Major stakeholders are expected to make their case on Wednesday in a Congressional hearing that will set the stage for what is likely to be a long battle over Internet radio royalty rates.
At stake are hundreds of millions of dollars in fees paid by Internet radio providers such as Pandora Media, Slacker Radio, Clear Channel's iHeartRadio and others that rely on the Internet to stream music to millions of online listeners.
Though federal lawmakers are not expected to take action on this topic until next year, the hearing, held by the House Judiciary Committee, is an important opening round, a chance by all stakeholders to set the tone and begin shaping the type of public opinion that can sway political votes.
Among the list of heavyweight speakers lined up for Wednesday's hearing are Pandora CEO Joe Kennedy, National Association of Broadcasters president Bruce Reese, Recording Academy chairman emeritus Jimmy Jam, and SoundExchange president Michael Huppe. In addition, two experts are expected to testify, including David Pakman, partner of Venrock Capital, and Jeffrey Eisenach, managing director of Navigant Economics. For updates on the speaker list, check the Committee's information page on the hearing.
In a nutshell, the main issue is whether Pandora and other radio webcasters should pay the same sound recording royalty rates as satellite radio company, SiriusXM, and cable music provider, Music Choice.
"Under the current framework, there are very different royalty rates for different technologies," said John Villasenor, a professor at the University of California in Los Angeles and a senior fellow at the Brookings Institution's Center for Technology Innovation. "There's a real inconsistency. Most people agree that it doesn't make sense to have such dramatically different rates across different services. The disagreement is over what we should do to address those differences."
Pandora has argued that Webcasters should be subject to the same rate standard as SiriusXM, whose rates are determined by the U.S. Copyright Royalty Board under a formula that takes into account the ability to make the copyrighted artwork as widely available while also fairly compensating the artist. Under that standard, SiriusXM pays 8% of its revenue in royalty fees, a rate that is likely to go up, Villasenor predicted.
Pandora currently operates under a "willing buyer, willing payer" market-based royalty standard. As a result, the Oakland, California-based company has historically paid more than 50% of its revenue in royalties. In the first six months of this year, for example, Pandora forked over $116.3 million in royalties, nearly 64% of its total revenue.
"I do believe that there is a very happy common ground that will allow Internet radio to flourish that is fair to everybody," Tim Westergren, Pandora's co-founder, tells Billboard.biz. "But I think that we're in a place that makes no sense. One form of radio is subject to a completely different set of rules than the competition, and there's no justification for that."
A number of interest groups have lined up against Pandora, arguing that Pandora is simply seeking to lower its royalty payments. Those groups include SoundExchange, a non-profit organization that collects digital radio royalties on behalf of artists, the Recording Industry Association of America, the Recording Academy and others that havebanded together under the umbrella of the MusicFirst Coalition. The coalition has rounded up more than a hundred artists who have signed a letter to lawmakers saying Pandora wants to "gut the royalties that thousands of musicians rely upon." Those who have signed the letter include Natalie Cole, Big Sean, David Sanborn, Pink Floyd and Roger Waters.
Because of the sheer complexity of the issues, both sides have tried to boil the arguments down to simpler soundbites -- Webcasters want fairness, while artists say they're not getting enough money as it is.
As a result, Wednesday's hearing is an opportunity for each party to claim the higher ground as a prelude to next year's main event, when lawmakers are scheduled to consider legislation that could determine the flow of Internet radio royalties for years to come.