The Radio and Recording Industries' Unnecessary Roughness

One of the largest items hanging over the radio industry right now is the looming addition of a performance royalty payment from broadcasters to recording artists being pushed forward under the banner of MusicFirst, an acronym standing for “Music Fairness In Radio Starting Today”. MusicFirst is backed by a coalition of musicians, the Recording Industry Association of America, Sound Exchange, and a number of other organizations and unions who support the interests of performance artists.

Historically, composers of music have received copyright royalties from all exhibitions of their music through organizations such as ASCAP, BMI and SESAC, but performers of those musical compositions on the other hand only receive payment for certain exhibitions of their works. The biggest carve out from these royalties historically has been use of a performer’s music on broadcast radio stations, a practice in which the United States is generally out of step with many other developed nations.

With regard to composers, the radio industry is represented en masse by its own coalition called the Radio Music License Committee (disclosure: author was formerly a committee member), and every few years the two sides negotiate an agreement on what those copyrights will cost the radio industry. It’s generally not a pretty process, but in the end the two sides come to an understanding. In the instance of performance rights, however, the story is far different.

This exemption of payment obligation for performance rights on radio has been routinely debated between the radio and recording industries for more than 70 years through numerous legal proceedings and Congressional actions, but generally the decisions have come down heavily in favor of the radio industry. Of this current push for performance royalty payments, the National Association of Broadcasters [NAB], which is the largest trade and lobbying group on behalf of the broadcast industry, has labeled this a “Performance Tax”, and has vehemently opposed it on grounds of historical precedent.

At the core of the issue is the value that radio stations offer to recording artists for exhibition of their works. The recording industry will claim broadcasters are using their songs for free, while the broadcast industry claims that it is giving the musicians valuable free promotion airtime that stimulate record sales to which the radio industry enjoys no economic participation. As mentioned, in the past the court and legislative bodies have agreed with the radio industry, and though the debate continued it was generally a symbiotic relationship where each side benefited to a large degree. In the digital age however, this relationship has drastically changed, resulting in the issue once again reemerging.

The recording industry has seen significant drops in revenues over the past decade as music migrated to digital downloads where users could buy simply only the songs they wanted as opposed to being forced to buy whole albums. In addition, piracy of music became rampant in the late 1990’s through file swapping services such as Napster (NAPS) and many other internet platforms.

To counter this, as seen in the news headlines, the industry radically stepped up its enforcement against piracy going so far as to sue teenagers and their parents who illegally download music. They further lobbied Sound Exchange, the independent, nonprofit performance rights organization that is designated by the U.S. Copyright Office to collect and distribute digital performance royalties, to push for an increase in royalty rates collected from the likes of internet and satellite radio companies who use their musical performances. After receiving some backlash from internet radio start-ups, Sound Exchange was forced to modify their positions somewhat to this end. In general though, all exhibiters of music performances other than broadcast radio stations now pay some sort of fee to the recording industry for use of these performances.

Radio stations, on the other hand, are dealing with significant problems of their own right now. In a February 25th note to clients, John Blackledge, media analyst at JP Morgan declared “We believe the radio industry is already amidst an advertising recession”, and anyone who follows the sector knows that radio broadcasters have seen significant drops in their share prices over the past twelve months. In some cases, these declines are in excess of 70%. Radio broadcasters are themselves dealing with the impacts of digital distribution and faced with the daunting task of dealing with not only competition from satellite radio services XM Radio (XMSR) and Sirius (SIRI), but also the Apple (APPL) iPod and thousands of legitimate internet radio stations serving every conceivable market niche, some of which are backed by major technology players such as AOL (TWX), Yahoo (YHOO), and Real Networks (RNWK).

Simultaneously, as they are battling to retain listeners, radio stations are confronted with the likes of Google (GOOG) competing with them for advertising dollars and a general demand from ad agencies for greater accountability and more in-depth ratings information. As a result of these demands from advertisers, the radio industry is facing significant cost increases of approximately 65% from Arbitron (ARB) for its ratings services as it upgrades from the old diary system to the “Personal People Meter”.

All the while, the radio companies have to deal with repeated calls by the likes of Mad Money’s Jim Cramer and other financial gurus that radio is as dead as an industry gets.

If the recording industry is no longer benefiting from the promotional free airplay they receive from radio, then clearly the argument as to why radio should not have to pay them is no longer valid; however, it doesn’t necessarily mean that because the recording industry’s business model no longer works that the radio industry should be forced to entirely foot the bill. That is akin to a child breaking their toy and therefore feeling justified in taking one away from a sibling. That logic doesn’t work with most mothers, and it doesn’t work here.

