“we Can Work it Out:” a Chance to Level the Playing Field for Radio Broadcasters

• Publication year: 2009

Cassondra C. Anderson⁰

The music industry has changed dramatically during the last fifteen years. In particular, the rise of digital broadcasting illustrates the great disparity that currently exists in the royalty rate scheme for the radio broadcast industry. The current scheme dictates that Internet, satellite, and cable radio broadcasters pay royalties to both the song composer and the artist when a song is aired on their service, but terrestrial radio only pays sound recording royalties to the composer. This disparity is not the result of sound legal principles. The rationale for terrestrial radio's exemption was that the promotional value the artists received from having AM/FM stations play their songs provided all the compensation they deserved. However, in light of the current state of the music industry, this rationale no longer justifies terrestrial radio's exemption. New legislation pending in Congress seeks to remedy this unfairness by removing the statutory exemption for terrestrial radio broadcasters. In addition, the House and Senate versions have been amended to include the application of the first three factors of the "801(b) " standard to determine royalty rates for all radio broadcast platforms and replace the myriad regulations under which the industry currently operates under. Including this standard in the legislation is vital in addressing the current disparity in royalty payments. However, as it currently stands, the legislation fails to include one important factor of the "801(b)" standard, and Congress should amend the legislation to include this factor before passing the bill.

I. Introduction

You turn up the volume just in time to hear Stevie Wonder singing "We Can Work It Out."¹ But who is receiving royalties as you listen to the song, and how much is he or she getting? The answer depends on the type of radio broadcast program you have tuned in to. If you are listening to your Sirius Satellite radio² or a Pandora³ station on your laptop, then Stevie Wonder, the performer, as well as Paul McCartney and John Lennon (or rather, the estate of John Lennon),⁴ the song's composers, are receiving compensation. In this scenario the content provider⁵ pays royalties varying from 7% to 300% of its gross revenue.⁶ However, if you have turned up the volume on a stereo that is broadcasting a terrestrial radio station,⁷ Paul McCartney and the estate of John Lennon are the ones receiving royalties.⁸ Stevie Wonder, on the other hand, receives no royalties—meaning the content provider is paying 0% of its revenue to the performer in the form of royalties.⁹ Current proposed federal legislation, entitled the Performance Rights Act,¹⁰ seeks to change this scenario so that terrestrial radio broadcasters would pay royalties to artists in addition to the composers when a song is played on their station.¹¹

The Performance Rights Act is a long-overdue piece of legislation,¹² which will herald much needed changes to the royalty rate scheme for radio.¹³ However, if members of Congress fail to adopt this controversial legislation¹⁴ with the full "801(b)" standard included, they run the risk of exacerbating the disparities that currently exist in the royalty rate scheme by allowing a serious imbalance to stand in the face of legislation seeking to end decades of inequity in the radio industry. This legislation provides an opportunity for Congress to not only provide fairness to artists by compensating them when their songs are broadcast over terrestrial radio, but also to level the playing field by applying the same royalty rate standard across all platforms of radio. Congress should seize the opportunity to correct this current disparity, which has significant economic implications,¹⁵ by applying all four factors of the "801(b)" standard to each radio broadcast platform.

Part II of this Recent Development discusses the passage of two pieces of legislation which were pivotal in establishing the current state of the recorded music industry and have laid the groundwork for the inequities the industry operates under today. Part III lays out the royalty rate scheme under which Internet, satellite and cable, and terrestrial radio currently operate. Part Iv highlights the events that have led to the renewed debate over royalty rates, culminating in an introduction of the Performance Rights Act of 2009. Part V discusses why the "801(b)" standard is better than the alternative "willing buyer, willing seller" or "fair market value" standards that have been proposed and argues that this federal legislation needs to be amended to include the fourth factor of the "801(b)" standard.

