Podcast Audio | Posted by Phil Leigh on September 25, 2012
Chicago teachers and the music industry share a delusional reality denial – they both think it’s a river in Africa.
Copyright law is one of the most convincing validations of the cliché, “The ways of the dollar are devious.” What else could explain the following complexities?
First, there are two kinds of music royalties. One is for the music publishers and the second is for the record labels. Music publishers represent composers and the record labels represent the “performing artists”, meaning singers and instrumentalists.
Second, conventional radio stations are required to pay music publishers, but not record labels. That’s because for the better part of a century, radio station “airtime” was the key determinant of a music track’s popularity. Thus, instead of collecting royalties from the radio stations, the record labels paid them bribes – termed payola – as an incentive to play specific tracks. When payola became illegal, it was replaced by other perquisites.
ASCAP and BMI collect music publisher royalties from radio stations. They are essentially “non-profit” debt collectors. Anyone selling a CD, or digital track, or even a pub owner playing background music, must also pay music publishers. But in such instances the publishers use a different debt collector, to wit, The Harry Fox Agency. As readers might guess, visits from Harry Fox, ASCAP, or BMI are greeted with all of the enthusiasm of a call from the IRS….”They’ve come to help you with your records.” If you don’t have any records they cheerfully provide some they conclude are applicable.
As new forms of music distribution evolved, the publishers and labels helped Congress to distinguish between such matters needing government regulation to prevent ruinous competition, from other matters that should be left to the “free market”. They persuaded Congress that a governmental board, termed the Copyright Royalty Board (CRB) should set royalty rates to be paid by digital services. However, they also helped Congress to understand that CRB rates should be much higher for digital services than for legacy conduits liked radio because…well, the newer services don’t understand the music business.
The labels and publishers prevailed upon Congress to require the CRB to set rated based upon the principle of whatever a “willing buyer and willing seller” would agree upon. Even though historically record labels gave their records and CDs to radio stations for free, such transactions were presumably not between “willing buyers and willing sellers” because…well, that’s different, see? Such precedents suggest that the record label as “willing seller” voluntarily undervalued its product…even if that is precisely what they did, it does not apply to the new era because…well, it just doesn’t.
Instead the CRB applies “willing buyer and willing seller” in some esoteric manner to derive a rate that avoids “ruinous consequences” for the legacy music business. Even if it does impose unreasonable hardship on the new digital services, that doesn’t matter because the newcomers don’t understand the music business, remember?
Cutting the Gordian Knot
Together with others, Pandora is attempting to get a bill through Congress to permit the CRB to consider the financial impact of royalty rates on fledgling businesses like Internet Radio. In our analysis, the bill is not likely to become an Act because the legacy music industry proclaims that it avoids free market forces by enabling the CRB to consider other factors aside from the “willing buyer to willing seller” standard when setting rates. Thus, royalty rates are likely to remain high for Internet Radio. Yet the playlist and playback limitations on Internet Radio imposed by the label-sponsored Digital Millennium Copyright Act (DMCA) fourteen years ago are annoyingly restrictive.
Eventually, however, the music industry will feel compelled to strike a music service deal with Apple in addition to current agreements to sell digital tracks at iTunes. But it’s as certain as fleas on a yard dog that Apple will decline to offer a service that has all the operating restrictions imposed by DMCA. Apple has worked too hard to successfully transform media to let the publishers and labels force them to offer an inadequate music service that dates to the last century. Thus, once Apple gets the agreement they want, most consumers will no longer be interested in “Internet Radio” as presently restricted by DMCA. As the industry become de minimis, aggregate royalties from Internet Radio will be inconsequential to the labels and publishers. They’ll end-up being even more dependent upon Apple.