Must Pandora die?
The Internet radio royalty crisis may be coming to a head, as one of the country’s most-beloved webcasters, Pandora, tells the Washington Post that it is on the verge of shutting down over the issue (here).
As you know, the problem in a nutshell is that whereas all other forms of radio in the U.S. and around the world pay about 3%-5% of their revenues as a royalty to songwriters and 0%-7% of their revenues as a royalty to labels and performers, last year the U.S.‘s Copyright Royalty Board (CRB) set that second royalty rate for Internet radio to the equivalent of 70% to 300% of revenues.
While there’s a judicial appeal of this decision in progress, plus occasional negotiations going on between SoundExchange (representing labels and musicians) and various subsets of webcasters, plus bills introduced in Congress that would roll back the CRB decision, none of these fixes may happen before Pandora’s venture capitalists decide to give up and pull the plug on the service.
What are they thinking?!I’ve been talking to several journalists this week about the issue, and the question they always ask me is this: “Trying to bankrupt your industry doesn’t make any sense! WHY is SoundExchange doing this?”
As near as I can read the situation, there are several phenomena at play simultaneously that explain their seemingly-irrational behavior:
CONFLICTING INTERESTS WITHIN SOUNDEXCHANGE: The SoundExchange board consists of people representing a variety of different interests — major labels, indie labels, and musicians — and thus may be at an impasse.
Internet radio is clearly good for musicians and good for indie labels, so the major label guys may well be thinking, “Anything that’s good for them might not be as good for us.” My guess is that these internal conflicts may be blocking any productive movement.
RECORD INDUSTRY LAWYERS RUNNING THE PROCESS: Music industry lawyers have a reputation, deserved or not, of being greedy, litigious guys who only think about short-term victories and power plays, not what’s in their industry’s long-term best interests.
These are the same lawyers who, when they were trying to shut down the original Napster in 2001, were told “Don’t do it! Napster is controllable; if you shut it down, you’ll unleash a new generation of peer-to-peer services that will be uncontrollable. You’ll be in much worse shape!” But they did it anyway. For all intents and purposes, it’s really record company lawyers who unleashed BitTorrent and Limewire on the world.
And these are the same lawyers today who are suing grandmothers and poor people for thousands of dollars every week in file-sharing lawsuits, really damaging their lives, even though they’re doing hardly anything to get any worthwhile PR benefit from it.
As long as it’s these guys charged with running this process, we may see that type of behavior.
FEAR OF THE NEW: Here’s a theory: The executives running the music industry don’t like new technology or new business models in any way, shape, or form, so in their minds they’ve lumped us in with home-taping and CD-ripping and file-sharing. (“Anything new is bad.”)
A BIGGER PATTERN OF COPYRIGHT LAW ABUSE: Copyright law was originally designed to benefit the public — by balancing the needs of creators and distributors. What we’re seeing here, specifically in the DMCA, is part of a movement by the entertainment industry to subvert copyright law to simply maximize the revenues of copyright owners, with no more concern for copyright users or the general public.
That may be why SX’s John Simson told the Senate Judiciary committee that the traditional 801(b) standard for rate-setting, which balances the needs of copyright owners, copyright users, and the general public, is “outdated.”
BIG LABELS’ DESIRE TO MAINTAIN POWER & CONTROL: Independent labels and artists generally welcome the opportunity for the fair and open access that Internet radio offers to all artists and labels. (Prior to Internet radio, radio airplay could be accessed only by the very small number of major label artists who had the benefit of traditional big budget record industry promotion to large broadcasters.)
As musician Matt Nathanson testified at the recent Senate Judiciary hearing, Internet radio has broken the huge bottleneck for artist development and growth that this system represented. On the other hand, the four major labels and their trade association, the RIAA, see the new level playing field that Internet radio establishes as a threat to the old system which they controlled and dominated.
The four major labels seem to have a collective blocking veto over all royalty decisions at SoundExchange; as a result, their view has dominated SoundExchange’s position, even at the expense of its other members.
WE’RE MERELY A STEPPING STONE TOWARD BROADCAST RADIO: This whole conflict may very well simply be part of a longer-term game plan on the part of the record industry to try to get a performance royalty out of broadcast radio. In other words, the big labels may be willing to kill our industry just to give themselves a better negotiating position when they go after that industry.
By the way, as has been noted here in RAIN before, the National Association of Broadcasters (NAB) has been very tame in its support of webcasters, even though most of its members are streaming, perhaps conflicted because they see Pandora, et al., as potential competitors someday. However, this weak support is going to come home to roost soon, as SX says that for “parity” reasons broadcasters should pay what webcasters are paying.
ConclusionIf Pandora is forced to shut down, the outrage will be huge — among consumers, journalists, bloggers, working musicians, and even Congressional staffs.
That will be the tipping point that either (1) triggers a consumer backlash against the RIAA, which, if expressed in the form of a boycott, as some bloggers have proposed, could cost the industry hundreds of millions of dollars in record sales, (2) leads to belated reasonable negotiations from SoundExchange, and/or (3) spurs Congress to pass the Internet Radio Equality Act.
But Pandora dosen’t deserve to be the sacrificial lamb that keeps other webcasters alive. They’re loved by millions of listeners, and they’ve been great for musicians, fair to labels, and generous to their fellow webcasters.
Either SoundExchange or Congress should act quickly enough to stave that outcome off.
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