Royalty rates for online music have always been a complicated issue for me. I can see the side of the rights holders and performing artists just as well as that of the "casters," both terrestrial and web.
I have a foot in both camps: in addition to being an online music service provider/webcaster and thus paying digital transmission royalties since 2001, I had 17 years experience in the record business as a producer and co-owner of an independent label that released almost 150 albums. In that capacity I signed a lot of royalty checks. I like paying royalties. It makes me feel like an honest member of the arts ecosystem, a proper "cultural citizen."
The recent CRB decision to ramp up the rates for digital transmissions have caused another outcry from the webcasting and broadcasting communities, including NPR and satellite radio. It's understandable that everyone in the broadcast business wants to operate with the lowest possible costs, but copyright has always been about finding the proper balance between competing interests.
The bigger picture is that we began webcasting in the 1990's with a distorted, biased music royalty system that favored music publishers and had been subject only to politically driven reforms and very limited competition since the 1920s. So the system that is now painfully being born for royalties on digital transmissions started from unfair and had nowhere to go but up. The more you know about the history of the music business, the more certain you will be of this. Nevertheless, the current system still has a long way to go before we see a truly rational scheme for music royalties.
New York attorney Bennett Lincoff has been dissecting this issue brilliantly for years. To my knowledge he was the first to call for a "unitary" scheme for music right in 2002; he won't be the last, since it's the only way to really make it work. Even U.S. Registrar of Copyrights Marybeth Peters called for similar (but more limited) reforms in 2005. I'm signatory to a new effort calling for this kind of solution that includes many of the progressive voices on the Pho conference email list including Jim Griffin, Gerd Leonhard and others. What we have here, Pogo, is a policy gap.
Bennett Lincoff's most recent paper describes a new system that is astonishingly simple on the licensing side but still fairly complicated on the payment side. Yes, it's just a proposal, yes, it would be highly controversial, and no, it is nowhere near being adopted; but it would be a MONUMENTAL improvement over the current system, which was created for the physical product era and makes less sense every day in the wake of a worldwide digital media network.
The proposal demonstrates that if you free yourself from historical precedent and address the problem directly, fair and feasible solutions can be designed. Bennett lays this all out with admirable clarity in lucid, but not overly lawyerly prose; you will find studying it very rewarding if you really want to understand the stakes of the problem and the solution.
As flawed as the existing DMCA legislation is, it at least recognizes and begins to repair two structural deficiencies in the old music royalty system that operate to the advantage of incumbent radio and TV broadcasters — lack of payment to owners of the sound recording, and lack of payment to featured recording artists as performers.
Most people do not know that (after costs) the royalties SoundExchange collects on digital transmissions are divided 50% to the owner of the sound recording, 45% to the featured recording artists/performers, and 5% to the musicians unions. None of it goes to the music publishers, songwriters and composers, who are paid via a separate system collected by ASCAP, BMI and SESAC in the U.S.
This is a long overdue correction that directly benefits performers, independent musicians and labels, and for that reason alone I support it. Europe has been way ahead of the U.S. on this; rights collectives like GEMA in Germany have collected and disbursed payments to all rights holders in a combined system for years.
If you want to understand the rights holder's side of the issue I recommend the interview BRIAN ZISK of the Future of Music Coalition did with JOHN SIMSON of SoundExchange in Royalty Week. (.pdf) Simson is a very clear, very practical guy as you will see from what he says. One thing he mentions that is sure to be even more controversial is that SoundExchange and the RIAA intend to fight to change the law as it applies to legacy broadcasters so that ultimately...the rates are uniform.
This means that terrestrial broadcasters would no longer have the 'carve-out' they've enjoyed since the 1920's, where they pay only the music publishers, songwriters and composers for use of recorded music. With the radio industry already under pressure from changing advertising models, you can bet the screams about this will be much louder, and the lobbying from the NAB should be nothing short of tactical nukes.
Anybody with even a passing understanding of the history of music royalties knew that the initial rates and policies for digital transmissions under the DMCA were just to get started and would not last. Effectively, webcasters have been paying below minimum wage for the use of music.
There's no doubt that the artificially low rates did support a great deal of innovation online, and today listeners enjoy tens of thousands of free webcast services as a result. But the low rates have come at the expense of the creative community, and allowed both radio stations and web-only services to put off the hard work of creating "real" business models to support their services. This is exactly the same issue I've been nagging my public broadcasting colleagues about in earlier posts here and here.
Even so, the CRB-proposed rates are supposed to ratchet up gradually and there should be enough time for serious webcasters to phase in the changes they need to make. Of course, they will do everything they can to fight and delay the actual application of the CRB decision, which is what is happening right now.
Are the proposed rates fair? Perhaps they are — in the long run. No doubt they would be disruptive to the status quo, so they may need to be implemented more gradually, or we may need additional policies that help existing webcasters through the transition to a more equitable rate.
As far as Hearts of Space is concerned, we are a "new subscription service," not a "non-interactive webcaster," and are subject to a slightly different set of rates and policies. Nevertheless, we ran the numbers as percentage increases immediately in the wake of the CRB announcement and found that we could probably absorb a doubling of the current rate before we'd have to raise our prices. After that, they would go up incrementally — but not enough to dissuade anyone who really wanted access to our material. The "user value decision" to pay for content is more complex than just the price.
My point is that if you have rational business model to start with, paying more — even multiples more — for your basic source material is not a major problem. After that, increased rates are likely to be reflected in higher end user prices. To me this is inevitable and desirable, since it means that significant new income streams will go to the musicians and small labels on whom Hearts of Space largely depends. By "significant" I mean capable of sustaining continued activity by those artists and labels. A SoundExchange check that won't buy a pizza dinner for two is not going to cut it.
What about the "innovation" argument? Clearly, today's low rates and liberal policies have supported this. If you look across the range of webcasting services online today, you'll find an array of free and paid services supported by hosting providers ranging from ordinary ISPs to specialty webcast providers like Live365.com, MySpace and YouTube. You'll find innovations in community features, recommendation engines, and customization options. Would these features exist if royalties were higher? I think they would have taken longer to become commonplace, but would still have been developed because they serve real needs for end users.
The majority of these webcast services raise subsistence-level income from placement of text ads by Google or banner ads from various advertising networks. A few of the more established and popular services like SomaFM also raise money via the public broadcasting model of direct appeals for user donations. And public broadcasters have extended their existing business model and fundraising techniques to the web as well.
These two business models are better than nothing, but with usage now spread out across tens of thousands of webcasters, it's obvious that only the most popular ones at the steep head of the Long Tail will be able to raise enough money to survive this way. Ultimately webcasters will have to consider other ways of monetizing their services.
This is the sticking point and the heart of the challenge: to add enough value to a free service to build substantial traffic and thus appeal to advertisers, OR, to charge users access fees they consider fair and are willing to pay.
The sooner webcasters absorb this realization and start working to achieve it, the sooner reasonable amounts of money will start flowing to the musicians, labels, and other rights holders who deserve it. At worst, it will force the more marginal web players to get serious...or get out.
I realize that sounds hard, but if you're a musician or a niche label trying to make a living, it's a very real issue. And as the old product-based music business morphs into a licensing-based business over the next several years, it will increasingly be the case for everyone who makes recordings.