These are not the free market rates you’re looking for
America’s music-copyright world was shaken up in December when the Copyright Royalty Board (CRB) issued its long-awaited rate adjustment for Pandora, a digital Internet radio service. The decision lowered rates paid by its subscription service and increased rates for its ad-supported service – the latter representing the vast majority of Pandora’s listeners and revenues. For more detail on how this process works, check out Ali Sternburg’s blog post at DisCo.
Based on a surge in Pandora’s stock price when the decision came out, the development seems to have been received well by investors (although it has since slumped). It represented a middle ground of potential rate outcomes and also removed a great source of uncertainty for the company, even though Pandora is still losing money – as is its main competitor, Spotify.
Like all rate-setting exercises in the music-copyright industry, the CRB rate adjustment for these Internet radio services pay artists is supposed to represent what a “willing buyer” would pay to a “willing seller.” That sounds like free-market talk, even though, when it comes to music copyrights, no free market has ever really existed in the modern era, and certainly not in the digital era. So, it’s a guess, at best.
The landscape for music licensing and royalty payments is governed by a maze of consent decrees, statutory licenses, multiple royalty types, twin copyrights for the composition and sound recording and myriad other stakeholders, including publishers, labels, artists, performance-rights organizations and other entities. The framework of music copyright is “fractally complex,” even when compared with other areas of intellectual property law.
For webcasters like Pandora, statutory license rates are set by the CRB, a panel of three appointed judges operating with a limited scope of information they are allowed to consider, in an industry warped by decades of government intervention. At one point the CRB announced rates under the so-called “willing buyer/willing seller” standard that were higher than webcasters’ total revenues, which doesn’t seem like something to which a “willing buyer” in the real world would agree (i.e. under a free market).
But are Internet radio services at least on equal footing with their competitors in other media? Not exactly. Many legacy services are grandfathered in, due to special deals. For instance, terrestrial radio stations don’t even have to pay sound recording royalties. By comparison, Pandora pays 50 percent of its revenues to recording artists.
Given their leverage, especially with their control of the artists and labels that command the most music-buyer attention, it’s no surprise many companies have opted to circumvent this framework and make direct deals with rights-holders. These include Amazon, Spotify and even Pandora. Yet these deals are typically opaque and can obscure direct payments, equity and other revenues that are going to intermediaries rather than artists. R Street Associate Fellow Sasha Moss covers this issue in more detail in her recent paper, “Transparency in Music Licensing and the Statutory Remedy Problem.”
While there’s no obvious (or at least obviously beneficial) way to raze this system and return to a free-market state of nature, policymakers should recognize that government should not be picking winners and losers from the outset. Even if it’s impossible to say what the appropriate rate ought to be under a free market (since, again, that’s not what we have), what we can do is say that different platforms doing the same things ought to be treated the same way. Ultimately, a system that punishes innovators for not having been around to capture regulations is not what our political system should stand for.