It’s Time to Pay the Piper
(and the singer, percussionist, guitarist, keyboard player...)

 

With the Performance Rights Act legislation now under consideration in the U.S. Congress (an Act that would establish a performance right for sound recordings), it is time to take a quick look at the background and current arguments for and against this legislation.

For generations, companies owning radio stations have taken advantage of the use of free sound recordings to build highly profitable businesses with stations that were bought and sold, often for significant profit. Most companies concentrated on developing specific formats for their stations, be they news, talk or music segments such as country, classic rock, hip-hop or pop. They used this model successfully to create valuable household brands that drove the desired demographic of listeners and thus advertisers to their stations. As a result, a music radio station is identified by the type of music they play. The logic is compelling: There is no format without the music and so, for example, without sound recordings of classic rock there would be no classic rock radio stations. Yet radio stations do not want to pay for the content that establishes their brands, defines their identity and produces billions of dollars in advertising revenue.

Radio station owners have long acknowledged the value of the content they play by paying royalties to publishers and songwriters. Furthermore, station owners have been effective with their argument that the promotional value of air time was so significant, so valuable, that the sound recording rights holders were fairly compensated and thus additional royalty payments to performers and record companies were not called for. The fact that record companies have spent millions on radio promotion confirms that radio provides significant value to record companies. However, with the increasing popularity of the Internet, digital media providers, other media formats and video games, the promotional value provided by radio has diminished.

For years the community of artists and record labels has vocally complained that they have been unfairly kept from being compensated for the exploitation of their sound recordings and have taken their concerns to law makers and, through comment letters, to the FCC. By now paying the pipers, radio stations would finally acknowledge that they owe much of the value of their brands to record companies, recording artists and their recordings; and the rights holders would finally be fairly compensated for the exploitation of their works.

Radio stations are trying to fight this legislation on many fronts. They have been broadcasting what performance advocates like Sound Exchange and Music First claim are misleading announcements and advertisements characterizing performance royalties as a tax that will only benefit foreign record companies and not artists. They argue that due to their recession-drained revenues they cannot withstand paying performance royalties and that if they are forced to do so numerous radio stations will be driven out of business. They cite industry statistics from BIA Advisors, Magna and Wachovia that show radio station ad revenues plummeting as much 8.5 percent in 2008 and an additional forecasted drop of as much as 11 percent in 2009. Total radio ad revenues under these estimates will shrink from $16.7 billion in 2008 to just over $15 billion this year with modest revenue gains not forecast until 2011. They also warn that stations will have to resort to an all-talk format and/or 8 will play only the recordings from top artists (or will only broadcast the sound recordings from entities that provide gratis performance licenses).

Yet, companies know that to be successful they must meet customer demand. Music lovers want to listen to music and radio stations will broadcast what the audience wants. Moreover, the claim of a tax going overseas mischaracterizes the payments as a tax when it is in fact a royalty, and conveniently ignores the fact that the major international record companies are global entities with thousands of U.S. employees and hundreds of U.S. recording artists. The proposed performance rates may weed out a minimal number of financially weak stations but, for the most part, these added royalty costs will be absorbed.

In addition to the diminished promotional value of air time, recording artists and labels note that the U.S. is the only major Western country that does not recognize a performance right in sound recordings and that by being in conformity with international treaties foreign performance royalties will now be paid to U.S. recording artists. Furthermore, as Congress has already established a performance right for sound recordings with respect to digital transmissions, adding terrestrial transmissions will eliminate this discrepancy and put an end to the free exploitation of sound recordings.

If the Performance Rights Act becomes law, how could the new performance royalty system work? One way is for compensation to be structured similar to the model in place for performance royalties paid to publishers and composers. In my view, negotiated or statutory rates should be at levels lower than what is paid to publishers and songwriters, and amounts and rates currently paid to publishers and songwriters should not be reduced. Similar to performance royalties paid for compositions, performance royalties paid for sound compositions should be split evenly between, and paid directly to, record companies and performers. Furthermore, an open marketplace should be created for collection societies to administer royalty collection and distribution. Also, some consideration should be given to the payment of back royalties to U.S. artists now under the control of foreign collection societies.

As with any new idea whose time has perhaps arrived, there are many unanswered questions. For instance, will bands be required to register as one entity or can each performer register individually? How will band member splits be established, registered, verified and paid? Complicating matters even further, if royalty judges establish statutory rates, questions regarding the constitutionally of their appointments may be problematic. These and other questions are sure to come up as the radio industry, performers and labels continue to develop and support their positions. It may be time to pay the piper; exactly how, how much and to whom is still very much up in the air.