Why Artists Should Always Get Paid By Broadcasters Who Play Their Songs

Why is it that Internet, satellite, and cable radio broadcasters pay performance royalties for the sound recordings they play, and American over-the-air “terrestrial” AM and FM broadcasters do not? The answer isn’t particularly satisfying for artists, record labels, and anyone who thinks the government shouldn’t be in the business of impeding new technologies.

For decades, terrestrial broadcasters have been exempt from paying a performance royalty to the owners of sound recordings, who are typically record labels and recording artists. By contrast, with the growth of digital transmissions in the 1990s and the accompanying concerns about the decline of music sales, Congress passed legislation imposing royalty obligations on the newer audio broadcast technologies. Under the resulting system, the rates today vary widely depending on how sound recordings are transmitted to listeners.

For example, some providers of audio-only channels available via cable or satellite television service currently pay performance royalties of 7.5% of gross revenue, Sirius XM satellite radio currently pays 8% of gross revenue, and Internet radio services, depending on their size, can be compelled to pay  as much as 50% or more of revenue. To make matters even more confusing, these rates are evolving over time in complex and only sometimes predictable ways.

During the past several decades, proposals to end the terrestrial broadcasters’ performance royalty exemption have repeatedly been floated. The most recent significant legislative push to end the exemption came in 2009, when both the House and Senate Judiciary Committees passed versions of a bill called the Performance Rights Act. Neither bill received a vote by the full House or Senate.

There was talk of an industry-brokered compromise in 2010 that never came to fruition, in part due to opposition to a proposed term in the agreement that would have called for the “inclusion of radio chips on all mobile phones.” The Obama administration has also weighed in: In March 2011 the White House’s Office of the U.S. Intellectual Property Enforcement Coordinator released a white paper recommending “that Congress create a right of public performance for sound recordings transmitted by over-the-air broadcast stations.”

There’s a glimmer of hope that the inequities in the current system may once again be getting legislative attention. On June 6, the House Energy and Commerce Committee’s Subcommittee on Communications and Technology held a hearing on “The Future of Audio.” The subcommittee heard from a parade of witnesses, several of whom addressed the terrestrial broadcast performance royalty exemption.  However, the Energy and Commerce Committee does not have oversight over the nation’s copyright laws, so until efforts are revived before the House and Senate Judiciary Committees, no change in the law can be expected.

A key argument against ending the exemption for terrestrial radio has been that radio play drives music sales. And indeed, the longstanding existence of “payola”, the (illegal when undisclosed) practice of providing payments to radio stations to play music by certain artists, is economic proof that the broadcasters’ view of the sales value of radio play has merit.

But if airtime on traditional AM and FM stations drives sales, so, too, can exposure through cable, satellite, and Internet radio. And, the argument can also be inverted: By playing artists who people want to hear, broadcasters of all stripes attract more listeners, and can therefore charge higher fees to their advertisers or subscribers. It’s a well-recognized symbiosis in which the benefits flow in both directions. Exposure drives sales, and good music attracts listeners.

However, this balance, and the entire music broadcast industry, can only exist thanks to a flow of intellectual property that only goes one way. Broadcasters use intellectual property owned by artists and record labels, and not the other way around. The fact that artists may receive some benefit from radio stations’ use of their intellectual property shouldn’t strip them of their right to be paid for its use.

So what should be done? To start, Congress should end the terrestrial performance royalty exemption. This would rectify a glaring inconsistency in American copyright law and would also bring American artists one important step closer to receiving overseas terrestrial broadcast royalties. As had been proposed in the 2009 Performance Rights Act, new legislation could require smaller terrestrial radio stations to make revenue-dependent, flat annual payments in the approximate range from $5,000 down to $500, which could hardly be described as onerous.

Rates for larger stations would likely end up in the hands of the Copyright Royalty Board, a prospect which would justifiably make the terrestrial broadcast industry nervous. CRB rates for other (non-terrestrial) broadcasts have sometimes been punitively high, forcing Congress to intervene on more than one occasion to pass legislation providing relief. Similar intervention might be necessary for terrestrial broadcast royalty rates as well if the exemption is ended.

In addition, and in some respects more importantly in the long run given the inevitable transition to digital, performance royalty rates should be harmonized across digital broadcast technologies. The current framework, which forces Internet radio providers to pay extremely high rates while charging somewhat more modest rates to satellite and cable music broadcasters is not only unfair, but also impedes innovation. “Given a more equitable royalty standard, I’d expect we would see an explosion of new technologies to connect artists and Internet radio listeners over the coming years,” says Pandora Founder Tim Westergren. “The one-to-one nature of Internet-delivered radio could allow thousands of artists to engage with their audiences in unprecedented ways that could really revolutionize the industry.”

Somewhat ironically, impetus for a partial solution may come from the terrestrial radio stations themselves, who are seeing small but growing numbers of listeners migrate to their online streams. A recently announced deal between radio broadcasting giant Clear Channel Communications and Nashville record label Big Machine provides a potential model. In return for reduced webcasting royalty rates, Clear Channel will, for the first time, pay royalties to sound recording copyright owners for its terrestrial broadcasts.

However, while the deal has been termed revolutionary, in at least one important sense a better description may be evolutionary: It reflects an approach available only to companies such as Clear Channel that have a foot in both the traditional broadcasting and webcasting worlds. By contrast, pureplay providers like Pandora don’t have the option of offering to start paying terrestrial broadcast performance royalties in exchange for reduced webcasting royalties. And even if other record labels ink similar deals with Clear Channel and other terrestrial broadcasters, that wouldn’t address the concerns of independent artists. The upshot is that a comprehensive solution will almost certainly require congressional action. A separate but related issue is ensuring that artists, who have often gotten the short end of the stick from record companies, get their fair share of royalties.

There’s also a larger context that goes well beyond the world of digital music and relates to disincentives to innovation. The government should not be stacking the deck against the newest, most compelling technologies. Saddling Internet radio with high royalty rates while giving terrestrial AM and FM stations a free pass impedes the growth of a promising new way to distribute content. And, it sends a message to would-be-entrepreneurs with ideas about how to revolutionize an industry that the playing field is far from level. In an increasingly competitive global technology environment, that’s a message we can’t afford to be sending.