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The crux of the entire CRB royalty rate controversy boils down to two simple questions: "What is practical?" and "What is fair?"

We’ve covered the "practicality" issue in previous issues of RAIN — if the nature of the advertising marketplace in 2007 means that the CRB’s royalty rate is close to 100% (or more) of most webcasters’ revenues, they will be forced out of business and there will be no royalties for SoundExchange to collect.

Today, let’s look at the other path: "What is fair?"

Webcasters believe that artists SHOULD be compensated fairly
SoundExchange has been taking the "fairness" tack in its recent press releases (the intended audience for which is probably some combination of consumers, journalists, and Congress).

Regarding the satellite radio CRB hearing, they issued the following release: "‘The essence of satellite radio is music,’ said John Simson, Executive Director of SoundExchange (pictured below right). ‘Without music, XM and Sirius would not exist. We are asking simply that these companies recognize our substantial contribution to their business by paying a fair price  to artists and record labels for their creativity and investment.’”

More recently, regarding the webcasting CRB decision, they issued the following release: “‘We sought a dialogue with these services in order to determine if there is an appropriate business solution that addresses their concerns while still ensuring fair compensation for artists,’ said Michael Huppe, General Counsel of SoundExchange. ‘It is in the industry’s interest to foster the continued growth of Internet radio, and we stand ready to work towards that goal,’ added Huppe."

Great! Webcasters today are virtually unanimous in their support of the concept that record labels and musicians should receive "fair compensation" when their songs are played on Internet radio stations.

(Footnote: Many webcasters, on the other hand, believe the rationale for this creating new royalty within DMCA was erroneous. (Back in 1998, record labels told Congress that consumers were going to use Internet radio’s "digital" transmission to grab and save "perfect digital copies" of the music being played. In fact, that has not occurred.) But, for now, we’re moving on.)

So, let’s take a closer look at what "fair compensation" might mean. What is fair?

Airplay ITSELF is a benefit!
Since the early days of radio, when broadcasters were just beginning to transition from having live musicians in the studio (or broadcasting live from a concert venue) to playing recorded music, Congress has had a consistent answer to what "fair" compensation is to the performers for such airplay: The airplay IS the compensation!

The RIAA likes to point out that this legislative philosophy (i.e., the absence of a sound recordings performance royalty for broadcast radio) is unique to the United States. They have been calling it an “historical accident."

But what they fail to acknowledge is that this “historical accident" led directly to the United States’ record industry becoming the largest and most profitable in the world!

This has been a mutually-beneficial situation: Congress and the FCC authorized a lot more radio stations per city than governments in most other countries did. (Another "historical accident"? Not really in this case either; it was a smart public policy decision.) In a sense, this is bad for U.S. radio station owners (more competition), but it was good for labels and musicians.

It meant that there were more venues for more different styles of music to receive airplay, leading to lots of hit product in lots of different genres — a thriving Top 40 industry, a thriving country music industry, a thriving R&B industry, a thriving smooth jazz industry, and so on.

That’s the magic formula of the music industry: Lots of stations, lots of listeners, and lots of airplay for lots of different kinds of music leading to lots of sales!

(Note that if you hear a SoundExchange spokesperson talking about broadcasters or webcasters "building a business on the backs of musicians," remember that the opposite is even more true — that virtually every successful record label and recording artist is a success due to the hits that were built as a result of millions of hours of free marketing they received from radio stations in the form of airplay!)

If you need any more convincing that airplay is actually a benefit to labels and musicians, ask yourself this: Why else have labels spent hundreds of millions of dollars a year for decades on "radio promotion" departments (including salaried employees, trade press advertising, free distribution of LP’s and CDs to stations, and independent promotion)?

That logic suggests the answer to "What is fair compensation?" is "The airplay itself." I believe most independent record labels and working musicians would agree; in fact, I believe even at the major labels, the sales & marketing execs would agree. (It’s only their legal departments that are behind this attempted money grab.)

