by : Featured Articles, Music Law, October 2013

The Peddling of Recording Rights

The Peddling of Recording Rights

Recent negotiations between Clear Channel Communications and Warner Music Group have sent shockwaves throughout the recording industry. For the first time on a major scale, the broadcast giant will pay performance royalties to recording artists for plays on terrestrial radio. Considering the defeated state of record sales, many hail the deal as a harbinger of equality for rights holders. Though, a revenue sharing arrangement between two industry powerhouses may shackle a steadily growing market for independent music.

The Context

For every song written, recorded, and released, there are two copyrights. One rests in the song’s melody, harmony, and lyrics while the other protects the audio recording. To this date, terrestrial radio stations—as separate from digital stations like Pandora—are only legally required to pay for use of the former. This is relatively specific to the United States; many foreign markets recognize both rights for public performances.

All broadcasters, as well as clubs, concert halls, airplanes, and restaurants, must purchase a license to play music publically from a performance rights organization like ASCAP, BMI, or SESAC. These companies collect fees and allocate payments to songwriters and publishers. Meanwhile, the owners of recording copyright, including performers, producers, and sidemen alike, are unpaid. Online webcasting, however, requires two licenses; artists and labels are paid alongside songwriters.

Those with stakes in broadcast have long argued that recording artists benefit through “promotion,” that radio play leads to record sales, and that artists should not expect any additional royalties from stations. The value of recorded music has diminished markedly, and in an age where retweets are a more salient metric than albums sold, the argument for recording royalties is more pressing. Performers, record labels, rights organizations like SoundExchange, and the RIAA itself are clamoring for a legal change that would credit recording artists for their work, align the U.S. with foreign markets, and upgrade royalties to the digital age.

The terms of the deal are non-exclusive, meaning the agreement could foreshadow pervasive changes in the industry despite a lack of new laws. While Sony and Universal, the two largest of the remaining three major labels, have already declined Clear Channel’s offer1, the successful negotiation with Warner appears to have created urgency for new legislation while energizing the cause of recording artists. It is conceivable that Sony and Universal may accept similar terms to Warner in the future–and give rise to a new industry standard of revenue sharing, despite a lack of legislation.

The Warner Deal

While the details are not fully known, Clear Channel has made similar deals in the past with labels like Big Machine, Robbins Entertainment, and Fearless Records that can illustrate the terms of the Warner deal. Artists like Taylor Swift, Mumford & Sons, and Fleetwood Mac are accepting makeshift performance royalties on broadcasts and, in return, are licensing their music directly to iHeartRadio—Clear Channel’s digital radio inroad—at a reduced rate. According to a variety of sources, these deals have been beta tests and the latest agreement is of nearly identical structure set on at much larger scale.

If so,  Warner is likely accepting 1% of Clear Channel’s advertising revenue as a royalty for terrestrial broadcast and around 2% for online webcasting. In exchange, Warner is lowering Clear Channel’s PurePlay rate, a figure normally set at 22¢ per 100 streams by statute, which gives iHeartRadio discounted access to a strong catalogue of popular music. The exact amount is undefined, though 12¢ is the estimated rate. According to Clear Channel’s Robert Pittman, a structure of predictable costs allows for better scaling, and the relationship will grant iHeartRadio a competitive edge in the growing online radio sector.

For Warner, the smallest of the remaining three major labels, the deal is a calculated strategic move. To remain in the running alongside Sony and Universal, the company is linking arms with a pivotal player in the “push” based music economy—broadcast radio. Warner is recruiting stakeholders where countless listeners go to learn what’s hot. The new symbiosis means that hundreds of Warner’s artists will not only benefit from new performance royalties; they will be featured on dedicated promotional segments; album previews, exclusive interviews, and special appearances across Clear Channel’s network and at live events.

Implications

Notably, Clear Channel is accepting an early loss with its eyes set on a more strategic position in the future. At present, Warner benefits significantly from a brand new revenue stream. Though, as more and more people migrate to online streaming services, iHeartRadio will be more likely to capture mind share. Digital has experienced a 421% growth in the past decade compared to terrestrial’s 8%, leading the company to expect a positive return on the deal. Pittman sees the value in growing alongside digital radio, and has positioned itself to fight for elusive profit in the online space. To paraphrase, he says the deal redefines the relationship between music companies and radio; it builds a better foundation for the digital future.

