Ending Radio’s Free Ride

By David Macias, cofounder of Thirty Tigers. He's exploring this topic further at SXSW on the panel Still Hazy After All These Years: Performance Royalties and Terrestrial Radio.

The Robinson-Patman Act was a law passed in 1936 in order to strengthen anti-trust law. It forbids one entity from offering the same good or service to two different competitors for different prices, thus allowing one competitor to maintain a decided advantage in the marketplace. It provides exemptions, for instance, one for qualitative differences (Boone's Farm and Dom Perignon are both alcoholic beverages, but no one would argue that they should be sold for the same price) or for things like volume discounts, happy hours, etc.

But none of these explain why AM/FM ("terrestrial") radio operators do not have to pay royalties for playing recordings that internet and satellite radio operators are mandated to pay. Congress created this unfairness through a patchwork of licensing laws and statutes over the past 100 years, but seems to have ignored the basic insight of its own Robinson-Patman law – that markets don't work when competitors pay arbitrarily different prices for raw materials. That's true for physical products, like construction materials that contractors have to buy. And it's true for creative products, like music that radio stations need.

That your local FM pop station can play the latest Katy Perry single without compensating the owner of the recording or the artist, while SiriusXM and Pandora cannot, creates an unequal cost to doing business that has thwarted competition and is a clear violation of the spirit of the Robinson-Patman Act. The only reason this price disparity is not against the law is because Congress created an AM/FM performance rights loophole decades ago, which terrestrial radio to sidestep the payments everyone else is legally required to make.

And the broadcasters are working Congress to hold on to this loophole protection. Every Congress they introduce a resolution called the Local Radio Freedom Act (LRFA) that argues for the AM/FM free ride. But if Congress is going to grant an exemption to accepted US antitrust principles, then we should set the bar very high and be cognizant of the rights of all parties involved. My question is, does the rationale behind the LRFA meet this standard?

The first question is whether terrestrial radio and their brethren in the digital realms are even competitors. The answer to that is pretty self-evident, but if there is any doubt, a glance at the latest 10K filing from Clear Channel Communications (the largest owner of AM/FM stations) should clear that up. On page 16, it states,

"Our media and entertainment and our outdoor advertising businesses compete for audiences and advertising revenues with other media and entertainment businesses and outdoor advertising businesses, as well as with other media, such as….satellite radio and Internet-based media, within their respective markets."

The next question is to whether this preferential pricing structure has prevented competition. In the recent hearings on the Internet Radio Fairness Act, the bill's sponsor Rep. Jason Chaffetz of Utah, stated correctly that there were several companies that had started and abandoned efforts to start internet radio businesses, including MTV, Rolling Stone, Microsoft, AOL and Yahoo!, and went on to say that internet radio should "be thriving beyond Pandora." I couldn't agree more. Whether Pandora is even thriving is in question, given its poor performance in generating profits to date, although Internet companies often go through a "growth phase" where they build their audience and basically give away the service, only to cash in down the road. That seems to be the case with Pandora, which has a market value of about $2 billion.

But there is no doubt that if the cost of paying for music was lifted from Pandora, as it is with terrestrial radio, they would be extremely profitable right now. Of course, that would also be monumentally unfair to others in the value chain. Better to level the playing field and end terrestrial's free ride so Pandora doesn't have such an uphill competitive battle to fight. Terrestrial radio can credibly make the argument that people are tuning in, at least in part, for their local weather information and zany morning show hosts. Pandora is only music. They should pay a higher rate for the use of music than terrestrial radio.

So it is clear that this is a competitive industry, where all competitors recognize that they are in competition and one segment, which still dominates the market, is getting a government-mandated walk on a major cost input that all the other segments of the industry have to bear. Clearly, this is a situation that prompted the Robinson-Patman Act in the first place.

But then why was Pandora on the same side of the table as the National Association of Broadcasters (NAB) at the IRFA hearings? Shouldn't they be making this argument? The reason that they don't is that their interests are clearly aligned with the NAB in that if, given the choice of leveling the playing field down by paying no (or little) performance royalties themselves or having the stations represented by the NAB instead be required to pay, they would choose the former.

They must be mightily impressed with the NAB's terrific track record of getting Congress to contravene the tenets of the Robinson-Patman Act and would probably like to use the NAB's great lobbying skills to drive their own rates down considerably. And the NAB wants Pandora's rates to go down because they understand that the rise of digital transmission is a near inevitability and its members are investing in solutions in that space (i.e. IHeartRadio). They are protecting future margins for their members.

So it remains up to the music industry and musicians to fight against the use of their intellectual property without compensation by entities that are realizing commercial gain from this free use.

