Should We Save Net Radio? The Q&A

http://redmonk.com/sogrady/2007/06/30/save_net_radio3/

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Following my arguments on behalf of the SaveNetRadio.org coalition and – indirectly thereby – the Internet Radio Equality Act, I received an interesting forward from a Friend of RedMonk. The original note was from Kill Rock Stars, a label notable for giving us both The Decemberists and Elliot Smith. I reproduce the relevant portion of the email below in full.

> +++++++++++++++++++++++++++++++++++++++
> Editorial from Portia on Internet Radio
> +++++++++++++++++++++++++++++++++++++++
>
> hi mailorder freaks,
>
> i wanted to tell you guys exactly what is going on with this Internet
> Radio Equality Act because it comes up before congress for a vote
> next week. this is a BIG issue for artists and independent labels,
> because basically this act is trying to cut webcasting royalties to
> artists by 70%. internet radio webcasters have ALWAYS been paying
> out royalties to artists, this isn’t a new thing. this bill is just
> trying to reduce the amount of money people get paid for their music.
> the sneaky thing is that the bill is being pushed by an organization
> called SaveNetRadio, which claims to represent small internet radio
> sites like Pandora, but which ALSO represents AOL, Yahoo, and
> Microsoft — companies which can EASILY afford to pay artists the
> fair market royalty for their songs.
>
> there is a personal angle to this story too: yesterday a lady from
> SaveNetRadio called me to ask if i’d come to washington DC next week
> and testify on their behalf. i’d be instructed by their legal team
> on what to say, and then i’d testify in front of congress. she said
> they’d been having trouble finding a representative from an indie
> label to testify for them. THIS IS NOT A SURPRISE! obviously, KRS
> is not the only indie label that thinks their artists should be paid
> fairly for their songs. which is great, but i’m afraid since
> SaveNetRadio obviously has money and are organized, that their side
> is going to be the only one that’s heard at these hearings. so i’m
> putting a link here to a site that SoundExchange set up for people to
> write to their congresspeople about this issue. i know we
> erroneously posted a link to SaveNetRadio itself a couple weeks ago,
> we apologize about that — it was a miscommunication! literally!
>
> Click here to make your voice heard in Congress:
>
> http://capwiz.com/soundexchange/issues/alert/?alertid=9500831&PROCESS=Take+Action
>
> take care,
>
> Portia

A dissenting opinion, to be sure – and one that certainly deserves to be heard and recognized. The question now for those undecided, whether they’re the artists, webcasters, or copyright holders or merely regular listeners like you and me is: who’s right?

I will make no claim that the side that I come down on still – SaveNetRadio.org – has the right of it here. I’m just another music fan, and have tried as best I can to understand the landscape with the information that’s available to me, but you should obviously take into account my bias (I’m a WOXY fan) along with my very light understanding of the economics involved.

But I do think Portia – and SoundExchange, the organization opposing SaveNetRadio – are wrong here. If you’re interested, the following Q&A might help explain why.

Q: Anything to disclose? Any relationships here to be aware of?
A: Aside from the mentioned WOXY link, I am a fan of both NPR and KCRW, which also oppose the royalty hikes.

Q: What about Portia’s claim that this is about “trying to cut webcasting royalties to artists by 70%?” Is that accurate?
A: No. The Internet Radio Equality act would basic nullify higher rates about to go into effect, returning it to the same model followed to date. For a description of how the rates would affect webcasters, here’s the (presumably independent) ars technica:

The current fee structure involved an annual fee plus a percentage of the profits. Given the tenuous profitability of Internet radio stations, the low fees undoubtedly helped ensure that many of them stayed afloat, but did little to ensure that money flowed towards those that hold the copyrights on the music they broadcast.The new fee structure would change the basis of the payments to a flat fee for each song streamed on a per-user basis. Thus, in 2007, every song sent to every listener would net SoundExchange $0.0011, regardless of whether the broadcaster made any money by doing so. But that’s probably not the worst of it. The fees are scheduled to more than double over the next five years, and apply retroactively [emphasis ars technica’s] to the start of 2006. Under this plan, it’s hard to imagine that Internet broadcasting will make much financial sense without a dramatic increase in commercial time.

Thus Portia’s claim, to me, seems to be at best a bit of hyperbole. Particularly since their assessments of rate increases don’t seem to include the per channel minimums. It’s possible that she’s merely regurgitating position information from SoundExchange without having examined it carefully.

Q: Who is this SoundExchange? Are they good guys fighting for small artists against AOL, Yahoo, and Microsoft?
A: That does seem to be what they’d like you to believe. Frankly, to me, SoundExchange’s positioning here is – at best – misleading. Portia’s quick to cite the big guys fighting the royalty hikes, as is SoundExchange’s own internet petition, the headline for which is “Stand up for artists’ right to be paid fairly!!!!”, and which includes the following text: reads “As you may have heard, the U.S. Copyright Office has recently set new royalty rates that have to be paid to you by Internet webcasters (such as AOL and Yahoo).”

Put that way, it implies that big companies – AOL/Yahoo/etc – are cruelly denying artists and small labels money. Setting aside the fact that AOL/Yaoo/etc would likely be the only webcasters left post a rate hike due to the immediate cessation of business for smaller players, it’s also – in my view – a false dichotomy.

