by : Business, Dec.'12, Featured Articles

The Battle Over U.S. Intellectual Property Costs

The Battle Over U.S. Intellectual Property Costs

New music media companies are trying to lower intellectual property costs.  Digital radio is calling for cheaper royalty fees and forcing the issue on a variety of fronts.  The opposing side takes the form of rights collectors who represent songwriters, publishers, record labels and performing artists.  In essence, those who make up what is traditionally understood as the music industry are pitted against the evolving digital music sector.

It is helpful to understand how copyrights work.  For every song, two copyrights exist: the compositional copyright and the sound recording copyright.  Generally speaking, songwriters and publishers typically own the compositional copyright, while the sound recording copyright belongs to recording artists and record labels.

In the world of traditional, terrestrial radio, AM and FM stations pay royalties based on the compositional copyright.  These royalties are systematically collected by performance rights organizations (PROs) such as ASCAP, BMI or SESAC.  These PROs distribute money to the rights holders who are signed up with them after taking a percentage to cover their operational costs.  With the exception of SESAC, the PROs are classified as non-profit organizations.

Like terrestrial radio, digital radio providers, which include SiriusXM Satellite Radio, Pandora Internet Radio, other online services and cable TV music channels, pay royalties to songwriters and publishers via the PROs.  However, unlike terrestrial radio, they also pay royalties based on the sound recording copyright to performing artists and record labels.  The PRO that was formed in 2003 to collect these digital performance fees is called SoundExchange.

As the digital music companies grow, they are demanding that their current royalty fees be reduced.  Pandora has just sued ASCAP for that reason and SiriusXM is suing SoundExchange.  Pandora is also fighting SoundExchange but this time, on Capitol Hill with a new bill called the Internet Radio Fairness Act.  Pandora says that the fees are strangling not only their own company but also the digital music market as a whole and stunting their ability to be profitable or for new market entrants to raise funding.

Pandora Sues ASCAP

Pandora filed a lawsuit in early November against ASCAP, claiming that the terms of their 2005 agreement, which expired almost two years ago, were “experimental”.  ASCAP, on the other hand, has presented the terms as being “effectively non negotiable.”1 After failing to reach a new deal privately, Pandora is bringing the issue before the U.S. District Court in New York.

Earlier this year, ASCAP negotiated a deal with Clear Channel that set their royalty rates much lower than Pandora’s even though Clear Channel operates their own internet radio service: iHeart Radio.  Pandora’s founder, Tim Westergren, said that, “royalty rates for different formats of digital radio are astonishingly unequal.”2

Pandora also claims that it deserves a break because ASCAP has lost some of its major publishing clients (EMI and Sony/ATV come to mind).  These important publishers have already or are steadily moving towards negotiating licensing deals directly with Internet radio services like Pandora. Pandora argues that the value of these independent deals should be carved out of what it owes ASCAP.

SiriusXM Satellite Radio vs. SoundExchange

In a similar scenario, SiriusXM sued SoundExchange in March, pushing for cheaper digital performance license fees.  The satellite radio company is also suing the American Association of Independent Music (A2IM), alleging that the association conspired with SoundExchange to block SiriusXM from lowering their royalty rates and that, in doing so, the two entities violated antitrust laws.

SiriusXM claims that when it reached out to several record labels to try to negotiate direct deals, the labels had already been privately instructed by SoundExchange and A2IM to refuse.  SiriusXM argues that rights holders could be paid more if SoundExchange were not taking a fee from the collections and went so far as to request that SoundExchange be dissolved.

The Internet Radio Fairness Act

While these different lawsuits play out, Pandora is seeking change before Congress.  Senator Ron Wyden (D-Oregon) and his co-sponsors have introduced The Internet Radio Fairness Act to “remove the regulatory shackles preventing Internet radio from being commercially viable.”3 According to Senator Wyden’s summary, Internet radio is a victim of discrimination.

