Recording executives applauded Clear Channel Media and Entertainment's breakthrough decision to pay artist royalties for terrestrial radio airplay in a new agreement with country music label Big Machine, but a congressional hearing this week also illustrated how the deal may turn out to be a double-edged sword for the music industry.

For about 80 years, labels have tried to get a sound recording royalty paid to performers - songwriters and publishers have long received royalties whenever their tunes are played on the radio - but the National Assn. of Broadcasters has so far thwarted every proposed legislative move. The NAB won't even call the new potential cost a "royalty," instead referring to it as a "tax."

Clear Channel's concession to pay a sound recording royalty for terrestrial radio is a huge win for the record industry since Clear Channel is radio's largest operator. Previously, radio broadcasters have refused to budge, arguing that the airplay promotes music and results in album or single sales that directly compensate artists.

While Clear Channel signed the sound recording performance royalty, split 50/50 between the label and the artist, the rest of the U.S. radio industry appears to be digging in its heels on the issue. The NAB even notes that, since the Big Machine/Clear Channel deal is a market deal, it proves that Congress shouldn't enact legislation to mandate such a royalty.

RIAA chairman/CEO Cary Sherman approved the Clear Channel deal in concept, reserving any full endorsement until he understands its specific terms. "I am delighted to hear that [CEO] Bob Pittman and Clear Channel [are] stating that artist and record companies deserve to be paid, and that promotion isn't enough," he says, adding, "We don't know if other radio groups will follow, so it doesn't solve the problem. We need an industry-wide solution."

At the House Subcommittee on Communications and Technology, the NAB's political action committee trustee Steven Newbury laid out the radio industry's case against the performance royalty in testimony submitted before the hearing. According to Newbury, radio doesn't replace sales, it promotes them; the digital radio performance right carved out in 1995 addresses piracy concerns, a factor that doesn't happen with terrestrial radio; and there isn't a sound recording performance right for any music played in stores, bars, restaurants, clubs and sports arenas. Finally, he argued that digital radio services don't have a mandate to provide public service to local communities, and those services aren't subjected to FCC restrictions or obligations.

The Clear Channel/Big Machine deal has also unleashed a fresh round of cries from radio and some new-tech music service providers for lower digital radio rates as well as pricing parity between digital radio and music services.

Tim Westergren, founder/chief strategy officer of online radio provider Pandora, supports fair artist compensation through sound recording performance fees, but he also calls for payment parity between various competing digital radio and service segments. "This lack of a level playing field is fundamentally unfair and indefensible," he says.

Currently, different forms of radio and digital services pay different rates. Last year, satellite broadcaster SiriusXM paid 7.5% of revenue, while this year that rate comes out to 8%. Pandora, under what's called a pure-play model, is stuck with whichever is greater: 25% of revenue or a 0.102 cents pay-per-play formula, which last year came out to 50% of revenue. Likewise, Clear Channel's iHeartRadio Web platform pays 0.2 cents per play.

"I can't build a business space based on paying money for every time I play a song, but I can build a business by saying I will give a percentage of revenue that I bring in," Pittman says. "What we are really trying to do is come up with a predictable model."

While Clear Channel and Big Machine won't disclose terms, sources say Pittman agreed to a deal conceived by Big Machine president/CEO Scott Borchetta that will have the radio company pay 1% of music advertising revenue for terrestrial radio and 3% of digital radio music advertising revenue for Web simulcasting; and for its small iHeartRadio listener playlist service, the same rates as Pandora.

Last year, Clear Channel Media and Entertainment produced $1.2 billion in earnings before interest, taxes, depreciation and amortization on revenue of almost $3 billion. While the percentage of revenue from music advertising hasn't been disclosed, Clear Channel would have paid labels and artists $31.2 million if the new deal had been in effect last year and offered to all labels based on its total revenue.

Pittman says he can't yet afford to try and make an overall deal with the entire record industry. He claims he's starting small to see how the new payment scheme works and whether it'll help digital radio grow. ••••