Storyline 2013: Royalty Rumblings

In the anatomy of the music industry, the cost of content is X-rayed to an unusual degree. If you shop at The Home Depot, you’re not confronted with controversy surrounding how much the store pays for the paint it sells. But Spotify and Pandora are forced to publicly defend their inventory acquisition costs — and in a reversal of standard business critiques, the complaints against those brands are that their costs are too low.

2013 was the year in which music royalties were lifted from the realm of legal arcana, and placed in public consciousness. Along with that, the related issue of musicians’ livelihood was insistently inserted into the online conversation … by musicians, mostly. The “Spotify Debate,” an extended series of statements, interviews, and revenue disclosures starring Thom Yorke, David Byrne, Billy Bragg, David Lowery, Damon Krukowsky, and others, galvanized a more general awareness of the business of music-making than ever before.

Within the swirling criticism of streaming services as erosive forces that undermine album and song sales came a torrent of misunderstanding and misinformation. Royalty and revenue are complex, encompassing contractual relationships among online services, labels, performers, and creators. The issues extend to all distribution paths — Internet radio, subscription services, terrestrial radio, and download stores. Most of the loudest activism from musicians, which could be boiled down to “Streaming doesn’t pay us enough,” failed to achieve a whole view of the landscape, or the transitional phase from which the streaming industry is striving to emerge.

Meanwhile, the U.S. government, which has its fingerprints all over royalty rates paid by music distributors to music owners, lobbed a new bill onto the scene. Representative Melvin Watt introduced the Free Market Royalty Act, a proposed law that would remove the government’s exemption of AM/FM broadcasters from paying royalties to recording artists and labels. Removal of the blanket license would force broadcasters and labels to negotiate for the right to play records on the radio — hence the “Free Market” part of the bill’s title. Some observers regard this solution, or a similar one, a necessary corrective to one of the glaring inequities in the music distribution industry, unfairly favoring AM/FM with a legacy regulation that doesn’t match digital realities.

Nobody we spoke to believed the Free Market Royalty Act stood much chance of becoming law. For one reason, some labels and broadcasters already started grappling with creative deal-making, obviating the need for government intervention. Clear Channel‘s breakthrough deal with Warner Music Group agreed to payments to Warner labels for broadcast of its recordings, in exchange (presumably) for lower royalty obligations for online use of those recordings. The deal template has been replicated by Clear Channel with smaller label groups, and anticipates a tidal consumer migration from radio to Internet radio. If online listening is the future, and the government is too slow to establish a level playing field, Clear Channel is trying to get in front of the shifting paradigm.

An older proposed bill, the Internet Radio Fairness Act, also addresses the royalty inequity which burdens online streaming. Introduced in 2012, the IRFA was championed by Pandora and demonized by anti-Pandora pundits who claimed that the leading Internet radio brand was trying to cheat performers. Given that simple opinion framework, it was big news in December when Pandora turned away from that legislative solution and began focusing on the Copyright Royalty Board (CRB) process. The CRB is a three-judge panel that sets statutory royalty rates every five years. New rates don’t go into effect until the end of 2015, but the process of filing intent and making arguments starts early. The CRB’s rate-setting is informed by real-market conditions, so Pandora’s shift of focus indicates a move away from changing the foundation of government regulation.

All of these royalty rumblings will remain in the spotlight in 2014, as adoption of streaming music continues to grow, and the CRB process starts to be publicized.