For decades, the recording industry has lobbied Congress to change how radio stations pay royalties. The broadcasters have lobbied just as hard to preserve the status quo, making an agreement look all but impossible.
Andrew Harrer/Bloomberg News
Stations get a “free ride” on royalties, Ben Allison, a musician, told Congress. Clear Channel made a deal with Big Machine, Tayor Swift’s label.
But last week, a groundbreaking deal by Clear Channel Communications, the country’s largest radio broadcaster, raised the possibility of a solution to the standoff through marketplace negotiations instead of political head-butting. It also put the spotlight on how federal copyright law keeps up with digital media.
The agreement, between Clear Channel and Big Machine, the record label behind Taylor Swift and other country acts, will for the first time allow a label to collect a royalty when its songs are played on the radio.
In the United States — and almost nowhere else — radio companies pay only songwriters and music publishers, not record companies. The system, dating back almost a century, is based on the idea that radio play has enough promotional value for performers that they do not also need to be paid royalties.
The arrangement has long irritated labels and performers; Frank Sinatra was a vocal opponent. But with record sales plummeting over the last decade, the labels have pursued royalties more urgently as an additional revenue stream.
“Terrestrial broadcasters have an inexplicable ‘free ride’ when it comes to performance royalties,” Ben Allison, a jazz musician and the governor of the New York chapter of the National Academy of Recording Arts and Sciences, the organization that produces the Grammys, told a House subcommittee last Wednesday at a hearing with music and technology executives called “The Future of Audio.”
“They are exempt from paying performers any royalties when they use our recordings to fuel their multibillion-dollar industry,” Mr. Allison continued. “This makes corporate radio the only business in America that can legally use another’s intellectual property without permission or compensation.”
So why did Clear Channel change its position, breaking ranks with its powerful lobbying group, the National Association of Broadcasters?
The answer apparently has nothing to do with politics; with Republicans expected to retain control of the House in this year’s elections, few in the industry predict a new Washington battle is likely. Rather, it has to do with digital music, and Clear Channel’s desire to reshape its business in anticipation of rapid changes in the marketplace.
When the first webcasting laws were passed in the 1990s, labels and artists gained the right to performance royalties for online streams. But webcasters have long complained about the size and structure of these royalties, which are set by federal statute. The more people listen, the more the companies have to pay — unlike on radio, where stations pay a set percentage of revenue to music publishers. Pandora Media pays more than half its revenue in music royalties.
For Clear Channel, digital royalties are a looming problem. Today, 98 percent of listening to its stations is through its 850 terrestrial radio stations, and 2 percent is online, the company said. But that is expected to change, which would leave Clear Channel and other broadcasters exposed to expanding royalty payments. To limit those expenses, Clear Channel struck its deal with Big Machine, bypassing the federal “penny rate” for a share of advertising revenue, both online and over the air.
As various forms of digital music proliferate, the distribution of royalties has become a crucial issue throughout the industry, with efforts to reach new agreements, expand existing systems or bypass those systems entirely.
Last week, SoundExchange, a nonprofit group in the United States that processes online royalties, made five deals, bringing the number of foreign countries from which it collects royalties to 22. Yet Sirius XM Radio recently has sought ways to avoid SoundExchange through direct licensing agreements with record labels, an effort that has proved contentious.
For Clear Channel, the Big Machine deal is likely to be a money loser in the short run, because it will be paying the label far more for terrestrial radio play than it will save online. But if the deal takes hold, it could save Clear Channel a great deal of money in the long run and change the economics — and politics — of radio.
The Clear Channel deal came up several times at the Congressional hearing on Wednesday, and was often characterized as a positive sign that the marketplace could solve a problem that high-powered lobbying had been unable to settle again and again.
“We’re obviously delighted that the biggest radio group acknowledged that something should be done,” said Cary Sherman, the chairman of the Recording Industry Association of America.
Media executives used the hearing to air some of their familiar concerns and requests, including the need for the government to be tough on piracy and the broadcasters’ wish to have radio chips placed in mobile phones.
Tim Westergren, the founder of Pandora, called for lower rates for streaming services and for equivalent royalty systems across media, because Pandora must pay labels millions of dollars in royalties that broadcast radio companies are not required to pay.
“It is time for Congress to level the playing field and to approach radio royalties in a technology-neutral manner,” Mr. Westergren said. “The current rate-setting law is unfair to performing artists, unfair to record labels, and unfair to Pandora and Internet radio as we compete every day with broadcast radio and satellite radio for listener loyalty and advertising and subscription revenue.”
Few companies have the negotiating leverage of Clear Channel to change an entrenched royalty system. But its Big Machine agreement at least suggests that changes can be made in the industry.