An Unfree Market

How The Rates Harm Many Copyright Owners

A Radio Ink article that I learned about via Kurt Hanson's RAIN provides a quote from the Copyright Royalty Board's explanation as to why it settled on the per-song per-listener rate favored by the RIAA over the percentage of revenue model that other performing rights organizations use and for which webcasters argued:

“In reaching a determination, the Copyright Royalty Judges cannot guarantee a profitable business to every market entrant. Indeed, the normal free market processes typically weed out those entities that have poor business models or are inefficient. To allow inefficient market participants to continue to use as much music as they want and for as long a time period as they want without compensating copyright owners on the same basis as more efficient market participants trivializes the property rights of copyright owners.”

Aside from the implication that small webcasters such as myself are a bunch of mooching freeloaders, on the surface, this almost sounds reasonable. For someone like me who considers himself to be a free market sort of guy, it sounds like they are talking my kind of language.

Not.

For the judges to attempt to cloak their rationalizations using free market verbiage is absurd and drops context in a massive sort of way because the entire process they are part of and the results of their decision is the exact opposite of a free market.

In a free market, prices for goods and services are not determined by a handful of judges sitting on a government board.

In a free market, the government does not grant special privileges for one industry (i.e. AM/FM radio which does not have to pay such royalties) by exempting it from the laws and rules that all other market participants are required to play by.

In a free market, prices fluctuate according to supply and demand and whatever is going on in the wider marketplace as a whole. No commodity in a free market is guaranteed year over year price increases - let alone double digit price increases. (I sure wish I were guaranteed such year-over-year increases in my salary at work!)

The prices in the CRB's decision only fluctuate in one direction - up. And they do so without any consideration given to the larger marketplace conditions that the buyers might find themselves in at the time.

The task that was given the CRB and the standard that it was instructed to go by was: "to establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller."

I am sorry - but that is simply not possible to do. I don't care how fair, objective and conscientious the judges on the CRB might have been, nobody is in a position to come up with such a rate.

If the judges on the CRB were in a position to know what the exact market rate for copyright music ought be for every year through 2010 - well, I suspect that they might be spending their days doing something other than pouring over mundane and boring legal minutia because each of them would be richer than Bill Gates from playing the commodities market and having been right 100 percent of the time.

For a person to know what the market price for a given good or service in the year 2010 ought to be would require nothing short of psychic powers or omniscience.

What if we are in a recession in 2010 and the market for advertising dries up? What happens if Internet radio's audience decides it prefers podcasts instead? What happens if some yet-to-be-invented and bandwidth swallowing "killer ap" comes along and bids up the price of bandwidth making it significantly more expensive for webcasters to transmit and listeners to receive streaming audio?

Can things like this always be predicted in advance? Of course not. And yet every one of these and an unlimited number of other potential scenarios would have a profound impact on what a "willing buyer" would pay to a "willing seller" in an actual free market.

So, no matter what per-song per-listener rate the CRB comes up with, that rate is ultimately arbitrary.

Moreover - and this is very important - the rate is not merely arbitrary in a very wide and generalized sort of way, the rate is highly arbitrary as it is applied to any particular copyrighted recording.

Let's just assume for the sake of argument that, by some unknown magical and mystical means, the judges on the CRB do know with intrinsically guaranteed certainty that the per-song per-listener market price of a copyrighted sound record really ought to be the .0019 rate they have put forth.

If so - then the next question is this: which copyrighted sound recording?

Do the judges on the CRB actually mean to suggest that the market value of all copyright sound recordings is identical?

Let's just assume that the market value of a Brittany Spears recording is such that it can attract an audience large enough to make it worth a webcaster's while to pay .0019 cents per listener. Does it, therefore, follow that it would also be worth a webcaster's while to pay that same .0019 per listener to play a contemporary group that I happen to enjoy, Mora's Modern Rhythmists which plays 1920s and 1930s pop in an authentic style? (I need to state that Dean Mora was not told that I planned to write about him and one should NOT assume that he necessarily agrees with anything at all that I write about.)