Radio royalties in other countries
But let’s try this from a different angle:

Governments in other countries took a different approach to balancing the needs of copyright owners, copyright users, and the public good, and in most countries the record label and/or musician does receive a royalty payment when their music is played on the radio. In those same countries, on the other hand, radio stations typically benefit from having fewer competitors in their city. (Is this a better system? No! The record industry has historically been most profitable under the U.S. system, I believe.)

So we can also attempt to answer this "fairness" question by looking at the vast record of deals in which sound performance royalty rates were established for radio airplay — specifically, decades of such deals in Canada, Europe, and Australia.

Such testimony was presented in the previous CARP hearings (for 2000-05) via the written testimony of an expert named Paul William Kempton, founder of a U.K.-based consulting firm that consults on royalty negotiations across Europe.

The chart below represents RAIN’s summary of his findings. Columns #2-3 refer to the royalty for the composer of a song (analogously, in the U.S., the royalty due ASCAP / BMI / SESAC). Columns #4-5 refer to the royalty due for the performance of the song. Column #6 looks at the ratio between the two. (Percentages in columns #3 and #5 are of either total station revenues or of station advertising revenues. "PRO" means performing rights organization):

Conclusions we can draw from other countries
This table leads to three important conclusions:

First, it appears that, contrary to the CRB judges’ conclusions, setting a royalty rate on a percentage of revenue basis (as opposed to a per-song-per-listener basis) is not "unworkable." Somehow, if it has worked around the world for decades, and in the U.S. for composers’ royalties for decades, it seems arbitrary, capricious, and flat-out inaccurate for them to call the approach unworkable, as they did in their decision.

Second, it appears that the general consensus in countries around the world that have established a royalty rate for use of sound recordings on the radio is that a "fair" royalty rate is about 3% to 4% of revenues.

And third, we see a clear pattern that the sound recording in almost every country appears to be granted a smaller royalty rate than the composition royalty. Kempton wrote, "From my analysis of prevailing headline royalty rates in a number of jurisdictions, I find that the royalty rates for performance of sound recordings are no higher, and indeed, are generally set lower than royalty rates for the musical composition. While the differential ranges from country to country, there is a consistent pattern of lower sound recording royalty rates throughout the territories analyzed."

(Footnote: Why is this true? I think two reasons: First, the label and performer get more value from the radio airplay than the composer does — they keep more money from sales of the CD, they receive an additional benefit in a potential revenue stream from concert ticket sales, etc. Second, at least for an artist doing cover versions, the song may indeed be worth more than the singing; if you record an enjoyable cover version of Cole Porter’s "Night and Day," I think it’s arguable that Porter did contribute more to the track than you did.)

Satellite radio royalties: Also low
Finally, let’s look at satellite radio. Even before the record industry got Congress to impose a sound recordings performance royalty on webcasting, they got Congress to impose that royalty on the nascent satellite radio industry.

A different CARP held by the Copyright Office five years ago determined a royalty rate for that industry, and although their decision was made confidential, stock analysts believe that XM and Sirius are paying about 3% to 4% of their revenues for this royalty (although some sources estimate the rate might be as high as 7%.)


In conclusion…
Looking at virtually every data point at what might be “fair” compensation (in terms of a royalty) for the airplay of sound recordings on an Internet radio station, one comes up with a number in the 0% to 7% of revenues range.

This does not seem to support SoundExchange’s argument that asking the CRB judges for the greater of 30% of revenues or $.0019 per performance (which, in the current advertising environment, works out to effectively about 75% to 300% of revenues) is "fair."

The CRB judges weren’t asked by Congress to decide on a rate that was fair — the record industry had inserted a clause into the DMCA (“willing buyer / willing seller”) that gave the judges a different instruction.

In the long run, however, as seen in the SoundExchange quotes at the top of this essay, fairness eventually matters.

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