The act calls for equality between cable, satellite and Internet radio.  Currently, SiriusXM pays around 8% of their revenue in digital performance royalties, cable pays 15% and Pandora pays over 50%.  The act does not specify that Internet radio fees be specifically lowered to Sirius’ rate but that all digital radio broadcasters be treated the same.  (This does not include traditional, terrestrial radio – only digital.)

The rates for satellite and cable radio are set by a panel of special judges who make up the Copyright Royalty Board.  Senator Wyden argues that the board uses a broader set of factors in determining the rates for satellite and cable than they do for Internet radio.  His bill mandates the use of the same methodology for services such as Pandora.  This is the focus of the act.  However, a bill is like a train leaving a busy station and the reality is that only so many trains can leave a station.  There is a whole other set of provisions tucked into the proposed legislation that would affect the music industry.

Extra Provisions

1) The act also protects Internet radio broadcasters from being sued by record labels for copying and storing digital back-ups of legally licensed/purchased songs.  To date, this has generally been considered illegal and so the act would make the copies legal as long as they are only intended to facilitate webcasting.

2) Furthermore, the bill attacks the competence and fairness of the judges who sit on the Copyright Royalty Board (CRB), claiming that they operate “uniquely”4 and outside of the procedures that other courts follow.  Under the new act, the judges, who are currently appointed by the Librarian of Congress, would be nominated by the President and confirmed by the Senate.  The act would also require the CRB to adhere to the Federal Rules of Civil Procedures and the Federal Rules of Evidence.

3) Sponsors of the bill are claiming that it is difficult for the CRB to gather enough information about the true market value of music licenses.  The IRFA would “take steps to shine a light on”5 private royalty agreements to make more information available to copyright holders, copyright users, and the CRB.

4) A last provision aims to boost the ongoing initiative for a global music registry by directing the Librarian of Congress to submit recommendations that are in line with the World Intellectual Property Organization to Congress regarding this matter.  The act claims that a global registry would help broadcasters obtain licenses more easily and also help artists and rights holders to “hold broadcasters accountable for their compensation.”6

The Counter Bill

Congressman Jerrold Nadler (D-N.Y.) is drafting a rival proposal, which is rumored to essentially go the opposite way by raising the royalty rates for cable and satellite to match the higher rates that Internet radio pays.

It would also require AM and FM terrestrial radio stations to start paying digital performance royalties.  These traditional radio stations currently do not, so the proposal would make up for this by mandating higher webcasting royalty fees than even Pandora pays for any adjoining online broadcast of a terrestrial broadcast.

Who Stands to Gain

Pandora Internet radio and Clear Channel Media and Entertainment are the two major forces behind the IRFA.  According to the National Journal, both companies have each invested roughly around $100,000 so far to help fund the creation and lobbying of the bill.7

Pandora is increasingly popular but not yet profitable partly because of how much it is forced to pay in royalty fees.  Its listeners and revenues are growing enormously and yet the company is not quite sustainable.  Pandora’s founder, Tim Westergren, claims that keeping his company alive is important for the music industry in general.  He argues that artists and rights holders benefit from a fair and competitive Internet radio marketplace.  “Internet radio has been shown to help decrease music piracy and increase music sales,” he recently stated, “when the digital music sector is allowed to grow and innovate, everybody wins.”8

Clear Channel has its own Internet radio service and owns several stations within Sirius XM Satellite Radio. But Clear Channel also favors the bill because it excludes terrestrial radio stations (of which it owns many) from the conversation.  The media mogul needs to stand behind the act in order to defend against Congressman Nadler’s counter bill.

The two companies and the political sponsors of the act formed the Internet Radio Fairness Coalition on October 25th, enlisting major technology trade groups such as the Consumer Electronics Association and the Computer and Communications Industry Association.  Also on board is Salem Communications, which is another terrestrial radio broadcaster, and several other advocacy groups.

Opponents

The main opponents of the IRFA: SoundExchange, the Recording Industry Association of America, and the National Music Publishers’ Association have joined together, with others, under the MusicFIRST Coalition to rally against the act.  They claim that by cutting royalty rates for Internet radio, artists and rights holders will miss out on what they are due.

