The Case For Internet Radio Music Royalty Reform

Posted via Forbes

This week, Congress held hearings on the Internet Radio Fairness Act. They heard that the music royalty burden is too great to endure for all but the largest web broadcasters and even those are financially handcuffed, preventing real growth.

To me, it’s what they didn’t hear that is the real story and where the real debate should be focused. Even the name of the Act is a misnomer. This is not really a question of whether royalties should be lowered for Web and mobile broadcasts. The real question is whether royalties should finally be implemented for traditional, terrestrial radio.

Today, if I listen to a local station on my car radio on the way to work the station monetizes my listening through advertising. That revenue is offset by no cost in terms of royalties. If when I get to the office I listen to the same station on my computer, the station must pay a royalty to the rights holder. When I go to the gym at lunch and continue listening to the same station, again the station must pay.

Royalty amnesty made sense when terrestrial radio was the only way for the masses to hear music without buying it. Radio played a critical role in music discovery. Discovery lead to ‘record’ purchases, ticket sales, and so on.

Why Music Royalties Reform Makes Sense: Leveling the Playing Field

Today, that entire dynamic has changed. Purchases of ’records’ or CDs in their entirety is sharply down from decades ago. Instead, consumers graze music, buying tracks individually in many cases rather than the whole release. One of the primary ways that process is enabled is through listening to tracks online – whether via Internet radio pure plays or the digital arm of terrestrial stations. Pandora, Slacker and many others allow for nearly infinite choice compared to the narrowly formatted offerings available over-the-air where most markets are served by only a handful of stations. Online the truly infinite dial exists. In addition to music discovery across a broader spectrum of genres and artists, online consumers peruse song lyrics, bios, concert schedules, merchandise and other dimensions of artists not feasible offline.

Some terrestrial radio stations have similar features online too, but for many others the specter of online royalties inhibits them from building out a truly robust digital offering. In truth, they’d rather listeners listen over the air. Terrestrially, zero percent of their revenue goes to royalties. Pandora says it pays over 50% of its revenue to royalties – and they negotiated a “better” deal than most. Over the air, they pay nothing per song. Terrestrially they profit from audience growth. Online they’re captive to their own success. The better their offering, the more people will listen online. The more they listen online, the more the station has to pay in royalties. Few are willing to step out of a certain revenue equation to a variable one. ‘What if this thing really takes off?’ they wonder.

To me, it’s therefore not a question of how much Internet royalties should be for Web broadcasts that enable Web and traditional broadcasters alike to build audiences and therefore businesses, but how much should those artists be paid per song per listener regardless of listening device. Consumers don’t distinguish online and offline. Why do royalties?

It is absolutely critical to answer this question now as these are actually early days in term of technology’s impact on radio. As more and more dashboards become wired for Web, choice and access to Web broadcasts will further proliferate. What then? As the ubiquity of smartphones becomes undeniable, the issue grows and grows.

OK, But What About The Artists?

Not to be lost in all this, I believe artists will actually benefit financially. The breadth of music available online simply cannot be replicated in a mainstream terrestrial context. Artists that have had no airplay can find sizable audience online and be compensated accordingly. The more equitable the royalty terms, the more likely online radio will flourish. The more it flourishes the more artists stand to benefit. Now that’s a deal.

I deal with both traditional and Web broadcasters every day. While they’re operating in very different realities financially, they’re generally very well aligned around the fact that digital and mobile is here to stay. In creating an underlying cost structure that allows everyone to put their best foot forward digitally by evening out royalty expense, artists and rights holders will win and so will the public. More choice will flourish, and that sounds sweet to me.