Should Radio Stations Pay for Performance Rights?

I grew up on radio; I love it. I missed my local radio station so much when I went to college that my long-distance girlfriend at the time once sent me a cassette tape of the radio station to listen to (oh the days of cassette tapes!). So when the other day, when I heard my favorite radio station run an ad explaining that there was legislation in Congress that threatens local radio, I decided to look into it. Congress is seeking to grant artists radio performance rights. That would require radio stations to pay royalties to artists who perform the songs -- not just those who hold the copyright (typically the songwriters). But after doing some digging, I'm pretty confident that my beloved radio stations would be just fine if the legislation passes.

Broadcast Radio vs. Artists and Record Companies

The battle has been heating up recently. Earlier this week, the New York Times reported on the conflict. It all started last year when the House and Senate judiciary committees both passed resolutions which would require broadcast radio stations to pay fees to artists and their record labels. As you might guess, radio stations were not amused. They claim the legislation would hurt local radio stations, limit the variety of music listeners hear and harm smaller artists.

At first, I was confused. Why didn't artists and record companies just demand royalties to allow radio companies to play their content? I saw it as analogous to what has been happening recently with the broadcast television and the cable companies. There, the content providers are demanding a payment from service providers and have had significant success in their effort.

Why can't recording artists and their labels do the same? Because they have no legal standing to demand royalties. The legislation being considered by Congress would provide performers and record companies would begin to provide that. The reason why broadcast television can make such a demand on cable companies is based on the Cable Act of 1992 (.pdf). Music performers have no such luxury.

Is Publicity Enough?

Radio says that the relationship that exists in its current form is perfectly fair: stations can play whatever music they want without compensating the performer, because she benefits through the publicity. Now, people will go out and buy her album or go to her concerts. While a benefit definitely exists there, it's a little hard to see why radio stations should be able to keep the profit off advertising dollars based on listeners enjoying a product performed by artists who they aren't giving a cut.

Moreover, those record sales aren't doing particularly well these days. Here's a graph that my colleague Derek Thompson used in a post last month (from a CNN/Money article):

I should point out, to be fair, that this chart was poorly constructed to be misleading. Sales are bad, but not quite as bad as this chart looks. The vertical axis should start at zero, not $6 billion. It does, however, demonstrate that music sales have declined by 57% in the last decade. There are a lot of culprits, from online music piracy to more sophisticated custom Internet radio stations. But one thing is clear: the record sales that artists and record labels used to rely on are a far less significant means of income.

Less Music Variety, Fewer Stations?

So you can see why artists and record companies are more concerned than ever about getting paid royalties. But if it will really destroy broadcast radio, as the industry's ads indicate, then that's a problem too. The "" website threatens:

If you're one of the 235 million people who listen to radio each week, a tax could reduce the variety of music radio stations play, and all but eliminate the possibility of new artists breaking onto the scene. The tax could particularly affect smaller, minority-owned stations, some of which may have to switch to a talk-only format or shut down entirely.

It also affects your community. Radio stations are major contributors to public service - generating $6 billion in public service annually, providing vital news and community information and free airtime to help local charities. If a tax were imposed, stations' critical community service efforts could be reduced.

As mentioned, I love radio and doubt I'm alone. So I'm probably not the only listener who finds this claim troubling. But I spoke to the House Judiciary Committee to set the record straight. Judiciary staff provided me with the following breakdown of what the bill would cost radio stations:

77% of all radio stations would be eligible for fees as low as $500 per year

Specifically, sliding scale creates an annual, flat fee based on a station's annual revenue (guaranteed by statute that cannot change without change in law). Based on annual revenues:

- Stations that gross less than $100,000 per year pay a $500 fee
- Stations that gross more than $100,000 and less than $500,000 per year pay a $2,500 fee
- Stations that gross more than $500,000 and less than 1.25 million per year pay a $5,000 fee
- Non-commercial radio stations (like public radio, college radio, and religious non-profit radio) that gross less than $100,000 per year pay a $500 fee
- Non-commercial stations that gross more than $100,000 per year pay a $1,000 fee

Broadcasts of religious services and talk stations that use only pieces of music during their programming are wholly exempt from all royalty payments.