In the resolution supporting the LRFA, numerous rationales are listed for why terrestrial radio should be granted free use of others' intellectual property. Let's look at these rationales, bullet point by bullet point:

• Whereas the US enjoys broadcasting and sound recording industries that are the envy of the world, due to the symbiotic relationship that has existed among these industries for many decades;

Not true. This "symbiotic relationship" might be the envy of the world from the viewpoint of international broadcasters, but other stakeholders would beg to differ. In every country, save China, Iran and North Korea, broadcasters must pay producers for the use of their intellectual property. In fact, because the owners of recordings in other countries don't receive payment from US broadcasters, the organizations that pay performance royalties in other countries withhold payments to owners of US recordings and musicians, meaning that they are penalized doubly for the inequity of the US system.

• Whereas for more than 80 years, Congress has rejected repeated calls by the recording industry to impose a performance fee on local radio stations for simply playing music on the radio;

Why this is a listed as a rationale for the passage of a law is beyond me. Just because an inequity has been codified for a number of years, that does not justify its continuance. I'm sure if we look back in the resolutions to fight the laws to outlaw child labor, we would likely see something like "Whereas for more than 80 years, Congress has rejected repeated calls by anti-capitalist agitators to impose restrictions in the labor relationship between willing suppliers of labor and employers who simply desire to help these young laborers contribute to household incomes…"

• Whereas local radio stations provide free publicity and promotion to the recording industry and performers of music in the form of radio air play, interviews with performers, introduction of new performers, and concert promotions;

It is true that we in the music business do expend great energies for this promotion. At the same time, the exact reach and value of this promotion is not entirely clear, especially with the rise of Internet radio, Facebook sharing, and iTunes – all new ways for fans to discover and share new songs and acts. When the Government Accountability Office did a rigorous study of this issue, comparing AM/FM "spins" to record sales in 2010, they found the promotional value of terrestrial broadcast to be "unclear". If we're honest, everyone knows that promotion doesn't balance out a total wipe out on performance pay. Don't take my word for it, ask the most important broadcaster in the country, Bob Pittman, Clear Channel CEO. "There are plenty of people in radio who think we already give the record labels so much by giving them free promotion to break their artists, and they say that ought to be enough. But clearly that is not enough…"

More to the point, whatever the value of AM/FM "promotion," that is not justification enough for the continuation of an unfair compensatory relationship. When railroads were monopolizing the market for the transport of agricultural goods, the railroads claimed that the farmers were not forced to pay their rates, but did so willingly. That's a pretty limited version of what it means to willingly pay. The farmers HAD NO OTHER CHOICE TO MOVE THEIR CROPS. It was this very type of unfair relationship that brought about anti-trust laws in the first place. And the music industry and musicians have even less of a choice than those farmers – radio has a "compulsory statutory license" to play any song it wants, and music can't say no (which I actually think is a good thing provided rights holders are paid a fair royalty, which I explain later in the piece).

Another thing that bothers me greatly is that other mediums are not subject to this whole set up. For instance, if this rationale is applied to the movie business, why can't television broadcasters simply air the movie "Lincoln" at will? After all, it's giving the movie studios free publicity that will help them sell DVDs. Why the double standard between local radio and television broadcasters? Closer to home, digital radio provides promotion just like AM/FM, but it still pays to compensate the music creators more directly. Artists and music producers are unified across the board that we feel that our intellectual property is being hijacked. We participate in the current system out of economic necessity, and our participation should not be used as a justification for its continuance.

• Whereas Congress found that the sale of many sound recordings and the careers of many performers benefited considerably from airplay and other over-the-air broadcasting;

And I can find lots of performers whose music continues to keep listeners engaged until the next commercial for the local car dealership, but who are now destitute or died in poverty.

• Whereas there are many thousands of local radio stations that will suffer severe economic hardship if any new performance fee is imposed, as will many other small businesses that play music including bars, restaurants, shopping centers and transportation facilities;

Once again, just because the beneficiaries of an unjust law might have to adapt to compete under a more just law is not reason for its continuation. The thing is, all of these businesses are already paying for the right to play music. They are paying the songwriters. The publishing industry is fond of reminding us that "it all begins with a song." I would remind them that "it all ends with a recording" that someone paid to make, and performed by someone who used their talents to bring magic and economic value to their song. Why one group in the creative ecosystem gets compensated, while others do not, has never been adequately explained to me. I'm even willing to support the argument that songwriters should be paid a higher royalty than owners of recordings and artists, because the latter groups have other means with which to earn incomes, but there's a big difference between less and nothing.

Congress has been sensitive to these concerns in the past – when a bipartisan bill was passed in 2010 by the House and Senate Judiciary Committees, it included specific protections for songwriters and it capped royalty payments by truly small and local players as low as $500 a year. The same is true with AM/FM's concerns about promotion. The bill explicitly required the music royalty to account for whatever promotional value artists received. That's what we need – a comprehensive solution that recognizes everyone in this creative/business ecosystem matters and balances out the equities on all sides. We are far from that today.