Q: How so? Are there not big businesses backing SaveNetRadio?
A: Indeed there are. But there are also some large businesses backing SoundExchange, which they notably decline to mention. From SoundExchange’s about page, we discover that “Members of SoundExchange include major and independent record companies from Sony BMG Music Entertainment and Warner Music Group,” among others. Far more interesting, to me anyway, is the composition of SoundExchange’s board, which includes the following individuals:

• Alasdair McMullan – EMI
• Andrea Finkelstein – Sony BMG
• Mitch Bainwol – RIAA
• Michael Ostroff – UMG (Universal)
• Paul Robinson – WMG (Warner)
• Steven M. Marks – RIAA

Tiny companies, indeed. You’ll forgive me, then, if I’m suspect of SoundExchange’s inclination to position itself as fighting the good fight for artists against big, evil companies like AOL and Yahoo.

Q: Irrespective of the involvement of the RIAA – who is not likely to be on many people’s Christmas card lists after their litigation against individual consumers for exorbitant sums of money – isn’t it important that artists be compensated for their efforts?
A: Probably, although the point can be debated. What’s worth discussing is where the actual money goes. Portia argues that the “act is trying to cut webcasting royalties to artists by 70%,” but in fact the artists only see 50% of the royalties paid.

Q: Only 50%? Seriously? How much is that?
A: Seriously, at least according to what SoundExchange’s own FAQ tells us. It informs us that “half of the statutory royalties paid to SoundExchange go to artists…The remaining half goes to copyright owners.” As for the actual amount, SoundExchange for some reason declines to provide a figure for 2006, but “SoundExchange collected approximately $15 million in royalties from webcasters in 2005.”

Q: Above, you said that the point that artists should be compensated could be “debated.” Care to explain that remark?
A: Certainly. First, it’s useful to ask what the compensation rates are for terrestial radio, which for all of its limited range is still the medium commanding the bulk of the advertising dollars.

Q: And what is that rate?
A: They pay only the copyright holder, not the artist. From the SoundExchange FAQ:

Do traditional so-called terrestrial radio stations (AM/FM) have to pay the
same royalties for over-the-air broadcasting?Not at this time. With every sound recording, there are two copyrights — one for the musical composition (the notes and lyrics) and one for the sound recording (the performance of the song by performers). When radio stations broadcast over-the-air, they do not pay royalties to record companies and performers; they only pay a royalty to the person or company who hold the copyright to the composition (i.e., the songwriter or the music publisher).

So it’s worth asking, I think, why artists should be compensated for performances delivered on internet radio but not terrestrial radio. A cynic might wonder, in fact, if it’s an attempt to subsidize a wealthy industry (terrestrial radio) at the expense of a poorer one (internet radio). But who’s cynical?

Q: Is that the only point that makes compensation debatable?
A: No, not in my opinion. To make the point, take a look at the SoundExchange’s answer to the question of whether or not their intention is to put webcasters out of business:

No. We want to see webcasters thrive. If they grow, we grow. Everyone in these proceedings is interdependent, and we are all in this business together. However, assuring fair treatment for all stakeholders in this dynamic landscape is critical. Webcasters and simulcasters are in the business of providing a unique product—music—to consumers. SoundExchange believes the CRB correctly recognized that the people who create the music—artists and labels—for these various platforms should be fairly compensated in a manner that reflects their gifted talents and the value of their contributions.

Seems reasonable, probably. But there’s another way to think about it, one that I think is important. Take me as an example: WOXY.com has introduced me to two dozen artists – at a minimum – that I could not reasonably be expected to discover in the course of my usual listening. Of these, I’ve legally purchased music from at least 20 (see here for a partial list). In that light, what SoundExchange regards as a “product” – the music being webcast – could also be defined, in my opinion, as “marketing.” Marketing WOXY has to pay for. In other words, WOXY is paying SoundExchange for the privilege of marketing their members product. While it’s a nuanced question, then, I think that at the very least the idea of whether compensating artists is “fair” or “right” should be viewed from multiple angles. Not just from the “victim’s” perspective.

Q: You mention your purchases, but isn’t that an anomaly?
A: Again, SoundExchange would dearly like you to believe that. They take strong exception to the idea that they benefit from the promotional exposure, saying that

The CRB stated in its ruling that the webcasters presented no “empirical evidence” that exposure on internet radio leads to increased sales. In fact, CD sales have slumped 25 percent since 2000, while webcasting audiences have grown dramatically.

Where to start with that one. First, they contradict that position later, saying that “If [webcasters] grow, we grow.” If there’s no evidence that promotion leads to purchase, why would that be true? Second, it simply defies logic – not to mention my own experience. Their claim that “listening is the consumption” is undone by the runaway success of the iPod; the most popular music listening device we’ve seen in decades, remember, has no ability to play or otherwise consume internet radio. Third, there’s the CD component to the argument. I have no doubt that CD sales have slumped since 2000, but the argument that that’s due – even in part – to internet radio is asinine. Consumers are largely departing the physical medium because it’s less convenient and less immediate than legal online alternatives like iTunes, or even illegal alternatives like the original Napter or Kazaa – neither of which have any relation to internet radio. Lastly, there are the economics. While web audiences for internet radio have certainly increased, their revenue has not.

Q: What would you say then, to those in favor of higher royalties for webcasters?
A: Two things. First, why don’t you follow the real money and go after terrestrial broadcasting. There simply isn’t a lot of money in webcasting. But more importantly, consider what the current course of action will ensure: killing off more or less all of the independent broadcasters, leaving just the big guys. If that’s the direction you wish to pursue – by all means, continue. But that’s obviously not in listeners’ best interests, and I’d argue strongly that it’s not in yours either.