If a recording by Mora's Modern Rhythmists has the same marketplace value as a Brittany Spears recording - well, how come Dean Mora's bank account is most likely nowhere near as large as Brittany Spears'?

The sad reality is, unfortunately, everybody has heard of Brittany Spears, including people such as myself who tries to avoid modern pop music as much as possible. How many people outside of fans of vintage pop and the early 1900s retro crowd has ever heard of Dean Mora?

Having to pay .0019 per song, per listener is a very expensive rate. Basically, that means a station that plays on average 16 songs per hour is going to have to fork over every hour in SoundExchange royalties alone $3 for every 100 listeners tuned in or $30 for every 1,000 listeners or $300 for every 10,000 listeners.

The problem for niche genres and lesser known artists such as Dean Mora is the fact that it is much easier for a station with 10,000 listeners to sell $300 worth of advertising than it is for a station with only 100 listeners to sell $3 worth of advertising.

Buying and selling advertising requires more than just the advertiser forking money over to a station owner to run ads. On top of the cost of the spots themselves is the time that both parties have to invest in the transaction. The buyer has to spend time shopping for stations, signing the agreement, paying the bill and getting the ad copy and/or recordings of the commercial to the station owner. And the station owner has expenses involved in bringing his station to the attention of advertisers.

An audience of 100 listeners per hour or less is simply too small for a serious advertiser to mess with. Even if the spots were being given away for free, the advertiser still has to pay the per-hour costs of the person who is responsible for buying and overseeing advertising campaigns. And there is simply no way that a station owner with only 100 listeners or less per hour can sell advertising at a rate high enough to compensate him for the time it would take in order to make sales calls and drum up the business.

The answer given by the judges on the CRB is that, since stations that small are "inefficient" it is entirely appropriate for their owners to face economic reality and go off the air. But if a station with an audience of 100 listeners per hour is playing recordings by artists such as Mora's Modern Rhythmists to a niche audience - well, exactly what is it inefficient at? The only "inefficiency" is the fact that a handful of judges have forced it to pay an arbitrary and artificially high per-song per-listener rate which might be appropriate for streaming a Brittany Spears type mass market recording but which is vastly priced above the market value of streaming artists who are unknown and are not able to attract a similar mass audience.

What an across-the-board royalty rate of .0019 cents per listener means is that the only recordings that are economically viable for a webcaster to stream are those recordings which are actually worth .0019 cents per listener - i.e., those recordings which can bring in a large enough audience to enable a station owner to generate enough revenue to pay the .0019 on top of all of his other operational expense plus, hopefully, some sort of profit. And since the only way a station owner can generate such revenue is by the economies of scale that can only be achieved with a large audience the effect of the CRB's across-the-board per-song per-listener royalty rate is to artificially price niche genres and all artists who do not have a mass market appeal out of any opportunities to get Internet radio airplay.

If this is allowed to happen, it would place niche genres and lesser known artist back in the exact same unfortunate predicament they were in for decades with regard to AM/FM radio. There are only so many radio frequencies - which means that there can only be so many AM/FM stations in any given market. An FM station in even a small market will sell for many millions of dollars - in a major market such as Fort Worth/Dallas, where I live, such a station will sell in the hundreds of millions of dollars. In such a world, station owners have no choice but to program their stations to wide, mass market audiences. That is the only way they can bring in enough revenue to pay off their mortgages and other bills. And that is why you don't find major market AM/FM stations devoted to nothing but 1920s/1930s pop or Ukrainian folk music. It is simply not possible to make enough money on such formats to pay for the cost of buying the station.

But that, unfortunately, is the environment the CRB's decision will bring to Internet radio if something is not done about the rates. Only this time there will be a substantial difference: with AM/FM such a situation is necessitated by the limitations of technology. With Internet radio, there are no such technological restrictions and the situation will have been brought about artificially by means of decree by a governmental board.

