Guest Post: Meet the Free Market Royalty Act, an Elegant Solution to Some Complex Issues

Representative Mel Watt (D-NC-12) has introduced the Free Market Royalty Act (H.R. 3219), one of the most intriguing royalty proposals in years. The bill accomplishes two principal goals: Watt starts the process of getting the government out of the music business by eliminating the compulsory license for digital audio transmissions, and extends the sound recording public performance right to all audio performances.

Here’s why this is a productive solution to a knotty problem.

Anticipating the Market

The bill anticipates the market in two ways. First, it codifies what is already happening under private contracts between broadcasters and record companies. Broadcasters recognize the importance of paying for over-the-air transmissions and are doing so at an increasing rate. Although the compulsory license and statutory royalty regime still controls certain digital transmissions, it is becoming increasingly apparent that the rate-setting procedure for compulsory licenses is the domain of lobbyists, lawyers and those who can afford them.

While the compulsory license was useful when the Congress first adopted it in 1998, it has outlived that initial purpose. Last year’s choppy hearings on the Internet Radio Fairness Act demonstrated what a shambles the compulsory license can be when the market overtakes the process. Who can forget Chairman James Sensenbrenner’s trenchant challenge to Pandora at the IRFA hearing -- what if Congress did nothing? The implication being: What if Pandora had to negotiate like everyone else?

SoundExchange Is Key to the Solution

Watt’s bill also recognizes the value of keeping SoundExchange at the center of the private licensing in our future. Users of music need a reliable one-stop shop to get the rights they need for the public performance right in sound recordings. SoundExchange has been that shop both for rate negotiations that encourage innovation in the online music space and the payment of royalties to featured and non-featured artists, as well as sound recording owners. (And conducts royalty audits to enhance compliance.)

It’s a logical step in SoundExchange’s evolution to authorize it to issue blanket licenses, continue to collect and pay royalties and to audit licensees.

SoundExchange already negotiates royalty rates with many of the same licensees that are likely to seek a collective license under Watt’s bill. One would anticipate that the incremental transaction costs of collective licensing for over-the-air transmissions may well be quite manageable after the savings resulting from the elimination of costly rate-setting proceedings for the compulsory license.

Let the Market Do Its Work

The Free Market Royalty Act allows Congress to put the useful tool of compulsory licensing back on the shelf. Rather than get the government involved in arguments about royalty rates, the bill extends the performance right, tells the players they have to negotiate and with whom, and then gets the government out of the way.

Members can feel satisfied about having successfully used the compulsory license to attract capital to webcasting and satellite radio. Congress increased shareholder value through a robust system of well-defined property rights -- Pandora’s IPO and follow-on stock offerings and SiriusXM’s billion dollars of free cash flow are but two examples. The formation and growth of SoundExchange is another extraordinary benefit from the years we had compulsory licensing. And perhaps most importantly, all this provided fans with a significant number of legitimate, licensed and delightful alternatives to music piracy.

A raging success -- how often can we say that?

We can all appreciate Mr. Watt’s long standing commitment to getting a fair deal for all participants in the music ecosystem. But his Free Market Royalty Act recognizes that one job is done -- now it’s time Congress moved on to let the market do its work.

 Chris Castle is managing partner of Christian L. Castle Attorneys in Austin.