It seems that the larger problem with the recording industry is that, far beyond the piracy issues, they have allowed legitimate online music sites like Apple’s (APPL) iTunes to completely devalue music recordings to the point at which any song costs only 99 cents to purchase. A hit song clearly should garner a higher price than a secondary track on the same album, and in any other business those items would be seen as premium offerings commanding a higher price point. Some artists have even begun to revolt against the one-off digital music sales model, with hip-hop mogul Jay-Z going as far to say that albums are entire bodies of work with a sequential story to tell, and therefore not to be sold in individual slices at all. It’s a very interesting position; neither a movie is sold one scene at a time, nor is a newspaper by individual section.

The record labels have also grossly over-distributed these songs, and diluted this content to such an extent that there is really no necessity to purchase new music, whatsoever. Long gone are the days when one waited beside a radio to hear a new song being played at the top of the hour or waited outside a record shop to get one of the first copies of an album as it was released. Today, the same song may get played on a radio station over and over every few hours, and across multiple stations in every market before it is even released for sale. Further with iPods, cell phones and other digital music players, one can hear pretty much any song they want, anytime they want, wherever they want. As a result, there is simply nothing really special about music anymore that forces consumers to pay a premium to own and listen to it early and often.

In addition, as Jeff Smulyan, CEO of Emmis Communications (EMMS) has previously stated, if the radio industry is forced to pay the recording industry for use of a musical performance, then that artist and record label should pay all fees due to the owner of the underlying composition that radio now pays through ASCAP, BMI and SESAC. In no other business would a vendor pay its supplier, and then also be forced to pay a fee to the underlying patent holder for the product design. The cost of that copyright fee should be factored into the wholesale price of the product the record labels are offering if radio is forced to pay a fee directly to the recording industry.

These criticisms of the recording industry’s business model are not to say that broadcast radio stations should be allowed to continue to be the only ones who do not compensate all artists involved in the creation of musical and other performances. The logic to the argument that radio promotes artists could just as easily be ascribed to the satellite and internet stations that do the same thing, but do pay a fee to Sound Exchange for performance rights. Even though broadcasters do pay those same fees when they retransmit their signals over an internet stream, they do not pay it on their primary over the air use of the music, and it’s simply not fair to these other distributors of radio content.

Far beyond that, as a result of its prevalent and continued position of isolationism and protectionism where the broadcast industry’s first response to anything new or different seems to be to send the NAB out to shoot it, the radio industry has missed a huge window of opportunity to better their own hand in this debate. If the industry would adopt the same spirit of “coop-etition” seen in the technology space, then they would see that although there is some innate conflict, they have a vitally important relationship with the music industry, and that there are more reasons to try to build it up than let it fall further apart. This could be said for broadcast radio’s relationship with satellite as well, but that is an entirely different discussion.

When this idea first resurfaced, leaders of the radio industry could have sat down with leaders of the recording industry and brokered a new deal that benefited all parties involved rather than immediately turn their attack dogs at the NAB on it. Instead, they now face a pending bill in Congress introduced on December 18, 2007 called the “Performance Right Act of 2007” jointly introduced by Senators Leahy [D-VT] and Hatch [R-UT] and Representatives Berman [D-CA] and Issa [R-CA]. The impact of this bill and probability of this bill passage is debated depending on which media analyst you ask, but ultimately could end up costing the industry billions of dollars for nothing more than they already have today.

In exchange for a performance royalty fee, the radio industry could have tried to negotiate a better deal rather than outright dismiss the notion. One idea would have been to try to obtain a music exclusivity window, whereby songs would be available for a distinct period of time solely on broadcast radio stations. This is commonly done on the television side of the business as a TV broadcaster generally receives the exclusive right to air a new show from a distributor for a period of time before it moves to cable or online.

A window such as this would give radio broadcasters an incentive to break and promote new music and give them something unique to offer their audiences that could not be found anywhere else. This happens in some circumstances today, but in small doses and no real length of time ascribed to them. With this tool, radio broadcasters could establish special events such as “New Music Mondays” or what have you that drive listeners back to over the air radio and make it an appointment medium giving them a leg up on their satellite competition.