So the claim that small radio stations would be hurt seems pretty well handled by the bill, assuming the judiciary staff I spoke to wasn't misleading me. I appealed to the National Association of Broadcasters (the biggest opponent of the measure) for comment, but after more than 36 hours, they have yet to return my call (if they do, I'll be happy to update this post with their response).

Obviously, radio stations would prefer not to pay any more fees, as they'll eat into profits, no matter how small. But it does seem pretty reasonable that performance artists get a cut of the profits that result from their songs playing on radio stations. Although the Judiciary Committee didn't give me any estimates for how much the bill would cost those other 23% of (big) radio stations, I would suspect that they're the ones really fighting, since the fees would fall more heavily on their shoulders. I should add, the channel on which I heard the advertisement was owned by radio giant Clear Channel.

Better For Small Artists

In fact, the way I see it, the performance royalties could actually help small artists. Once the performance fee is enacted, new artists who aren't associated with any label might be more willing to give away their music for free promotion -- and radio stations would be more willing to take it without having to pay a royalty.

One feature of the bill that the radio stations also complain about is that music labels will get a cut of the profits. If only artists got the royalty proceeds, then the measure would probably be a little less controversial. But, again, this probably helps undiscovered artists. If record companies have more money, they'll be able to search and sign more new talent. Think of a record company as being like a pharmaceutical company. Just like pharmaceuticals have to spend a lot of time and money to find a miracle drug, record companies need to use a great deal of resources to find the next Lady Gaga.

Eventually, It Won't Much Matter

As concerned as I am about artists getting royalties from broadcast radio stations, eventually it's an issue that will fade into obscurity anyway. Once all radio goes to the Internet, the discussion will be moot. The Digital Millennium Copyright Act requires (.pdf) radio stations streaming online to provide performance royalties. Since we're already beginning to see mobile Internet radios, it's just a matter of time before broadcast radio is history. (Ironically, I was listening to the broadcast channel through the Internet when I heard the anti-performance fee commercial!)

Let The Market Work

Just yesterday I argued that fair negotiations make for an ideal economic outcome. I was then referring to the talks between cable companies and broadcast networks, but the same logic applies here. Since the performance rights bill would still provide the government with some price setting power, it isn't ideal -- but it is a step in the right direction. Under current law, performers and their record companies don't even have a seat at the table to try to profit from their music being played on broadcast radio. So I see this legislation as a step in the right direction.

(Image Source: Wikimedia Commons)

Update: I just heard from Dennis Wharton, spokesperson of the National Association of Broadcasters. He provided me with some more on their side of the argument.

First, I asked him about their estimate of the cost a performance fee would place on broadcast radio. At this time, it's impossible to know, because the Copyright Royalty Board (CRB) will decide the details. But most estimates agree that it will be at least hundreds of millions of dollars per year. One analyst from Wells Fargo, Marci Ryvicker, estimated that it could cost radio between $2 and $7 billion per year. He noted that broadcasters only make in the ballpark of $14.5 billion per year as it is, so that's a sizable chunk.

It sounds to me like a major objection is the role that the CRB would play. He mentioned that, regarding the Internet radio royalty law that started several years ago, the CRB demanded royalties so high that lawmakers stepped in and sought new negotiations between the broadcasters and those representing the recording industry to set a fairer rate. I think this is a valid point -- that's probably who the negotiations should be between anyway, potentially arbitrated by a disinterested party who understands the market (if necessary).

Finally, he reiterated their contention that they didn't like the money going to record companies, as the labels sometimes take advantage of artists. He says that broadcast radio has always been a big advocate for artists. He reiterated that providing free promotion is something that all artists, especially new ones, benefit from.