RIAA eyes radio's billions
Big Broadcasters ready to cuff labels again
Column Although the recording industry is thought by some to be all-powerful, American broadcasters actually wield far greater power. Radio has been able to get away with not paying labels for music they play: specifically, performance royalties that broadcasters elsewhere in the world owe to the labels for broadcast music. But is this all about to change?
As CD sales fall dramatically, labels are clamoring to find additional revenue streams and are turning to the issue of radio royalties. The recording industry, which posted a dwindling $11.5bn in sales last year, is appealing to broadcast radio, which boasted a steady $20bn in advertising revenue, for some financial compensation. But as friction between the two parties comes to a head, the labels are reminded once more of the overwhelming power of broadcast radio.
A brief history of lobbying
When it comes to music, United States copyright law protects two distinct sets of rights: rights associated with the musical composition (the song), and the musical recording (the master). The Copyright Act gives the copyright owners of songs the exclusive right to perform the copyright work publicly - but this does not extend to owners of the masters. This means that radio broadcasters must pay songwriters and publishers for the songs they play – not artists and labels. This arrangement has been in place for decades to the seemingly mutual benefit of all. But as the music industry suffers dramatic losses from declining CD sales, the record companies are clamoring for change.
When the old copyright law of 1909 was passed, sound recordings of music - which were in their infancy - were not covered. Eventually in 1972 federal law was amended to protect sound recordings, but public performance was deliberately omitted from the types of protection that normally apply to copyright materials. Why? Politics and money!
The broadcast community, which has one of the strongest lobbies in the history of American politics, successfully argued that radio is one of the strongest ways of promoting music recordings and should not be forced to pay for the performance of records.
In the past, radio stations have not been required to pay a royalty on the public performance of the sound recording based on the argument that airplay promotes CD sales and tours, the increase of which benefits the sound recording owners: the artists and labels far more than it does the songwriters. As the music and radio businesses both thrived it seemed that this arrangement was mutually beneficial.
But in recent years the arrangement has become insufferable to the artists and labels. In the hopes of securing some revenue from the ever-growing popularity of digital transmission, the Recording Industry Ass. Of America, the RIAA, led the record companies in the fight to obtain a performance right in sound recordings on all digital services, including the royalty on Internet radio. So the RIAA and SoundExchange - the newly-created collection that receives sound recording performance royalties - are backing the musicFIRST Coalition to push Congress to require the collection of royalties from over-the-air radio.
At a hearing held on July 31, before a House Committee to discuss the issue, it therefore came as something of a surprise that the Committee seems in favor of the imposition. Congressman Berman, (D. Cal) who chairs the Committee indicated that the royalty that he was seeking to impose would cover only broadcasters - and not be extended to commercial establishments like bars, restaurants and retail stores, who all currently pay a performance royalty to the music composers.
He also said that he wanted to ensure that any royalty would not hurt the ability of radio stations (especially smaller stations) to cover the news, and he would consider the possibility of special provisions to protect smaller stations. In addition, he made clear that he did not want any sound recording royalty to diminish the amount currently paid to composers. But while the current proposal is for royalties only on broadcasters, US Copyright Office chief, Mary Beth Peters made clear that she saw no theoretical reason why that royalty should not also extend to other public performances of music such as retail stores.
In every other developed country worldwide, copyright laws grant protection to songwriters and publishers as well as performers and producers for the public performance of their recordings and compositions. The rates differ from country to country but each upholds its responsibility to require broadcasters to pay for sound recordings via digital and analog transmissions.
(Internationally, rates vary according to station revenue: in the UK, the rate is between two and five per cent, for example.)
As a result of incongruous copyright laws, it has been upheld that since international owners of music records don't get performance royalties from US radio play, they are justified in withholding royalties otherwise payable to US copyright owners. The record companies hope that by pushing Congress to impose a royalty on broadcasters, they will not only receive additional income from US radio but also from foreign performing rights organizations.
So what's at stake?
If the record companies prevail, they'll be rewarded with a fraction of the estimated $20bn radio earned in ad revenue last year. If the rate applicable to satellite radio - which does pay royalties - is applied to terrestrial radio, the amount would be 7.5 per cent of $20bn, that, is $1.5bn.
It is important to keep in mind that this is an estimated number. The National Association of Broadcasters and musicFIRST Coalition are arguing not only about whether broadcasters should have to pay record companies but how much they would have to pay. Broadcasters claim member stations will have to pay between 10 and 35 per cent of their revenue to artists and record labels, most likely through SoundExchange. But musicFIRST claims that these figures are grossly exaggerated and points to a statement by the US Copyright Office which upholds that sound recording owners should be paid the same amount music composition owners are currently paid.
Webcasters take note
As the battle wages on, a third party is watching developments with great interest. Webcasters will be required to pay dramatically increased rates to labels to stream pre-recorded music, and are watching to see what percentage of revenue broadcasters will pay. If the figure is in the range of three per cent of revenue, as the US Copyright Office claims, then webcasters, some of whom have argued that their rates will cost up to 125 per cent of their total revenue, would be more than justified in protesting the settlement. It seems incongruous at best that webcasters would have to pay a figure approaching $2.3bn by 2008 under the CRB ruling, a sum which the US Copyright Office declared "grossly and purposefully overestimated", when terrestrial broadcasters are generating far more income.
Although webcasters may harbor some grudge against broadcast radio - which has always been exempt from paying performance royalties - some insiders believe that webcasters may actually join forces with the labels to urge Congress to make terrestrial radio pay its fair share for recorded music. In exchange for throwing their weight behind the labels, webcasters hope the labels will agree to reduce the rate they're requiring webcasters pay to stream their catalogue.
For more on the current webcasting controversy, check out my recent article, Who'll Win the Webcasting War?.
Politically speaking, the broadcasters are extremely powerful. Radio is everywhere: in every town and every city of every state, and politicians know how to use the power of the airwaves to reach the people.
Besides offering politicians a forum for campaigning, broadcasters offer campaign dollars and the support of the National Association of Broadcasters which represents approximately 70,000 radio stations and five broadcast networks. At the July 31 hearing, Mary Beth Peters testified that the lobbying power of broadcasters is the main reason that US law does not fall in line with the rest of the world.
The record industry does not have the same sort of clout or nation-wide influence. It operates out of a few particular locations in the United States, namely, New York City, Los Angeles, Nashville and Miami. And while it might have the support of the webcasting community, the latter does not have the political clout of the broadcast community. And yet the Judiciary Subcommittee on Courts, the Internet, and Intellectual Property, which is in charge of this matter seems to favor the imposition of this royalty on broadcasters.
Subcommittee chair Berman has said: "I will come right out and indicate my bias - I have supported the expansion of the performance right for over 20 years". Berman also indicated that he expected the committee to move legislation by the end of this year.
So even with the support of the webcasters, it will still be a steep uphill climb to get the traditional broadcasters to pay for recorded music. ®
Steve Gordon is an entertainment attorney and consultant in New York, and the author of The Future Of The Music Business. He was Director of Business Affairs, TV and Video at Sony Music for ten years. His website is at www.stevegordonlaw.com.