Radio broadcasters could have also seized this opportunity to redefine the relationship all together and reexamine the payola laws that prevent record labels from exchanging compensation for radio airplay. These laws also date back to the days when radio was the only game in town, which today is clearly not the case. If it were instead an open market system then record labels could pay to receive certain levels of airplay during the crucial first weeks of new releases that would help drive sales, and perhaps broadcasters could even pay instead to obtain market exclusivity and be the only radio broadcaster to have rights to a song for a limited window which could help drive ratings.

The two sides could also have come up with a new arrangement whereby radio receives a percentage of album sales further incentivizing the medium and better aligning its interests with the recording industry.

There are much smarter people out there who could come up with far better proposals and options than those I’ve offered above, but the point is that frankly, anything would be better than the situation the radio industry has now.

Radio’s only hope now to avoid these additional expense increases are to use its muscle in the NAB to lobby and incentivize politicians in an election year to look the other way, just as the industry has done in the past. If the bill is defeated, there surely will be continued repeated attempts by the recording industry to win this fight in Congress and the courts, and lots of complaining by satellite radio and others for unfair business practices. Radio needs the recording industry, and the recording industry needs radio stations. They have more in common than otherwise. Unfortunately, it seems there are too many lawyers and lobbyists, and not enough business minds driving the process. Otherwise, these two groups would realize there is probably a deal to be had that benefits everyone involved.

Disclosure: No positions

Disclaimer: This article reflects the individual views of Mr. Hannan and may not be attributed to any person, company or other entity with whom Mr. Hannan is affiliated.

Comments

[Malkiel]

Your suggestion would seem good except for one problem: for reasons unclear and unexplained, stations owned by the Clearchannel media monopolists are more or less boycotting new music in favor of "oldies" formats. Nobody can convince me that this is what the public is looking for: either there's an unseen economic penalty to playing new music, or Clearchannel is working from some agenda. In either event, it will take more than your suggestion to get them to start playing new music again on their stations...

[TMTrader]

CCU has every format conceivable, not just oldies but the new PPM ratings information does show that formats like oldies are actually very vibrant in certain areas. At the end of the day, you can't hold CCU up as an example for anything as its just a giant train wreck.

[AFN]

Best perspective on the issue I've ever read. Market forces can sort this whole mess out. Performance royalty should be 6% for all non-interactive delivery vehicles - satellite, Internet, terrestrial analog, terriestrial digital, whatever else comes along. At same time do away with payola laws. If promotional value of terrestrial radio to the recording industry is more than 6% of terrestrial advertising revenues, net gain to broadcasters. If over time listenership -and advertising - moves to Internet, then Internet will pay more royalty fees, but more promo dollars may move that direction as well. Market forces will pull this along and the most efficient distribution vehicles will prevail. Short of leveling the royalty playing field and letting market forces work, there will be no way to determine the relative effectiveness of each delivery mechanism.

[None-Too-Great Hits]

An outstanding article. I will read it again a couple more times over the next few days. For now, however, I would like to challenge the statement: "A hit song clearly should garner a higher price than a secondary track on the same album, and in any other business those items would be seen as premium offerings commanding a higher price point."

This is not clear to me, on two grounds:

First, one mans meat is another man's poison: listeners' tastes differ, and if somebody else finds value in a song that I deplore, who is to say which of us should be paying the premium?

And second, in the spirit of the proverb "promiscuity is its own reward," a hit song at the same price as a non-hit reaps the value of its own success simply by selling more copies, without the buyer being forced to pay a premium for it, or without the seller of the less-popular song being forced to denigrate its value.

It's unfortunate if "concept albums" get short-shrift in the new economy, but the days of albums loaded with second-rate songs coattailing on a hit are over, thanks to the pay-per-song model and uniform pricing. Steve is right.

DISCLOSURE: I myself have a home-made album on iTunes that isn't selling diddley-squat. If you check it out, you might say "rightly so" -- or you might not.

[J.P. Hannan]

NTGH- Thanks for the feedback... you raise some interesting points. Please keep in touch.

[J.P. Hannan]

Special thanks to the editors at Radio-Info.com for featuring it on their site as well. Great resource for anyone wanting a deeper look into the radio biz.

[User 158984]

Good attempt at balancing views but there are quite a few holes in this article, relative to forcing radio to start paying a "performance fee."

First, address your statement "This exemption of payment obligation for performance rights on radio has been routinely debated between the radio and recording industries for more than 70 years through numerous legal proceedings and Congressional actions..." After nearly thirty years in radio, I'm at a loss to come up with one time this issue was mentioned before a few years ago. I remember having record label promo people knocking down my door to get a record on air; in some cases leaving limos outside the station, with illegal substances in the backseat, so I could "go out for the night to unwind."

