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

The language in the debate about the Internet Radio Fairness Act might not be about money, but you can be certain the issue is ultimately about money. The bill would change how the Copyright Royalty Board (CRB) determines webcasters' statutory royalty rates for the digital performance of sound recordings. A move to the 801(b) standard is likely to result in different rates.

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What people say in this heated debate often detracts from the issues at hand and questions people should be asking. Ultimately people need to ask what are the best rates for the long-term health of the digital music business that allows for innovation while ensuring rights owners and performing artists are compensated for their investments and efforts. This is not an issue of simply raising or lowering royalty rates.

Labels and distributors know this is about money. They now have a line item on their budgets for Internet radio. It's part of their budgets. They are not gearing up to fight over the rate-setting standard just because they feel they have a duty to take an obligatory position against the opposing side. Rights owners see Internet radio as a meaningful revenue stream that is only going to grow over time.

"Everyone knows access models are the future," one high-level executive told me recently.

Although he often speaks about the need for fairness in standards, Pandora founder Tim Westergren has said this issue is about royalty rates. In June he told Congress the current "disparity in royalties" meant Congress should "level the playing field," or reduce the difference between the higher percent of revenue webcasters pay SoundExchange versus the lower percent of revenue satellite radio and cable radio pay SoundExchange.

Westergren believes additional benefits will come from lower rates. In a statement given to in July, Westergren said fair rates would "drive more innovation in legal music distribution and ensure more artists are fairly compensated" for the performances of their recordings.

Clear Channel believes a different approach by the CRB will help grow the market. "Our position is that if the CRB has more info, they can make better decisions and it will benefit everyone concerned because the pie will be bigger," Clear Channel spokesperson Wendy Goldberg says. That means everyone from record labels, artists and consumers will be better off as a result of the CRB adopting the 801(b) standard, she says. Clear Channel has joined Pandora in support of the Internet Radio Fairness Act by joining the Internet Radio Fairness Coalition.

It is certainly possible that lower webcasting rates will encourage more companies to enter the webcasting market. And it is possible lower rates will help webcasters invest more heavily and improve their services. But it is difficult -- possibly impossible -- to know exactly what rate that will find the right combination of market entry and revenue generation. Lower rates could very well encourage sub-standard market entrants who were not innovative enough to compete when rates were higher. The marketplace may be worse off having lower rates and more marginal services.

But rates cannot be so high that new entry to the market is limited. SoundExchange works with more than 1,800 digital services, according to an August press release. If you look over the list of companies that have filed a notice of use under Section 114 with the Library of Congress, you will see there have been 3,370 companies to do so. That means some of them, such as Imeem and Lala, are now out of business or no longer simulcast. Many on the list are terrestrial broadcasters that simulcast over the web. Far fewer are pure-play webcasters, and fewer still have even the slimmest of hopes of reaching large audiences and actually growing the size of the market.

In addition, changing the royalty rates could have perverse affects on business models. Lower the rates too much and less-than-average business models could achieve profitability. But raise the rates too high and even good business models may be unsustainable.

Regardless of the language used, the issue here is ultimately money. The best way to think about the issue is to think about the long-term health of the digital music market. These bills aren't really about raising or lowering statutory royalties by fractions of cents. The issue isn't the alleged greed of either party. The bills are about helping a vital part of the future music business to flourish.

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