If the judges on the CRB are sincere about determining a royalty rate for copyrighted recordings that approximates a free market price, then that rate must necessarily take into consideration the fact that some recordings are worth more in the marketplace than others.

But the CRB does not take such economic realities into consideration. What it does is assigns an arbitrary and very high across-the-board flat rate applicable to all copyrighted recordings - a rate which, in fact, is economically viable for only the relatively small percentage of recordings that have a large, mass market appeal. And, as a result artists and genres that do not currently have a mass market appeal will be arbitrarily priced out of being able to enjoy the many benefits they currently derive from Internet radio air play.

Let's say some government board decided that, in the name of "fairness" to chair manufacturers, buyers would be required to pay no less than $50 per chair. Who would benefit from that? Obviously chair manufacturers who are currently selling chairs over $50. They would suddenly be protected from down market competition. And who would lose out besides those who wish to purchase lower priced chairs? Obviously those companies that specialize in making low priced chairs and the shops that sell them would be hurt very badly by such a regulation.

The per-song per-listener rates set by the CRB will have the exact same effect on recordings of niche genres and those by less famous artists.

The reality is that there are a great many recordings that probably have close to a negative per-song per-listener economic value. A very significant percentage of Internet radio stations out there cost more to operate than they will ever generate back in revenue. Such stations are primarily hobbies and labors of love. Yet there are a great many specialty genres and artists for whom such stations represent their only chance of getting airplay on Internet radio and the benefits they receive from such exposure. Their recordings have a negative per-song per-listener economic value because it costs the stations willing to feature them more money to play the recordings than they could ever bring in as a result of playing them.

For the CRB to price such copyright holders out of the market for Internet radio airplay does them a profound injustice - especially since the purpose of the CRB is to look out for the property rights and best interests of all copyright holders, not just copyright holders who happen to be the major mass market labels which control the RIAA.

If a group such as Mora's Modern Rhytmists were to get airplay on a station the size of Radio Dismuke, it would not generate nearly enough per-song per-listener plays to qualify Dean Mora for the minimum amount of royalties he would need to accumulate before SoundExchange would ever cut him a check. Yet if such a station were to include his recordings in its playlist it would be of tremendous benefit to him. People who otherwise would not be aware of his band's existence will discover it. Some of them will become fans. Some of them might google his name and go to to his website and find this page where they can buy some of his marvelous CDs.

I guarantee you that Dean Mora would make far more money in sales of CDs from only one year's worth of exposure on a single station the size of Radio Dismuke than he would ever see in a lifetime of SoundExchange royalties generated from several such stations playing his material.

In the music business, getting airplay is a major element in a recording's success - and the only reason the word "payola" exists in our language is because airplay is so beneficial that it is actually worth a copyright holder's while to pay a station in order to get it.

Never forget what this battle is about. In a world where professional recording studios are commonplace and can be rented by the hour, where there are countless outsourcers who will manufacture CDs for well under $1 each and where more and more music is being distributed over the Internet, the only remaining relevance that the major record labels have is in their ability to promote their artists to the large audience concentrations on major, trendsetting FM radio stations in order to generate hit recordings.

Internet radio threatens to scatter those FM type audience concentrations to the wind across thousands and thousands of smaller stations. When that happens, the marketing advantage the big record labels currently enjoy over the independents will be significantly diminished. Since the major labels know that Internet radio is here to stay in some form or another, they are attempting to use the RIAA's political pull in order to get the government to pass rules and regulations which will artificially create on the Internet the same audience concentrations they enjoy on FM radio and which they desperately need if they are to remain relevant in a digital and online world.