Before this mess began the record industry was paying millions of dollars annually in payolla to get their music played - sounds like record execs thought there was some value in having their music on the radio. Audience numbers have not degenerated enough to warrant a complete reversal in the business model. Could it be that the record industry has butchered itself over the past fifteen years and now needs another revenue source?

Here's another of your comments that needs to be addressed: "They [labels] further lobbied Sound Exchange, the independent, nonprofit performance rights organization that is designated by the U.S. Copyright Office to collect and distribute digital performance royalties, to push for an increase in royalty rates collected from the likes of internet and satellite radio companies who use their musical performances." Sound Exchange is about as "independent"... from the music industry as my brother is to me. SE was a radio industry creation that was forced to declare it an independent company in the early days of CRB. SE is still very much under the thumb of the record industry.

Next, you declare "After receiving some backlash from internet radio start-ups, Sound Exchange was forced to modify their positions somewhat to this end." Where did you get your information? Or, is the word "somewhat" code for "we'll rape you this year, then rape you with the same force again next year instead of raising the violence level." The only modification to these outrageous performance fees is in extending the exceedingly high payment through 2010, instead of raising them annually. An "oh, by the way" on this is that there are caps in this offer that keep internet radio stations well-below audience levels needed for creating a viable business. Exceed the cap and you pay the higher fee.

Sound Exchange is still in a battle with all except a few entities that have signed - each of these granted exceptions by SE because they effect so little of overall airplay - ie: college radio. Religious broadcasters and NPR are also very close to an agreement with SE. But talk to anyone outside of these circles and you'll find having Sound Exchange respond to any proposal to change the rate is akin to getting rid of leech that's clamped on to the middle of your back. (Disclaimer: I am very close to these negotiations.)

Performers should be paid. It's "who" should pay them that's the question. As the record industry started down its path of forcing low-quality songs on the public, not-so-cleverly hidden within the one or two good tracks on an album, performers had their own deal with each label. What's changed which now forces performers to ask for payment from the one industry that gives them exposure?

Yes, we now have the internet. But it's still a near impossible job to put out a song/album and have it discovered online. As for Satellite Radio, do the math - 15 million national subscribers split between 200+ channels and two companies doesn't get you a large amount of exposure (especially when many of these subscribers are still in cars parked on auto dealers lots). Downloading? It's still illegal if the public doesn't pay. But that's a record industry problem, not radio.

I've not been a friend to the radio industry since consolidation, and still feel it stumbles every time it takes its foot out of its mouth. But here are reasons why terrestrial radio should not have to pay a performance fee; 1) It already pays BMI, ASCAP, and SESAC. 2) Musicians and artists receive their session fees and whatever meager percentages the record industry lets them have. Performers know this is a rough business before getting in, and they sign their deal with labels (hopefully) after reading the contract.

The one question I'm still waiting to hear answered - if label logic is used - is "why should a new artist be paid the same amount of royalty/performance fee as an established act is paid? Then, you can ask, "What was it that drove the established artist to become "established"... I'm willing to bet it wasn't selling songs out of the trunk of their car.

[J.P. Hannan]

Great points 158984. With respect to your comment about the history of this controversy, you are right not much has been openly debated about this in the recent years which is why it was immediately dimissed by the industry as nonsense. However, this issue has its roots as far back as 1930. There are a lot of resources online that go through the legal history of the matter, and if you want please email me and I can give you a great piece compiled by an FCC Counsel that goes through it case by case.

Again, the crux of my comments were not so much aimed at who's right, who's wrong, but rather the missed opportunity of the radio industry to better its own hand by volutarily revisiting an ailing business partnership.

Thanks again for the feedback.

[Scafeets]

If U.S. broadcasters want to continue their free ride based on the quaint notion that FM radio is still relevant, then there's room for compromise. Pay a performance royalty like the rest of the civilized world, or bring back 70s-style progressive radio. You know, where new artists get a chance, music is selected based more on quality than bogus research and "marketing incentives" and broadcasters are regulated to encourage both competition and public service.

I didn't think so. The radio industry has been drinking the Kool-Aid for so long that they are hopelessly mired in a downward spiral that will only end when the FCC says they are wasting airspace and that the public will be better served with other applications in their frequency spectrum.

Here's an indicator: The best-selling iPod accessory is not a receiver -- it's a transmitter!

Dead Industry Walkin'..................