Reason 1: Rates set under false pretense
In a negotiation class I took during b-school, we learned of the importance of the anchoring effect. The basic gist is that the first person to put forward a proposed number (price, quantity, revenue-share rate, whatever) often is able to “anchor” subsequent negotiation, creating a relatively higher or lower starting point and ultimately influencing the outcome to his or her benefit. (Of course, if a proposed number is completely off-the-mark, the other party may just walk away, assuming there’s another good alternative.)
In the final ruling of the Copyright Arbitration Royalty Panel (“CARP”) in 2002, there were arguably 3 things that got anchored:
- There *would* be a royalty required for the radio-style performance of a sound recording that happened to be delivered over the internet
- That royalty would be paid on the basis of fixed rate per unit (X cents per “performance” = per song, per listener)
- That rate would be initially established at $.000762 (= roughly 1 cent per hour, given ~14-15 performances per hour on average)
The notion that a sound recording royalty should be paid for radio delivered over the internet (or over cable or satellite, for that matter) was codified by the Digital Performance Right in Sound Recordings Act (“DPRA”) of 1995. And because the digital medium of the internet is inherently interactive (unlike cable or satellite), the criteria for qualification was further clarified in the Digital Millennium Copyright Act (“DMCA”) of 1998. But, importantly, internet radio would pay for sound recordings, unlike traditional (terrestrial) radio, which was viewed as a promotional vehicle supporting the sale of recording music (and for which the cash traditionally flowed in the other direction via “payola” or indie promoters). The WSJ covers this fact quite nicely (subscription required but covered in RAIN today).
Personally, I think radio should pay a royalty to the performing artist and label, but the rate must be something that allows businesses small and large to participate, and the rate should contemplate the fact that radio does, without question, drive music acquisition (legal or not). In economists’ parlance, music is an “experience good” – you don’t know you like it until you try it. And 30-second samples just don’t cut it. In fact, without internet radio of some form, one could argue there really is (or rather, will be) no other good, legal way to expose new music in both the Head (the “hits”) and the Tail. (I still don’t think that most people who download an MP3 from a blog are likely to go out and buy the same track.)
In any event, my primary point of this post is to highlight that the initial rates set for the sound recording royalty were done under false pretense. Basically, the CARP process looked to a “willing buyer/willing seller” standard and used the only deal that met this criteria and involved a webcaster with sufficient power in the negotiation: a deal between Yahoo and the Majors. Unfortunately, Yahoo intentionally sought a relatively expensive rate that (1) would shut out competitors, and (2) allowed them to pay relatively less through use of multicasting technology, which smaller webcasters could not take advantage of, except by working with Yahoo.
Doc Searls explains this nicely in a recent post, but I think a quick read of Mark Cuban’s email to RAIN pretty much says it all, describing why an inappropriate “anchor” was created for both the basis of the royalty (per-performance rather than percentage-of-revenue) and the magnitude of that rate. And now, five years on, this rate anchor has proven the starting point for an even more onerous outcome. Here’s Mark Cuban’s email:
It’s very interesting that they built this on the Yahoo!/RIAA deal.
When I was still there (the final deal was signed after I left Yahoo!), I hated the price points and explained why they were too high. HOWEVER, I was trying to get concession points from the RIAA. Among those was that I, as Broadcast.com, didn’t want percent-of-revenue pricing.
Why? Because it meant every “Tom , Dick, and Harry” webcaster could come in and undercut our pricing because we had revenue and they didn’t. Broadcasters could run ads for free and try to make it up in other areas so they wouldn’t have to pay royalties.
As an extension to that, I also wanted there to be an advantage to aggregators. If there was a charge per song, it’s obvious lots of webcasters couldn’t afford to stay in business on their own. THEREFORE, they would have to come to Broadcast.com to use our services because with our aggregate audience, if the price per song was reasonable, we could afford to pay the royalty AND get paid by the webradio stations needing to webcast.
More importantly — and of course I didn’t tell the RIAA this — we had a big multicast network (remember multicasting? Yahoo! didn’t seem to after I left). Well, multicasting only sends a single stream from our server, so that is what we would record in our reports for the RIAA, and that is what we would pay on.
So that was the logic going into the Yahoo!/RIAA deal. I wasn’t there when it was signed, but I’m guessing and I’ve been told that there weren’t dramatic changes.
Now, no one asked me any of these things prior, during, or after the first or second pricing. I’m not sure that this matters. But if it does, here it is: The Yahoo! deal I worked on, if it resembles the deal the CARP ruling was built on, was designed so that there would be less competition, and so that small webcasters who needed to live off of a “percentage-of-revenue” to survive, couldn’t.
There you have it, if anyone cares.
Filed under: valuation, ventures | Leave a Comment