Ted Kalo, the executive director of the musicFIRST coalition has called the act a “race to the bottom.”9 The coalition members argue that any conversation about changing royalty rates should begin with making terrestrial radio pay digital performance royalties just like digital radio services, as is common in Europe.  And they are certainly not in favor of lowering the current digital rates.

Kalo told Billboard Magazine that people have recently written over eleven thousand letters to Congress opposing the act.  “This bill is now commonly known as the ‘Screw Artists Act’ because it would produce a windfall to millionaires, mandate a pay cut for artists, and provide no benefits to subscribers,”10 he said.

The National Association for the Advancement of Colored People (NAACP) sent a letter in November to the members of Congress, accusing the act of being unfair to artists.  Hilary O. Shelton wrote the letter and is director of the NAACP’s Washington bureau and senior vice president for advocacy and policy.  She argued that the bill would violate “the founding principle of America’s labor movement,” declaring, “a fair day’s work deserves a fair day’s pay.”11 The NAACP is advocating on behalf of some of the elderly musicians from the blues and Motown eras who were unfairly compensated for many years and now depend on these royalties.

A few weeks later, another protest letter was sent to Congress.  It was signed by the National Music Publishers’ Assn. and other songwriter and publishing organizations as well as 127 top tier artists.  Alongside cliff notes from the letter, these artists’ names were published in a two-page spread in Billboard Magazine titled, “A Musician’s Perspective on Pandora.”

Rate x Volume

Artist compensation and livelihood is a key debate point for both sides.  Opponents are condemning music services for trying to reduce what artists make off of the creative content that represents the core of those businesses.  But proponents of the bill present the relationship the other way, claiming that musicians need the services to succeed.

On their website, members of the Internet Radio Fairness Coalition accuse opponents of the bill of being short-sighted and narrow-minded in their understanding of the music marketplace.  “The record labels and their allies don’t seem to understand how to help develop a sustainable market,” reads the statement. “The revenue the artists get is a result of the rate times the volume – so the record companies need to focus on the whole picture, and not just the rate itself.”12

Apple’s Prospective iRadio

Meanwhile, Apple is currently negotiating with the three top record labels in order to move forward with its own Internet radio.  Apple has allegedly offered the labels a royalty rate that is lower than what Pandora pays.13  At the same time, Apple is seeking greater interactive flexibility than with the Pandora model.  Apple wants to allow its listeners to be able to hear the same song or artist more often within an hour than is currently possible with Pandora.

In a sense, Apple is asking for more and offering less.  To incentivize the labels to lift interactivity limitations, Apple is rumored to be offering them a percentage of the ad sales generated by the service.  This may still not amount to enough for the labels but Apple has leverage.  First is the company’s massive reach and potential to provoke digital downloads.  Second is the benefit of adding a major competitor to the Internet radio arena, which is currently dominated by Pandora.  The IRFA is a third source of leverage.  Apple has not yet made an official threat to back the bill, but it could.  The record labels may choose to reach an agreement with Apple to avoid seeing it join forces with Pandora and the war surrounding the bill.

Direct Deals

The issue of carving out deductions based on direct deals between service providers and publishers or record labels continues to come up as these direct deals become increasingly popular.  Major publishers are separating from PROs and some record labels are breaking away from SoundExchange.  In a recent landmark lawsuit, a company called DMX (which delivers music to restaurants and stores) convinced a court that the terms of its direct licensing deals with several publishers should influence the royalty rates set by ASCAP and BMI.

Those in favor of direct deals say that publishers and record labels can take home more money if they negotiate themselves. Presumably, this should mean more money for the musicians and songwriters too.  However, it is important to note that the statutes used by PROs require that a significant percentage of the collected money go to the artists.

For example, ASCAP, BMI and SESAC must deliver fifty percent of the compositional royalty to the songwriter.  Similarly, SoundExchange is required to give forty-five percent of the digital performance royalty to the featured artist and five percent to the other studio musicians.  The remaining fifty percent of each copyright, and sometimes less, is allotted for a publisher or record label.  These rules protect artists from potentially being taken advantage of.  Another concern for critics of direct licensing deals is the loss of collective bargaining.  Fragmenting the negotiation power could eventually lead to the devaluation of music licenses.

