There’s a battle going on over the notion of fairness in royalties. The word fairness is being tossed around quite a bit by stakeholders as royalties are being established for fast-growing digital music platforms. I read and hear the word all the time.

One component of the fairness argument concerns the performance right for sound recordings. Broadcast radio doesn't pay for the use of sound recordings (although it does pay for the musical work, as I'll discuss below). Digital radio pays for the use of both sound recordings and musical works. The fairness of the lack of a broadcast radio performance right for sound recordings is a subjective matter. Opinions seem to be split down party lines.

The amount of the royalties each pays is a different matter. Are digital radio royalties less fair than broadcast radio royalties? Again, that's a subjective matter and opinions will vary. But we can take a quantitative approach to see how similar to two royalties are.
It may surprise you to learn that songwriters and publishers get roughly the same royalty from both broadcast and Internet radio. To understand that requires a different way of thinking how broadcast royalties are earned.

At his Rockonomic blog, David Touve of the University of Virginia estimates ASCAP collects the same amount of royalties, 18 cents, per 1,000 impressions from both broadcast radio and Pandora. That is to say, both broadcast radio and Pandora generate the same amount royalties per individual listener for each performance. 

How can that be? How can the two formats pay the same royalty rate when broadcast radio royalties are so large? There are two reasons; the way royalties are paid and the scale of the two formats.

While people know what Pandora pays for each stream to an individual listener, broadcast royalties are not broken down at an individual level. Nobody knows how much a radio station pays to broadcast to that truck driver on westbound I-40. Pandora pays per impression -- an individual hearing a song -- while broadcast radio stations pay a percent-of-revenue fee.

The numbers: Touve started with ASCAP's disclosure that 1,000 plays on Pandora pays 8 cents to songwriters and composers. Taking into account the publisher's share and ASCAP's 11.6% expense ratio (in 2012), he arrived at an all-in figure of 18 cents per 1,000 plays, or $0.00018 per stream. To calculate broadcast radio's royalty, Touve took into account estimated PRO collections in 2012 ($385 million), the number of monthly broadcast radio listeners in 2012 (240 million, per Arbitron), average weekly radio listener hours in 2012 (14.46, per RAB) and an assumed 12 songs heard per listening hour. (The royalty changes as the assumption of songs heard per hour is increased and decreased.)

Difference in size is the other reason broadcast radio seems to pay more. As I’ll explain in an upcoming ThinkTank piece in Billboard magazine, the current top-streaming song in the U.S. (as tracked by Nielsen, and excluding Pandora) has just a small fraction -- in the single digits -- of the audience of a #1 song on Billboard’s Hot Airplay chart.
What's fair and what's unfair is a different matter and on ongoing debate. But the numbers say what the numbers say.