Reason #2: Rates are WAY out of line with comps

14Apr07

I’ve been remiss in outlining my 5 reasons why the proposed internet radio royalties for the “performance of a digital sound recording” are, well, not great and will, if not clarified and revised, destroy the legitimate webcasting industry (that is, an industry from which labels and artists can derive payment), at least in the US (as some webcasters may simply migrate elsewhere since reciprocal licensing arrangements between countries still appear to be years away).

Perhaps most obvious of these reasons is that the new rates are simply way, WAY out of the ballpark in relation to any other reasonably comparable measure. The copyright judges were instructed to look to a “willing buyer/willing seller” standard – i.e. evidence of similar, existing rates that were negotiated in the marketplace – to inform their process of rate determination.

Well, for the last 5 years, there’s been little or no such negotiation for internet radio; after all, the compulsory license for webcasting has been in effect since 2002. The only “willing buyer/willing seller” rates considered previously (i.e. in setting those rates back in 2002) were those negotiated between Yahoo and the Majors, which as discussed earlier, were established under false pretense.

Given these facts, other licensing deals to which the judges could look for evidence of relevant willing buyer/willing seller rates fall into two categories, broadly:

  • Music delivered through media other than the internet in a radio-style manner (meaning basically “passive” listening to music of a known format or genre)
  • Music delivered through the internet in manner “superior” to radio (i.e. on-demand access to a specific artist or track, not unlike playback of a CD)

The first category – other forms of radio – comprises 4 basic channels for delivery:

  • Terrestrial (Clear Channel, CBS Radio)
  • Cable (MusicChoice, DMX)
  • Satellite (XM, Sirius)
  • Internet (Last.fm, Pandora)

Since the first 3 of these are inherently one-way – not interactive, as with the internet – royalties cannot be assessed on a “per-performance” basis. After all, there’s no way to know exactly how many people are listening to a particular song at a particular time on a channel on XM. Rather, royalties paid to the label and performing artist for a sound recording, and to the publisher and songwriter for a composition, both in the US and internationally, are calculated as a percentage of revenues.

So here’s the rundown for rates in the US, to the best of my knowledge:

Composition royalty [1]
==================
Terrestrial: 3-4%
Cable: 3-4%
Satellite: 3-4%
Internet: 3-4%

Sound recording royalty
===================
Terrestrial: 0% [2]
Cable: 8-10% [3]
Satellite: 5-7% [4]
Internet: 25-40% [5]

Quick comments on each:

[1] Composition royalties paid to ASCAP, BMI and SESAC are consistent across all types of radio. Since such royalties have been paid by terrestrial radio for years, there was clear precedence to guide negotiated rates between the “newer” forms of radio (cable, satellite and internet) and these royalty collection organizations.

[2] Terrestrial radio has historically paid – and even today pays – nothing, zero to the performing artist and record label. This is because it was determined long ago that radio play is promotional, despite that many a young person (myself included) used to tape favorite songs off the radio. In fact, historically, the money has flowed in the other direction. During the payola scandals of yore, labels paid radio stations outright to play their music. Even after being outlawed, this practice continued in the form of so-called “indie promoters” until recently. Admittedly, because there were fewer alternatives for radio listeners in times past, a label’s paying a relatively small number of radio stations made good sense. Today, there are myriad options for a listener, so it’s much harder for a label to use cash to ensure radio exposure (illegal or not). But this does not change the fact that radio affords essential exposure, irrespective of delivery channel.

[3] + [4] There are merely estimates that I’ve heard quoted at various times but I’m confident are not far from reality.

[5] Based on first-hand experience at Live365 and discussions with other large webcasters, this is the effective percentage-of-revenue rate that results from dividing the historical royalty rate of $0.000762 per performance (per song, per listener) by total webcaster revenues. This rate would be even higher than 50% for many small webcasters except that they were ultimately given the option to pay 10-12% of revenues as a result of the Small Webcaster Settlement Act of 2002.

But remember, the new proposed rates are expected to increase from the already-high rate of 25-40% of revenues to 2.5X that level by 2010. So while the advertising market for internet radio may well improve over the next 4 years, the baseline calculation for the CRB’s proposal (today’s sound recording royalty rates expressed as a percentage of revenue, multiplied by the proposed increase) works out to 25% x 2.5 = 63% of revenues on the low end, and 40% x 2.5 = 100% of revenues on the high end. Further, the fixed percentage-of-revenue alternative is now gone for small webcasters, meaning they’d be forced to pay far in excess of total revenues.

And this, again, is all prior to paying composition royalties (at the considerably lower rates noted above) and bandwidth costs, plus employee salaries, equipment and overhead – let alone any hope for a fair and reasonable profit.

Instead, the CRB decided that on-demand delivery of music provided a better licensing comparable by which to establish rates for radio play on the internet. Services like Real Rhapsody, Napster and Yahoo Music Unlimited provide all-you-can-eat streaming on-demand of any of millions of directly-licensed tracks for $10-$15 per month. In some cases, this even includes portability, such that you can take your favorite tracks and download them to an iPod-like device to take with you. How is this different from CD purchase and playback?

For one, it’s an ongoing subscription that must be paid to keep your music. Further, you can’t play these tracks on an iPod because Apple doesn’t support such a service, at least yet. And, of course, not all music has been licensed for these on-demand subscriptions. But, nonetheless, these offerings are arguably much closer to “ownership” than the ephemeral nature of radio, given that a subscriber can select any song he wishes at any time, and play it back on demand, on a computer, on a stereo and on a handheld device.

In a sense, the CRB set the royalty rates for internet radio as if it were a direct substitute for ownership, i.e. downloads or on-demand streaming. While tech-savvy people may be able to record streams off the internet, this is not the case for mainstream consumers, and such a scenario likewise pertains to satellite and cable radio. In any event, it’s clear that the CRB chose the wrong comparable, and if the royalty rates for radio are priced to reflect an ownership model, then the most important means for the legitimate, non-cannibalistic exposure of music will be squelched, to the detriment of consumers and creators alike.

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One Response to “Reason #2: Rates are WAY out of line with comps”

  1. I’m surprised no one has looked at jukebox rates. Current jukeboxes in bars are mostly done by TouchTunes and eCast. Both of them are internet connected, have the ability for users to play songs on demand, and the way the royalties work are a) annual jukebox licensing fee (something like $300 a jukebox annually, down to less than $100 if a single operator has enough), b) public performance annual fee that the location (bar, whatever) has to pay, and c) music licensing fees (which, in traditional jukeboxes are paid for the music that’s bought to put in them, but ‘net boxes pay per song played).

    Also, the amount of listeners is irrelevant when determining pricing. The newer jukeboxes pay something like a penny per play in royalties, but that could be for a room of 50 or more people. The same internet stream would be charged for EACH one of those people listening, and would wind up being FAR more than a penny per song played.

    I just haven’t seen anyone using the jukebox pricing example, as it seems the closest with a) public performance, and b) selectable play by users.


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