Radio already compensates a certain class of performers, those being air personalities. Why is it that Rush Limbaugh is allowed to be paid for his performance, yet Katy Perry is not? Both of these people are magnetic personalities that help local radio sell advertising, which is their life blood. Will someone explain what the difference is between these two (other than the $400 million contract Clear Channel gave Rush a few years ago)? After all, if Rush Limbaugh were not on the radio, he would not sell so many books, so really, shouldn't local radio be allowed not to pay his licensing fee, because they certainly suffer severe economic hardship by having to pay him? It's equally absurd with sports; sports teams benefit from AM/FM promotion, but radio pays millions for those broadcast rights. Congress ought to ask the NFL if they'd be willing to give up licensing fees since they receive promotion over air.

And the thing is, certain radio chains are already paying royalties to certain record companies in a case-by-case/voluntary agreement model, so certain broadcasters seem to be admitting that these recordings have value. I fear that what the broadcasters are doing by entering into these voluntary relationships to try to set a market value for the (perhaps) inevitable day that they do have to pay these royalties. By entering into voluntary compensatory relationships with record companies that are now getting nothing and might happy to earn even pennies on the dollar as opposed to nothing, they can go back to Congress or the Copyright Royalty Board and say that pennies on the dollar is what these recordings are worth. It's similar to the argument that SiriusXM made when trying to get record companies to sign up with Music Reports rather than continuing the current payment system for royalties through Sound Exchange: they argued that "80 companies had signed on," thus the rest of the industry was colluding to thwart a scheme that was to pay record companies slightly more, artists nothing, and thus reduce the overall cost of playing these recordings. Never mind that 80 labels is a miniscule fraction of the stakeholders, and those of us that actually read the Music Reports proposal and care about fairness to artists threw it in the trash. And never mind that the low rates in these current voluntary deals have been negotiated against the absence of any legal requirement to pay. Does anyone doubt that musicians and music labels would be in a better position to negotiate for fairer compensation if the law recognized their right to be paid for the work?

It's concerning to me as well that record companies that do participate in this case-by-case approach are going to accept far too little of a percentage for digital transmissions of broadcasts, which are a small piece of the pie now, but which will grow in the future, especially as we move toward a more equitable royalty structure between competitors, which will help create a more level playing field on which radio businesses who depend on digital transmission to compete. Short-sighted stakeholders on the label/artist side of the table, who are accepting pennies on the dollar from terrestrial radio now, could undermine a future fair digital royalty payment structure in the future by settling for too low of a digital royalty in the present.

It also undermines the idea of radio playing music under a compulsory license, which serves everyone on the value chain. I shudder to think of the regulatory and contractual mess (and cost) if every radio chain had to negotiate a separate legal agreement with every rights holder. I also shudder to think of the chilling effect it would have on smaller, independent companies, who lack the financial resources to negotiate with every radio provider in order to have their music played on the radio.

Another thing that concerns me about this voluntary agreement model is that if stations are cherry picking who gets paid and who does not, or paying different royalties to different artists, it would almost assuredly not provide the royalty boards in other countries enough assurance to release the payments being withheld to owners of recordings and artists. In addition to us groveling to get paid pennies on the dollar at home, it leaves us still unpaid on what is due us from broadcasters in other countries.

With the LRFA coming up for another renewal, and Congress either too frightened of upsetting media outlets back home or too ill-informed on the issue, the music industry and artist community grows ever more despairing of finding remedy through the legislative process. So far, the NAB and the radio chains that it represents have been unwilling to sit down with labels and artists and negotiate a royalty structure that addresses these grievances in a way that will engender fairness, while also being economically viable for them. That's the thing….if they sat down and seriously addressed this with the label and artist community, I think they would find that we have zero interest in coming up with a royalty structure that would harm such an important part of the entertainment ecosystem. I'm (foolishly?) optimistic that something that is not too draconian can be crafted, that is gradual enough to allow all parties to adjust their business practices to a new, fairer reality over a reasonable period of time.

What I would fear if I were the radio industry is that if the legislative solution is off the table and there is no stomach to sit down and negotiate something we can all live with, then the only recourse we have is to seek redress through the courts or through the U.S. Department of Justice. I'm no lawyer, of which I'm certain that I'll be reminded of in the comments section, but it seems like a bad idea to have a royalty structure in one part of the law (royalty free radio for a particular segment of the industry) that totally conflicts with basic principles under another part of the law (the Robinson-Patman Act). Who knows how the Copyright Royalty Board will do its job faced with the need to resolve conflicting statutes?

And no offense to the CRB, but any royalty system that would allow ALL the royalty payments for terrestrial radio to go to the publishing community and ALMOST ALL of the royalty payments for digital radio transmissions to go to labels and artists, could be judged capricious. NAB, do you really want to try your luck in the courts, the DOJ and the CRB, especially given the uncertain, contradictory framework that they are faced with? I sincerely wouldn't want that to happen. As I've said before, you're too valuable to the entertainment ecosystem.

But you know what? So are artists, and so are labels. Can we please just all sit down and figure out something that we can all live with?

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