II. Foundation of the Current State of the Radio Broadcast Industry

In recent history, the recorded music industry's fear of the effect of new technology and the opposing interests of powerful industry lobbyists¹⁶ has forced it to operate under great inequities. These factors are best examined in light of two pieces of legislation passed in the last fifteen years: the Digital Performance Right in Sound Recording Act ("DPRA")¹⁷ of 1995 and the Digital Millennium Copyright Act ("DMCA")¹⁸ of 1998.

The DPRA amended the Copyright Act by granting a limited public performance right in sound recordings.¹⁹ However, this limited performance right attached only to new radio broadcast platforms employing digital audio transmissions,²⁰ meaning Internet, satellite, and cable radio.²¹ Traditional, longstanding broadcast platforms employing analog transmissions,²² such as terrestrial radio, were exempt.²³ Then, in 1998 Congress passed the DMCA, which categorized digital music service providers as Internet, satellite and cable, and terrestrial radio and applied a different royalty rate to each for its use of sound recordings.²⁴ The exemption granted to terrestrial radio broadcasters in the DPRA illustrates the music industry's apprehension that the rise in popularity of digital technology would lead to a decrease in record sales.²⁵ The fear was that digital technology provided consumers with an opportunity to obtain high-quality access to single songs, perhaps meaning they would no longer have a desire for or need to purchase traditional CDs.²⁶ Even more troubling to music industry insiders was the opportunity digital technology provided for consumers to replicate and possibly distribute copies of the songs, further crippling record sales.²⁷

In addition, the categories established in the DMCA also illustrate how the fears of industry insiders contributed to the inequalities in the industry today. These categorizations were, in part, the result of apprehension within the music industry over what the new technology involved in digital broadcasting would do to the status-quo of consumption within the music industry.²⁸ Industry insiders also worried about losing control over the distribution of their product, realizing that the rise of digital broadcasting put more power in the hands of the consumer to determine where and how they received and used the industry's product.²⁹

Terrestrial radio's exemption from the public performance right in the DPRA also provides insight into the second cause of the inequities present in the industry today—the power of music industry lobbyists. With the passage of the DPRA, lobbyists for terrestrial radio, such as the National Association of Broadcasters ("NAB"), were able to convince Congress that terrestrial, over-the-air broadcasters did not pose a threat to the status quo of the recorded music industry, and instead promoted artists and consequently boosted record sales.³⁰ Lobbyists, such as the NAB, were able to leverage this supposed promotional value as a reason to exempt terrestrial radio broadcasters from paying statutory royalty payments to artists for performance of their songs on the radio.

The categorizations of broadcasters established in the DMCA also show the part music industry lobbyists had in creating the current inequities. In an effort to secure as much revenue as possible for the artists they ultimately represent, lobbying organizations used the fear over what digital broadcasting might do to the status quo of the music industry to advocate for the highest royalty payments they could get. In an age where the industry was changing and record sales were declining, lobbying organizations such as the Recording Industry Association of America ("RIAA")³¹ sought to get the most money it could from any medium possible.

An examination of the past fifteen years illustrates that the inequities that currently exist in the structure of sound recording royalties are the result of unsound legal doctrines.³² Rather, they are the result of fear over a changing business model, the industry's inability to embrace such changes, and the lobbying efforts of powerful industry players. The rise of the Performance Rights Act of 2009 gives Congress the opportunity to address the disparities created by these legally unsound principles at the same time.

III. The Current Structure of Radio Industry Royalty Rates

A. Internet Radio

The DMCA granted Internet radio stations a blanket license, for which they paid a fee determined by an adjudication process presided over by the Copyright Royalty Board ("CRB").³³ The standard used by the CRB to determine sound recording royalty rates for Internet radio is referred to as the "willing buyer and a willing seller."³⁴ Under this standard, the CRB judges look only at the perceived economic value of the sound recording when making their decision.³⁵ This standard is predicated on the economic idea of choosing the rate at which two parties in a competitive marketplace would agree to buy and sell the product.³⁶ Judges do not consider interests of the public under this standard—that is to say, they are not concerned with balancing the competing considerations of charging a fair rate against providing "goods" to the public.³⁷ Under this standard, Internet radio broadcasters pay performance royalty fees to...