Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions
Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

Get ready for a fight over Internet royalties ­ just don't expect the full fight to happen this year. Sources say the Internet radio bills introduced last week are merely setting the stage for a bigger battle in 2013 due to the current lame duck Congress.

Representatives Jason Chaffetz (R-UT), Jared Polis (D-CO) and Senator Ron Wyden (D-OR) introduced versions of Internet Radio Fairness Act last week that create a level playing field in Internet radio royalties across various platforms. The bills call for the adoption of what's called the 801(b) standard for setting webcasting royalties. This is the same standard used for setting royalties for satellite and cable operators.

The Chaffetz bill is sure to run into heated opposition next year. Sources say the RIAA is expected to put its full opposition against the Chaffetz, Polis and Wyden bills while backing an opposing bill by Congressman Jerrold Nadler. Currently in a draft form, the Nadler bill would raise the royalties of Sirius XM, Music Choice and Muzak ­ which were set using 801(b) ­ up to the market-based standard applied to webcasters. The bill would also account for, on an interim basis, the lack of terrestrial royalties for sound recordings by adjusting upward the royalty paid by a broadcaster for the live radio simulcast.

The war of words is likely to come down to a matter of big versus small webcaster royalties. The issue is far more complex and nuanced than it appears at first glance. One has to wonder if artists would be better off with higher royalties if they lead to a smaller Internet radio market. Of course, there is no guarantee lower royalties will lead to a boom of profitable, sustainable companies. And if artists should take a little lower royalty now, how long is it going to take for them to reap the benefit of a healthier Internet radio market? After all, careers can be very short-lived.

Artists and labels are taking the stance that the 801(b) standard would give webcasters a royalty that's below the market rate. "The Recording Academy instead supports Rep. Jerrold Nadler's legislation, which achieves true rate parity while fairly compensating artists," said Daryl P. Friedman, Chief Advocacy & Industry Relations Officer, The Recording Academy, in a statement to Billboard.biz.

Pandora argues lower rates are needed to help the Internet radio market grow. "I think it's very telling that broadcast radio, except for Clear Channel, has really not invested in web radio," Pandora founder Tim Westergren tells Billboard.biz. "When you consider that a lot of people would say that's the future of radio, the fact that the incumbent industry is kind of ignoring it is pretty extraordinary."

Pandora has started the political fight early this year, hiring a lobbying and testifying before Congress. The company has hired Seth D. Greenstein, a partner at the D.C. office of Constantine Cannon to help its work on royalty rate-setting. According to his biography, Greenstein concentrates on intellectual property litigation and licensing issues and co-founded the Digital Media Association. According to The Hill, Pandora has been running display ads on its mobile app that read, "Stop discrimination against Internet radio" that encourage listeners to call their members of Congress.

The RIAA will like its chances regardless of who wins the elections in November, according to sources. If Republicans keep the House, Rep. Bob Goodlatte will chair the House Judiciary Committee. If Democrats take the house, the Subcommittee could be chaired by either John Conyers or Nadler. All three have been supportive of the RIAA in the past, sources say.

Numerous trade groups, such as the Consumer Electronics Association (CEA) and the National Association of Broadcasters (NAB) support the parity bills also favored by webcasters such as Pandora. Some of these trade groups were responsible for the demise of anti-piracy bills SOPA and PIPA. But the outcome could be different this time. As one Washington D.C. insider notes, "It's easier to kill a bill than to make one a law."

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