Conclusion

In some ways it seems that the battles surrounding royalty rates are more important for radio services, record labels and publishers than they are for artists.  This year, the nonprofit organization, Future of Music Coalition released findings from its research project on artist revenue streams.  Performance royalties accounted for a small piece of the overall pie, trailing behind live performance, being a salaried player, and session work (in order).14  Nonetheless, the royalties still account for a significant portion of revenue – especially important for songwriters.

In order for any bill to become a law, it has to travel a long journey of obstacles and waiting lines.  No matter how much noise the proponents of the IRFA make, the likelihood of it becoming a reality is slim.  Whatever the outcome, it will not be soon.  Despite the buzz, the bill has been introduced during the current U.S. lame-duck session, which occurs when Congress meets after its successor is elected, but before the successor’s term begins (President Obama will be sworn into office on January 21st).  In the meantime, the digital radio providers, record labels, publishers, PROs and artists will continue to wrestle with these issues in private courts.  Lawsuits are also time-consuming and expensive, but could be more effective than relying on policymakers to keep up with the digital age.

 

By Emilie Bogrand

 

Endnotes:

1. Jeffery, Don. “Pandora Media Sues Ascap Seeking Lower Songwriter Fees,”

Bloomberg, Nov 5, 2012. http://www.bloomberg.com/news/2012-11-05/pandora-media-sues-ascap-seeking-lower-songwriter-fees.html

2.  Ibid.

3.  “The Internet Radio Fairness Act of 2012,” website of Senator Ron Wyden, accessed Nov 13, 2012. http://www.wyden.senate.gov/the-internet-radio-fairness-act

4.  “Summary of The Internet Radio Fairness Act of 2012,” website of Senator Ron Wyden, accessed Nov 13, 2012. http://www.wyden.senate.gov/download/summary-of-internet-radio-fairness-act-of-2012?inline=scribd

5. Ibid.

6. Ibid.

7. Izadi, Elahe. “The Money and Lobbying Behind the Internet Radio Fight,” The National Journal, Oct 26, 2012. http://influencealley.nationaljournal.com/2012/10/pandora-has-had-twinlogic-stra.php

8. “Internet Radio Fairness Coalition Launches to Help Accelerate Growth and Innovation in Internet Radio To Benefit Artists, Consumers and the Recording Industry,” The Wall Street Journal, Oct 25, 2012. http://online.wsj.com/article/PR-CO-20121025-911617.html?mod=crnews

9.  Ali, Ambreen. “House Panel To Look At Radio Royalty Rates During Lame-Duck Session,” Congressional Quarterly, Oct 10, 2012.

 

10. Peoples, Glenn. “Pandora, Clear Channel, Others Form Advocacy Group for Lower Web Radio Payments; MusicFirst Pushes Back,” Billboard Magazine, Oct 25, 2012. http://www.billboard.biz/bbbiz/industry/legal-and-management/internet-radio-fairness-coalition-founded-1007990962.story

11.  Sandoval, Greg. “NAACP Calls Pandora-backed Legislation Unfair,” CNET News, Nov 8, 2012. http://news.cnet.com/8301-1023_3-57547242-93/naacp-calls-pandora-backed-legislation-unfair/

12.  “Legislation,” The Internet Radio Fairness Coalition website, accessed Nov 13, 2012. http://internetradiofairness.com/legislation/

13.  Sandoval, Greg. “Apple’s Proposed Web Radio Service Is No Certainty,” CNET News, Oct 25, 2012. http://news.cnet.com/8301-1023_3-57540528-93/apples-proposed-web-radio-service-is-no-certainty/

14.  Thomson, Kristin. “DIY Musicians-Alone Together,” The Music Business Journal, July, 2012. http://www.thembj.org/2012/07/diy-musicians-alone-together/


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