On the surface, Warner’s direct license to Clear Channel seems to be a great stepping-stone for the music industry. Two of its largest players have been proactive in creating a royalty for performers where laws do not. Pittman further claims that the deals are a benefit to a listening public, which will benefit from a higher quality iHeartRadio service. Even SoundExchange, the entity responsible for collecting the same online royalties the deal slashes, has publically voiced its support of the agreement2. Nevertheless, among the cheering crowds, what remains unspoken is the effect an arrangement of such magnitude can have on the industry’s lesser-known contributors.

As two massive industry cornerstones enter into a revenue-sharing arrangement, their shared interests will overshadow those of outsiders. In addition to its contractual obligations to promote CeeLo Green, Green Day, and the rest of Warner’s roster, it will cost comparatively more for Clear Channel to stream the music of lesser-known, risky artists. Intuitively, stations will stick to tried and true music; mainstream radio will crowd out the independents unless they accept the same direct licensing arrangements as the majors. This not only elevates the barriers for music’s fresh prospects, it encourages a further devaluation of digital content.

The deal is non-exclusive; permutations of the agreement may likely spread to other major labels. If they do, and if the independent imprints refuse to follow suit, broadcasted content will narrow into a risk-managed portfolio of popular music; promotional segments will become a permanent soapbox for the tradition funnel of label-driven artist promotion. Comparatively, the out-on-a-limb creativity of unsigned talent will become too costly and unproven to bypass the agreements. The excitement of music exploration and discovery, along with the feasibility of the long tail and diversity will be further negotiated out of the mainstream.

Final Thoughts

The agreement has already caught the ear of congress. On September 30th, Mel Watt, a congressional representative from North Carolina, proposed the Free Market Royalty Act. If passed, this act would establish a radio performance right, but would supplant the CRB and empower the industry to negotiate its own rates. By replacing committee decisions, Watt believes the experts of the music business will create an effective model on their own. Continuing, the act encourages artists and labels to leverage their new bargaining power as a career tool—accepting royalties or exchanging discounts for “promotional consideration.” However, with no specific statutory rate, lower-level artists will lose their legal foothold; broadcasters like Clear Channel will be unlikely to negotiate terms with small artists. Should the FMRA pass; unions of independent labels may begin collectively bargaining for rates, defeating hopes of efficiency.

Only a legally mandated performance right can bring the entire industry forward. Privately negotiated workarounds, whether FRMA mandated or not, tend to favor the moneymakers. Standards crafted by the majors are bound to exclude the independents. Additionally, if the US legislates a similar right in all public venues including bars, universities, and television, international reciprocity will trigger and foreign markets will compensate American artists for public performances overseas.

Since its origin a century ago, legislators have shaped radio regulations to best serve the public interest. Initially, the laws defined acceptable communications standards and gave precedence to naval vessels and farms, though with the formation of the FCC in 1934, the government set out to influence content across the nation’s limited airwaves through several controversial policies. In the 1980’s, President Reagan and then FCC chairman Mark Fowler deregulated radio and left content to capitalism. It’s possible that today, Warner and Clear Channel’s deal will bring the FCC into a conversation with the Copyright Royalty Board regarding intra-industry revenue sharing and performance royalties in the interest of fair programming.

To quote representative Watt, a long-time supporter of the industry, “take away the music and you take away the audience.” The new music industry is hinged on access and individualization; playlists speak more to one’s personality than profiles. Music discovery continues to excite and data-driven recommender systems support the long tail and niche industries. While Clear Channel and Warner may seem progressive, the two may be making the wrong decision in barring themselves financially and ideologically from a catalogue of depth and from a proliferating independent scene.

 

By Kyle Billings

 

Endnotes

1. http://www.nytimes.com/2013/09/13/business/media/clear-channel-warner-music-deal-rewrites-the-rules-on-royalties.html

2. SoundExchange

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