Recording Industry Battles Online Radio

Allies of the recording industry in Congress have introduced new legislation to change copyright law in the face of a new, online landscape. But the proposal is facing criticism that it would insulate entrenched players in the market from competition, hurting consumers.

The bill, authored by Sen. Lamar Alexander (R-TN) in the Senate and Rep. Doug Collins in the House (R-GA), is titled the Songwriter Equity Act. Its stated aim is to give songwriters more consideration in the setting of royalty rates. In reality, critics allege, it would change existing law to extract more licensing fees from music distributors.

Both sides in the debate agree that artists, songwriters, musicians and recording companies deserve compensation for the rights to enjoy or broadcast their work. Today's musical royalty system, however, is an antiquated mess designed for an off-line world, colored in large part by the radio "payola" scandal from the days before space-flight. The current system actually involves bureaucrats from the Library of Congress to operate.

The music publishing industry is an oligopoly. Two of the three major recording industry bodies that set rates for songwriters and publishers, the Americans Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI) were found to be monopolies by the government in the 1940s and currently operate under a federal consent decree. The third, the Society for European Stage Authors and Composers (SESAC) is in the midst of an anti-trust trial. 

These three organizations, known as Performing Rights Organizations (PROs) set the rates distributors pay to broadcast artistic works. These royalties pay the composers ,songwriters  and publishers for their efforts and creativity. 

Recently, during negotiations between Internet radio service Pandora and ASCAP, one of the PROs that one of the music publishers, EMI, later acquired by Sony, withdrew from ASCAP the PRO's right to negotiate royalties for "digital streaming services" for the publisher and entered into its own direct negotiations with Pandora. Importantly, these negotiations would not be subject to the federal consent decree. 

As the negotiating deadline approached, Pandora asked Sony for a list of its song catalogue, so the service could prepare to remove the content if talks reached an impasse. Sony refused to provide this list, meaning Pandora was threatened with large fines if it inadvertently broadcast a work owned by Sony.  

Pandora sued and won a summary judgment against Sony's move. The court set royalty rates for distribution, using a pre-set formula estimating fair-market value. 

The Songwriters' Equity Act (SEA), however, has sought to override the rates set by the court and mandate a new formula to determine royalties. The new law would direct courts to consider songwriters' rates, which have been inflated by government entities to unprecedented levels, as part of the formula when determining royalty rates for songwriters and publishers.  Interestingly, the new law would not allow the Copyright Royalty Board to consider rates publishers ultimately charge distributors when determining royalties for songwriters. It would, however, force music distributors to dramatically increase their royalty payments to the PROs. Such a move would threaten emerging platforms like Pandora already struggling to find sustainability under the government set rates for artists.

The vast majority of royalty payments currently go to large corporate publishers and record labels. Songwriters and artists would likely be better off negotiating directly with music distributors. Alternatively, they could also negotiate a higher percentage of the licensing fee currently being collected by Sony and other music publishers.

Authors increasingly sell their work directly at sites like Amazon and, as a result, enjoy a greater share of the revenue generated from sales. Recording artists and songwriters would be well served to find a similar method for cutting out the middlemen.


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