royalty Rates (or something similar)

The current hot topic debate in the music industry involves the Internet Radio Fairness Act (“IRFA”).  Recently, the debate is getting louder as the top artists in the music world and successful Internet radio companies clash over the bill.  Supporters of IRFA say it is vital to the survival and success of all digital music streaming companies to end a flawed royalty system, but opponents claim it represents a disproportional cut in pay that musicians have come to and may eventually rely upon.  It’s no surprise this debate revolves around money, but let’s not mute what’s more important: the long-term health of the digital music business itself.

How are the current Internet Radio and Streaming royalty rates set?  Music rights owners (publishers, labels and independent musicians) and the digital radio companies do not negotiate the price of a license for streaming digital music.  Instead, Congress’ Copyright Royalty Board (“CRB”), a three-judge panel, directly sets the price once every five years after SoundExchange (remember SE represents both master owners and performers which can include labels as well as independent musicians) and the digital radio services (online, satellite and cable radio companies) present evidence about the value of recorded music and the technology for delivering it to music listeners.  Then, the CRB determines the royalties each kind of music service will have to pay out for the next five years.   SoundExchange is then charged with distributing out those royalties to its members.  The Performing Rights Organizations have their own equally confusing method for collecting and distributing royalties from internet broadcasts.

The debate or heavy complaining which led to the introduction of IRFA is coming from streaming services like Pandora.  CRB has decided on dramatically different royalty rates: Internet radio companies like Pandora, the IRFA’s most vocal supporter, purportedly pay more than 50% of their revenue in performance royalties; satellite radio companies like Sirius XM pay about 7.5%; cable radio companies like Muzak pay about 15%, and AM/FM radio pays nothing.  The result of these high royalty rates have forced most online streaming services out of the music business; most notably some giants such as AOL, Yahoo, and Microsoft.

With the rise of services like Pandora and Spotify, the labels and publishers went to extraordinary lengths to ensure that they would be paid a “fair” amount and the artists lobbied hard as well.  Any change, however minimal, will be met with angry voices screaming (or singing) on the other side.

IRFA is designed to give Internet radio stations a fairer calculation process for setting the price of their music and lower this difference.  The goal is to put services like Pandora, Spotify, Muzak, SIriusXM, on the same or similar footing.  But 125 major label artists including Rhianna, Ne-Yo, Billy Joel, Maroon 5, and Missy Elliot penned a letter opposing IRFA.  Their unified voice argues that IRFA will cut deeply into current Internet radio royalty earnings by an estimated 85%.

Who is right?  Who is wrong?  Who knows? What we are sure about is that, without a doubt, Internet radio is good for consumers. It allows for more music choices with more control for the listener, pushes songs from both major record labels and the nation’s rising independent musicians, and enables greater exposure and potential compensation for thousands of artists who would otherwise never be heard.  Rights owners see this medium as a meaningful revenue stream that is only going to grow overtime.  And the more listeners and the more plays mean Internet radio companies must pay more in overall licensing and rights fees to stream the music.  Supporters of IRFA say that not only will these lower rates drive more innovation in legal music distribution, but also ensure more artists are fairly compensated for the performance of their recordings.

It is hard for us at L4M to pick sides in this fight.  We have been writing about the changing music industry for almost five years now.  We spotted Spotify as a potential solution and also a potential problem prior to its US launch.  It comes as no surprise to us or our readers that there is a fight over how much streaming radio plays should pay out to artists.  Obviously, we want to see a fair resolution, but that gets us into the existential debate over what is fair and how much is art worth.  We’re not getting into that debate in this entry (save that for a night filled with several glasses of scotch and smoking jackets).

What do you think?  Comment, email or discuss over Thanksgiving dinner (please don’t).

This article was penned in part by aspiring L4Mer Jessica Rzotkiewicz