Performance Rights and Digital Royalties Heat Up in Congress

Performance Rights and Digital Royalties Heat Up in Congress

Two bills are gathering attention on Capitol Hill and in the press surrounding “performance royalties,” the payments radio companies make to artists and music creators in exchange for broadcasting their songs.

Internet radio proponents are pushing the “Fair Internet Radio Royalties Act of 2012” draft legislation sponsored by Rep. Jason Chaffetz (R-UT). The bill claims to erase differences in the calculation of payments from various digital music services to performers and music creators. To do so, the legislation would reduce royalty rates for Internet radio stations to the so-called 801(b) standard, which is currently being used by only a handful of companies such as satellite radio services and certain cable music services that were grandfathered into this lower standard. In reality, the bill could drastically slash digital performance royalties to artists, labels and everyone else in the creative community participating in the digital performance revenue stream.

This bill also fails to address the most important disparity between music services: AM/FM
broadcasters enjoy a unique and decades-old exemption from paying any performance royalties
to recording artists and record labels. AM/FM radio makes billions in advertising revenue every
year without paying a single penny to the musicians that created the songs they play. By
ignoring this special loophole for broadcast radio, the bill lets stand one of the greatest
inequities in the music industry today.

Ray Hair, international president, American Federation of Musicians (and a SoundExchange
board member), warned in a recent op-ed that the bill “could set us back decades…[i]nstead of
ensuring that terrestrial radio stations pay musicians fairly…it would allow the digital platforms
to pay musicians less too, at rates far below market value.”

Fortunately, this attempt to drastically change the music landscape has prompted a response:
the draft “Interim Fairness in Radio Starting Today Act of 2012,” from Rep. Jerrold Nadler (DNY). This proposed legislation recognizes the need for real equality in the calculation of payments by Internet music services without slashing payments to music creators by adopting
the “willing buyer/willing seller” standard (currently used for Internet radio rates) for all digital
platforms including Internet radio, satellite radio and cable music services. The bill also takes a
step toward addressing terrestrial radio’s unfair exemption.

Under existing law, different types of services operating under the statutory license (that
SoundExchange administers) have their royalty rates set by different rules. Internet radio
companies like Pandora, and most of the more than 1,800 services that pay SoundExchange, pay
based on a “willing buyer, willing seller” standard. This standard directs the Copyright Royalty
Board (CRB) to set royalty rates representing the fair market value for the recordings that they
use (i.e. what a “willing buyer/willing seller” would negotiate if there were no statutory license).
These Internet radio, satellite and cable TV services are built upon the content from this creative
community, and it’s only fair that they pay what music creators could get in the marketplace.

Ironically, satellite radio behemoth SiriusXM does not have its rates set by the “willing
buyer/willing seller” standard. Instead, because of a special interest legislative loophole,
SiriusXM’s rates are set at a below market rate by the CRB. As a result, SiriusXM rates were
slashed between 25 percent and 50 percent in the last CRB proceeding.

Since that proceeding, Sirius and XM merged and now, according to Q2 2012 financial results,
the combined company projects $3.4 billion in revenues, and free cash flow of approximately
$700 million this year. While SiriusXM maintains a cheerful outlook, it was the creative
community that subsidized SiriusXM’s growth.

Now Pandora wants to pay less, too, even as it has thrived under the current standard,
celebrating a successful IPO and achieving explosive growth. The company beat its financial
guidance the past two consecutive quarters, and with its Q2 FY 2013 earnings report, raised its
full-year revenue forecast to $425 million to $432 million. Pandora has also increased its market
share, with listener hours up 80 percent year-over-year.

SoundExchange agrees with Pandora Founder Tim Westergren, who recently testified to
Congress that “it is time…to level the playing field and to approach radio royalties in a
technology neutral manner.” However, SoundExchange believes that all digital radio services
should compensate artists and creators at a market rate. The organization also believes that the
real injustice is the fact that terrestrial radio pays nothing at all.

Nadler’s proposed “Interim Fairness in Radio Starting Today Act of 2012” could begin to address
these issues. In contrast, the so-called Internet Radio Fairness Act could be a step backward for
the creative community.

It’s SoundExchange’s mission to help support, protect and propel the digital music industry
forward. The organization stands behind the creative community, and the interests of the signed
and unsigned recording artists, and small, medium and large record companies that it
represents. But more importantly, the organization works to support the work and efforts of the
creative community who dedicate their lives to the music and entertainment that we all enjoy.
For this reason, SoundExchange will continue to work toward supporting the singular cause of
ensuring the long-term value of music.