The fact that this is nothing more than an attempt on the part of the RIAA to protect AM/FM audience concentrations and move them over, intact, to the Internet became very obvious to me the last time this battle was fought back in 2002. At the time, the CRB came out with a per-song per listener rate of .0007 for Internet streams of AM/FM simulcasts while the rate they came up with for Internet-only broadcasters was exactly double or .0014. On what twisted logic can one say that the value of a given recording being streamed is somehow different depending on whether the stream originates from an FM broadcaster or whether it originates from a station such as mine? Fortunately, that double standard was struck down. But the very fact that it was proposed in the first place told me that it was nothing more than an attempt to artificially impose a situation where the only Internet streams that would be financially viable were AM/FM simulcasts.

The task of the Library of Congress and the Copyright Royalty Board is to protect the property rights and interests of all copyright holders. The fact that the judges on the CRB chose to use their authority to create an arbitrary rate scheme which will price a great many copyright holders out of the market for valuable Internet radio airplay so that some copyright holders with political pull can be protected from emerging forms of competition - well, that is disgraceful. And the fact that they attempt to use the honorable term "free market" as a rationalization for their decrees is beyond disgusting.

So long as a governmental body is dictating a statutory rate that is applicable for all sound recordings under copyright, the CRB's per-song per-listener model needs to be permanently abolished. Because it is a fact of reality that some recordings are worth more in the marketplace than other recordings, it is simply not possible to come up with a single flat rate that is fair to the interests of all copyright holders, large and small. And it certainly is not possible or feasible for some government board to determine individual per-song per-listener rates for each of the tens of thousands of artists.

If the judges on the CRB truly cared about a free market approach to the issue, they would have immediately and eagerly adopted the same percentage of revenue approach the other performing rights associations (ASCAP/BMI and SESAC) have used for decades. Unlike some arbitrary number tossed out by a handful of judges, the amount of revenue that a station generates is determined exclusively by the free market.

If a station brings in a lot of revenue, that probably means that the music it plays has value in attracting a large audience that is willing to support the station and its advertisers. If a station does not bring in a lot of revenue, it does not necessarily mean that it is "inefficient" as the CRB suggests. In a great many cases, it simply means the music the owner chooses to play is not able to generate a very large audience - and thus his revenue, assuming he even gets any, will be reduced accordingly.

Under a percentage of revenue model, to the degree a station is successful from a financial standpoint, the copyright owners who helped make that success possible get to share in it. If a station is not able to generate revenue from the music it plays - well, then the copyright owners are immune from the station owner's losses but still derive the many, many benefits they receive from the free publicity. Plus, most royalty organizations have a minimum license fee - so even the smallest webcasters who stream music to very few listeners would pay into the system.

The fact is that certain highly successful copyrighted recordings do have an economic value that station owners derive benefit from - and such station owners should be required to compensate copyright holders accordingly.

But it is also a fact that some copyrighted recordings do not have a great deal of economic value and that the primary financial beneficiary from airplay is not the station owner but the copyright holder in the form of increased visibility, web traffic and sales of things such as CDs and tee shirts. Those copyright holders should not be denied the opportunity to benefit from such valuable publicity that small webcasters are willing to provide to them at no cost.

The judges on the CRB asserts that "inefficient" webcasters unable to generate enough revenue to cover the per-song per-listener rates "trivialize" the property rights of copyright holders. In reality, it is the CRB that trivializes copyright holders whose works are not capable of generating enough revenue to enable webcasters to cover those arbitrary rates - and the result is that such copyright holders will no longer be able to reach their audience through Internet radio unless some webcaster is willing to go through the paperwork and hassle of contacting them one by one for permission to bypass SoundExchage. Few broadcasters have the time and ability to do that.

So long as the government is setting the rates, a percentage of revenue model is the fairest approach because it provides a means of addressing the legitimate concerns and needs of all copyright holders, large and small, famous and not-so-famous.

If you have not yet done so, please write your representatives and let them know that you support Internet radio and that Congress needs to push for a percentage of revenue royalty rate that is fair to the financial interests of all copyright holders - not just the the major labels which control the RIAA.