While the future of internet radio companies such as Pandora and Last.fm faces growing uncertainty, the battle between webcasters and the recording industry has again come to a head as Congress met recently to discuss the appropriate royalty structure for digital radio.
Last March, the Copyright Royalty Board rejected arguments from both sides, ruling that internet broadcasters would be required to pay each time they played a song for each user who heard it, at a predetermined rate based on a "willing buyer, willing seller" standard, set to increase annually over the next four years. In just the first year, royalties paid as a result of this formula by Pandora, for example, accounted for over 70% of its revenue, threatening to run the internet radio company out of business.
Before the 2007 decision, internet radio companies were treated the same as terrestrial radio broadcasters. They were only required to pay composers of songs by purchasing blanket public performance licenses from ASCAP and BMI. The 2007 change was to account for the argument set forth by the recording industry that internet play is a "substitute" for purchase of the actual recording, diminishing the amount of income an artist might otherwise receive. Digital broadcasters counter that their services in fact result in increased sales, and without dependence on record companies. When a user searches an artist he likes on Pandora, he is instantly led to stations that play songs by similar artists, creating additional artist exposure and generating music sales as a result.
In light of the detrimental effect the new standard has had on internet radio and the interest in accommodating new technological mediums, the recent hearing in Congress discussed two new bills addressing the royalty rates. The PERFORM Act, favored by musicians, would get rid of the "willing buyer, willing seller" standard and subject all radio services, including satellite and cable, to the same "fair market value" standard, based on what value would have been received had the author been able to license the work in the marketplace. The Internet Radio Equality Act, on the other hand, backed by webcasters, would lower internet radio royalties to 7.5% of revenue, and adopt a standard based on Section 801b of the Copyright, evaluating such factors as maximizing availability to the public while maintaining a fair return to authors, for all future proceedings. The 801b standard is the same used to compensate authors when recording companies pay for use of a composition to make a recording, so webcasters argue the same standard should be used in this case. While there are clear differences between the two proposals, the debate has created a glimmer of hope that a resolution could be found in that the recording industry has not ruled out use of the 801b standard over a "fair market value" standard, insisting, however, that the 801b standard be tweaked to reflect current market realities.
Vol. 53, June 2010