Government should extricate itself from the music business

Katie McAuliffe Executive Director, Digital Liberty
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This week the House Judiciary Committee held a hearing on the Internet Radio Fairness Act (IRFA). While webcasters simulcasting Internet radio or providing non-interactive radio services argue that royalty rates are too high, artists and record labels disagree. Currently, non-interactive Internet radio services like Pandora are held to the willing buyer/willing seller rate-determining standard, while digital music services over cable and satellite, like Music Choice and SiriusXM, are held to the pre-1998 801(b) standard. (Digital non-interactive radio is a music service where you have little control over the songs you listen to; it is primarily passive. Interactive radio services like Spotify give users more control over what songs they hear, how often and the order.)

The willing buyer/willing seller standard requires that the Copyright Royalty Board (CRB) look at free market negotiations that have taken place and base their rates off of those. Since digital interactive radio services are some of the only negotiated market contracts available, the CRB bases its rates off of them. Of course the mere existence of the CRB and statutory licenses distorts the market and often precludes free market negotiations.

These statutory licenses through the CRB are in effect the government forcing the exchange of property so that others can build a business. At this week’s congressional hearing, Michael Huppe, the president of SoundExchange, provided a vivid example:

“In essence, the [music] owner does not have the ability to withhold [their music] from anyone seeking to use it for any purpose, as long as they meet the requirements of the statute. For instance, from the moment Pandora started using the statutory license, it had more rights to the repertoire of artists like Adele, Metallica, AC/DC or the Black Keys than did Spotify, which had to directly license music for its on-demand service.”

Jimmy Jam, the chair emeritus of the board of the Recording Academy, noted that “if a consumer downloads a song from Amazon’s MP3 store for 99 cents, Amazon pays the rights holders and creators about 70 cents. If a consumer streams that same song on Pandora radio, Pandora pays SoundExchange about one-tenth of a penny.” Bruce Reese of Hubbard Radio asserted that statutory streaming fees, the .0011 of a penny, must be paid per person listening to the song when it is played, not just how often the song is played. This process makes it difficult to build a profit from a streaming business.

However, earlier in the day at a songwriter event on the Hill, artists illustrated that radio webcasters play many hit songs millions of times in just a few months. Bon Jovi’s “Livin’ on a Prayer,” for example, was played 6,021,402 times between the beginning of January and the end of March. The royalties paid for that staggering number of plays, however, amounted to just $110.42. This already paltry amount is then split between all writers and performers involved in the song. Bon Jovi could easily make more working for a day at his local McDonald’s.

Earlier this month, The Daily Caller published an opinion piece by Bill Wilson. In the piece, Wilson suggests that Americans for Tax Reform supports the willing buyer/willing seller model. In fact, Americans for Tax Reform does not support either 801(b) or willing buyer/willing seller. We support purely free market negotiations between owners and artists with vendors.

Americans for Tax Reform’s president, Grover Norquist, has expressly said in a letter: “Both the existing and proposed models pick winners and losers, rather than allowing free market negotiations. The entire existing price-controlled arrangement is unfortunate and unnecessary. Instead, all parties, e.g, writers, artists, recording companies, broadcasting companies and others, should be allowed to negotiate mutually agreeable terms. There is no way, ultimately, for a legislator to decide what the fair market value of a product or service is. That is what the market is for.”

A letter from Brandon Arnold of the National Taxpayers Union expresses a similar sentiment: “While [the IRFA] would increase parity between Internet and satellite radio stations, it would also reinforce the federal government’s unwarranted role in royalty rate-setting. Further, it would result in Congress mandating advantages to some businesses over others.”

It is clear that much needs to be worked through for artists to be fairly compensated for their work and for radio services to maintain viable businesses. However, it is not the government’s job to favor either of these parties, or force someone to sell a product. Government should step back and allow the free market to develop a solution.

Katie McAuliffe is executive director of Digital Liberty, an Americans for Tax Reform affiliate.

Katie McAuliffe