Record Companies Con Conservatives on Internet Radio

The band Pink Floyd made famous the lyric, “We Don’t Need No Education” but as it turns out, perhaps they do.  As do some conservatives who are being sucked into Hollywood and the recording industry’s long con on royalty payment structures.

The big content elite like the Recording Industry Association of America (RIAA) have been using artists like Pink Floyd to push a desperate campaign to protect their monopolistic government backed price rigging scheme on royalty rates paid by Internet radio stations. The arguments they are using are as honest and factual as a Michael Moore documentary, but sadly, some conservatives seem to be falling for it.

Internet radio rates are mandated by a government board at the Library of Congress.  For whatever reason, this board has seen fit to set rates for internet radio stations six times higher than other similar mediums. As a result companies like Pandora are paying a majority of their revenues in royalty fees. Despite strong market demand for their services, they can barely eek out a profit thanks to the government.

Even in the current system, record labels have the option of negotiating royalty rates with internet radio stations but with the government jacking up rates so high, of course they don’t. Why would they?

The legislation they fear has been called the Internet Radio Fairness Act (IRFA). This bill would inject free market incentives into the royalties market by requiring the board to take into consideration the impact of the rates on the market place. The goal of this bill is to make market negotiations more appealing and government rate setting less appealing by forcing the government to use some common sense and consider the real world implications of the rates they are setting.

Pretty simple, right? Force government out of one-sided rate setting and create market incentives. Not if you believe the RIAA.

In order to defend a blatantly one sided government price fixing scheme they have decided to just ignore the facts and are calling IRFA “anti-free market” and “government price fixing”. Only in the confluence of Hollywood and Washington DC could government price fixing be considered free market and market negotiations be considered price fixing.

The problem with their position is that it doesn’t hold up to even the slightest common sense scrutiny. As it turns out, pointing to a cat and calling it a dog doesn’t actually make it a dog.

So, let’s take a look at some of the major arguments being made by the Big Content Lobby:

IRFA is “anti-free market”: We’ve already addressed the factuality of this above. But not content with simply perpetuating a lie, the Big Content Lobby is going one step further by throwing in a red herring by arguing for doing away with all government involvement in rate setting and going to 100% market negotiations.

Admittedly, on the surface it sounds alluring. 100% market negotiations. Now that’s free market. Not really. More like one sided monopoly negotiations. You see, what Big Content fails to mention is the fact that Payola laws from the 1930’s prevent broadcasters from negotiating their shelf space. So removing the statutory royalty system would give record labels the ability to set prices as they see fit and leave broadcasters legally barred from two way negotiations. Not surprisingly, the devil is in the details. After all, their goal is to convince conservatives to protect a government price fixing scheme. 

This is just a bailout for Pandora/Spotify is doing fine/Spotify negotiates with record labels: Right out of the gate, when the beacon of success they point to is a company that posted $56 million in losses in 2011 due to royalty payments that should tell you something. But Spotify’s cash hemorrhaging aside, there are some major differences between Spotify and other Internet radio stations that Big Content wants you to conveniently ignore.

First of all, Spotify and stations like Pandora are actually different services and are subject to different laws governing royalties. Spotify is what is known as an “interactive” service. Listeners are able to choose the specific artist and specific song or album they want to hear. So in the eyes of the law, Spotify replaces music sales. (or with Spotify, sometimes processes music sales). So this type of business requires negotiations with the record companies and is subject to higher royalties.

Of course, negotiations with the record labels should come easy for Spotify since the major record labels actually own a significant share of Spotify. So “negotiations” mean that record labels are basically deciding how much they want to pay themselves taking as much as they can, but leaving just enough to keep the doors open.

By contrast, Pandora and services like satellite radio is known as a “non-interactive” service as listeners can only choose the genre of music they want to hear. In the eyes of the law non-interactive services are considered to promote music sales for the record labels. Yet internet radio pays six times the royalty rates for providing the same service through a different medium. Why? Yep, you guessed it. The government price setting board at the Library of Congress.

Pandora is pushing a pay cut for artists/this will hurt artists: In a recent USA Today opinion piece Pink Floyd accuses Pandora of trying to trick artists into supporting a pay cut. Other artists have taken to placing their royalty statements on the internet to highlight the small amounts they are paid for their songs airing on the internet.

The problem with this argument is that the math doesn’t add up because it leaves out a very important factor–the middle man. It is documented that some artists receive small payments for internet air time. But it is equally well documented that companies like Pandora are paying millions of dollars in royalties for playing those songs. So where does the money go? You guessed it –record labels and exchanges–the middlemen.

So in reality, the issue for artists isn’t how much royalties are currently paid. Its how much they are actually receiving. But putting internet radio out of business with royalty rates that require 100% of their revenue will not rectify this and only hurt the artists even more.

Proponents of IRFA rightly argue that artists benefit from increased play on non-interactive stations. It’s a tried and true model that has worked since the beginning of radio. Putting internet radio stations out of business would only decrease artists’ exposure to millions of listeners and leave them with the same raw deal they currently have with record labels. In the end, only the record labels benefit, which is of course record labels’ goal here, and the reason for all the misinformation.

Record labels have historically opposed all new innovations. They sued and scratched and fought to prevent iTunes from taking off. The concept of allowing people to buy only the songs they liked instead of being forced to pay for all the B-side drivel they didn’t was anathema to the labels. But in time, they were overwhelmed and forced to get on board with the new model.

So as internet radio listeners continue to multiply into the tens of millions the record labels and their allies are again fighting progress. But their chosen approach this time should be anathema to conservatives.

There is no doubt that a system where government plays any role in rate setting for royalties is not a conservative ideal. But amending the current system to inject actual market factors and promote market negotiation is a good thing and is far from being “anti-free market”. Conservatives should not be duped into thinking otherwise by Hollywood and Big Content’s misleading talking points and long con.