Future Of Streaming Music Hangs On A 3 Member Board

Derek Hunter Contributor
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If you are one of the millions of Americans who stream music over the Internet, there is something happening in Washington, DC, that should be of keen interest to you. A government appointed panel you’ve likely never heard of is in the midst of hearings that could determine what sort of music choices consumers have in the future.

The Copyright Royalty Board consists of three judges, appointed for six-year terms, who set the price for how much streaming services must pay for the right to stream music online. The decision expected at the end of this year will determine whether those streaming services will be able to survive.

While this might sound dramatic, the potential impact of the CRB decision cannot be overstated. Each month, tens of millions of listeners use these streaming services. Despite this popularity and strong consumer adoption, no streaming model has yielded a profitable business.   The problem these services face are copyright fees that often exceed 50% or more of their revenue.

In the next few months, we will learn how much, either more or less, streaming services will have to pay record companies for the rights to stream their catalog. Streaming companies obviously want to pay less than the current rate and the record labels have asked for an increase of roughly 80 percent. Since the CRB meets only every 5 years, the decision they make will dramatically impact the future of this market or determine if it will continue to exist at all.

The law governing the CRB trial states that judges “shall 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.” However, determining the fair market value of a music royalty is a difficult and complicated endeavor. It has nothing to do with how popular a band or song is — Taylor Swift songs command the same price as a Minor Threat song per play. Finding the value between the two is what the CRB is attempting to do.

While government rate setters attempting to accurately capture marketplace value is not optimal, the judges, for the first time, have relevant market data to guide their decision. Between them, Pandora and iHeartRadio have negotiated dozens of market-based agreements with various record labels rather than operate under the government-established rate. These agreements, which have been submitted as evidence of what a willing buyer would pay a willing seller, suggest a market rate much lower than that previously set by the CRB.

The recording industry recently attempted to prevent some of this market-based evidence from being considered by the CRB judges. When that effort was overruled, Pandora’s stock went up 6%. This shows that the little-known CRB is wielding the power to make or break billion dollar business models.

If the CRB follows what the marketplace dictates via dozens of privately negotiated agreements, there will be a rollback in copyright fees. However, if the CRB ignores the market evidence, and raises rates, listeners may ultimately find that the Pandora app does not work anymore.