1. What is being debated?
The debates during the last 12 months stem from the industry’s transition to a new business model. Digital radio services are frequently at odds with rights owners and performance rights organizations over the amount of royalties they pay. The two sides have the opportunity to negotiate terms agreeable to both. When agreements aren’t reached, the two sides are subject to rules and rates determined by the government. Government appointees set statutory royalty rates paid by services like Pandora to labels and artists. A court may determine royalties paid to publishers and songwriters. But broadcasters will seek alternate paths when agreements cannot be reached. Recently, broadcasters in pursuit of better outcomes have used additional tactics like the Internet Radio Fairness Act and, specifically to Pandora, the purchase of a broadcast radio station.
2. Why don’t labels pull their repertoire from Pandora?
Noninteractive webcasters like Pandora perform sound recordings with a compulsory license created by Congress. This means webcasters can perform any recording without permission from the owner (terrestrial broadcast radio works the same way) and labels cannot prevent webcasters from playing their music. Some webcasters have chosen to negotiate direct deals with labels. Slacker negotiated licenses rather than use the compulsory license. Apple has also negotiated licenses for its upcoming iTunes Radio.
3. What is the Copyright Royalty Board?
Appointed to staggered, six-year terms by the Library of Congress, the three judges on the Copyright Royalty Board determine the rates and terms of statutory licenses and how the royalties are distributed. During rate proceedings, the various parties — webcasters on one side, rights owners on the other — present their cases by introducing evidence and presenting witnesses before the CRB.
In the United States, the royalties paid by satellite radio, cable radio and most webcasters are fundamentally different from the royalties paid by on-demand services (Spotify, Rdio) and download stores (iTunes, Amazon). The CRB sets the rates paid by services that use the compulsory license established by Congress for digital broadcasters like Pandora, SiriusXM and Music Choice, the cable radio service. Other types of digital music services (iTunes, Amazon, Spotify, Rhapsody) negotiate with labels the amount that they pay.
4. Does Pandora pay a rate set by the CRB?
No, not currently. The Webcaster Settlement Act of 2009 allows small and large pureplay webcasters to pay lower rates than the ones set by the CRB in 2007. Under the 2007 rates, Pandora would have paid 0.19 cents per stream in 2010. Under the settlement, Pandora paid 0.097 cents per stream in 2010 for ad-supported streams (and 0.22 cents for subscription streams). These rates run through 2015. Many other companies pay CRB rates.
5. Why is Pandora’s royalty rate different from those for satellite and cable radio services?
The CRB uses different standards for different types of digital radio services. The 801(b) standard applies to services that existed prior to the enactment of the Digital Millennium Copyright Act of 1998. This standard uses a set of four criteria that takes into account not just economic factors (fair return, the investment required by both parties, minimization of disruptive impact on an industry) but also sets a goal of maximizing the public availability of the creative works. Pandora and other services established after 1998 pay a rate the CRB establishes with what’s called the “willing buyer, willing seller” standard. This standard attempts to approximate what a buyer and seller would negotiate on the open market.
6. What is a consent decree?
ASCAP and BMI each operate under a consent decree, or binding judicial judgment, with the U.S. government. Each consent decree was signed in 1941 and stemmed from a lawsuit brought by the Department of Justice under the Sherman Anti-Trust Act. As a result, both performing rights organizations are obligated to fairly set rates and issue licenses. The consent decrees allow parties to negotiate rates. Parties unhappy with rates or unable to acquire a license can appeal to the court that oversees the consent decree.
7. What is the rate court? Why does it matter?
A rate court was established by amendments to ASCAP and BMI’s original consent decrees. The amendments allow for a district court to act as the rate court that handles disputes between broadcasters and the two performance rights organizations. The rate court is important because it sets royalty rates in lawsuits between parties that cannot reach a deal. Pandora is currently involved in two lawsuits before the rate court. In December, Pandora sued ASCAP and asked the rate court for “reasonable fees and terms” commensurate with ASCAP’s catalog and deals offered to competitors. Then in June, BMI sued Pandora and asked the court to set “reasonable, market-driven fees” after the two sides failed to successfully negotiate rates.
8. Why are publishers pulling digital rights from BMI and ASCAP?
A number of publishers have pulled their digital rights from the performing rights organizations. Sony/ATV Music Publishing, EMI Music Publishing and Universal Music Publishing Group believe they can negotiate more favorable rates than ASCAP and BMI can achieve while being limited by consent decrees and the rate court. The consent decrees mean a digital service can perform ASCAP and BMI repertoire even though rates haven’t been determined. But if a publisher pulled digital rights from ASCAP and BMI, a digital service that performed either organization’s repertoire without a deal in place would be in violation of copyright law. Thus, a publisher has more negotiating power by negotiating directly with digital services rather than going through ASCAP and BMI.
9. Are publishers and labels aligned?
Publishers and labels don’t have a tactical alliance nor are they coordinating their responses to Pandora, sources tell Billboard. Labels and artists make up one coalition. Publishers and songwriters are part of an entirely different coalition. However, the timing of events and a shared sense of frustration have meant that the messaging coming from both parties has converged. This may give the impression that the two sides are acting in concert.
When it comes to Pandora, publishers and labels don’t have the same interests. In a strategic sense, the two parties are competing for the same pot of money. Publishers are unhappy that they receive roughly one-fourteenth of the royalties that Pandora pays to labels and artists. Labels are protecting their share of the pie.
10. What are fair royalty rates?
Both sides of the debate appreciate the value of music but place a different value on it as an input to a business. Through its lawsuit against ASCAP and its support of IRFA, Pandora has argued that it is entitled to the lower rates afforded to other radio services. Rights owners and artists counter that it would be unfair to lower rates just as Pandora starts to generate significant revenue.
Royalties negotiated on the open market, without the involvement of government, are fair or close to it. Sony/ATV negotiated a 25% rate increase from Pandora after it pulled its digital rights from ASCAP and BMI. On the sound-recording side, iTunes Radio represents an open-market negotiation between labels and a noninteractive Internet radio service. Billboard estimates royalties paid to independent labels are, on the low end, slightly above the 0.12 cents per stream paid by Pandora for ad-supported streams. Taking into account streams for which Apple will not pay royalties, and assuming an average song length of four minutes, the effective per-stream rate would be 0.124 cents. -Ed Christman and Glenn Peoples