By John Seay, Atlanta Entertainment Lawyer: The Seay Firm LLC (@TheSeayFirmLLC)
On September 21, 2012, Rep. Jason Chaffetz (R-Utah) introduced H.R. 6480, better known as the Internet Radio Fairness Act (IRFA). If passed, IRFA would drastically reduce the amount of royalties that webcasters like Pandora pay to owners of sound recordings by directing the Copyright Royalty Board (CRB) to calculate royalty rates for webcasters using the same standard that it currently applies to satellite radio providers like SiriusXM. The change would have significant implications for musicians and the industry alike, but understanding why requires a basic understanding of music licensing.
When songs are recorded, two categories of copyrights are created: musical works (the copyright in the melody and lyrics) and sound recordings (the copyright in the recorded version of the song)(1). For artists signed to recording contracts, the record label usually holds the sound recording copyright as a work for hire, and the songwriter or the songwriter’s publishing designee usually holds the musical work copyright.(2)
If you publicly perform, i.e., broadcast, music, then you must obtain public performance licenses from the owners of both the musical work copyright (again, for signed artists this is usually a label-affiliated publishing company, while unsigned artists usually retain ownership in the composition copyright) and the sound recording copyright (i.e., the label in the case of signed artists or, in the case of unsigned artists, the artist himself). Historically, terrestrial radio stations have been exempt from paying the owners of sound recording copyrights, on the theory that radio drives the sale of music, which compensates owners of sound recording copyrights.(3)
Internet and satellite radio stations, however, are not exempt. When digital radio popped up in the 90s, Congress passed the Digital Performance Rights in Sound Recording Act, which awarded owners of sound recording copyrights an exclusive right “to perform the copyrighted work publicly by means of a digital audio transmission.”(4) By creating an explicit right, but limiting it to digital audio transmissions, Congress maintained the terrestrial radio exemption while forcing digital broadcasters like Pandora and SiriusXM to compensate both sets of copyright holders.
Obtaining a license to broadcast a song from an owner of a musical work copyright is relatively easy. Most songwriters are members of one of the performing rights organizations (PROs) like ASCAP, BMI or SESAC, whose job it is to issue licenses for such uses.(5) Providers like Pandora or SiriusXM can obtain “blanket” licenses, which allow them to broadcast every song in a PRO’s catalog in exchange for one simple payment.
In an effort to similarly facilitate the bulk licensing of sound recording copyrights, Congress created a statutory or “compulsory” license.(6) The statutory license is only available to providers whose services are non-interactive, meaning users cannot select the songs they listen to, which is why interactive services like Spotify cannot avail themselves of the statutory licenses and instead must license directly from the various copyright owners.(7) Sound recording performance royalties are collected and distributed solely by SoundExchange, the designated PRO for sound recording copyright owners.(8)
After establishing a statutory license for sound recording copyrights, Congress needed to set royalty rates for that license. In 2002, an arbitration panel (the CRB, which is the entity that currently sets these rates, came later) determined that the statutory license should be different based on the service for which the license is required. They elected for Pandora to pay a per-stream royalty and SiriusXM to pay a royalty based on its overall revenue. The rates were set differently for those services at least partially due to Pandora’s lower revenues and narrower business model (almost 100% music). Pandora currently pays approximately 1/10 of a penny to copyright holders whenever a song is streamed on its network, which amounts to 54% of its gross revenue, while SiriusXM pays 8% of its gross revenues in royalties, an expense that it passes along to its subscribers.
Pandora and its supporters have argued that the royalties they are required to pay render its business model unprofitable and unfair, especially where satellite radio pays significantly less as a percentage of overall revenue and terrestrial radio pays even less than that. Pandora would like to pay a percentage of its revenues to rights holders, like SiriusXM does, rather than a per-stream royalty. If IRFA passes and Pandora’s wishes are granted, then—by some counts—its royalty obligations would decrease by 85%.
Naturally, many musicians, record companies and performing rights organizations are opposed to IRFA, and have waged public campaigns against its passage. Opponents of the bill argue that Pandora’s entire business model is based on playing copyrighted songs, so asking them to pay a huge percentage of their revenue in royalties is appropriate. If anything, they argue, terrestrial radio’s archaic exemptions should be removed.
While IRFA is unlikely to pass in its current form, the complicated nature of the rights landscape suggests that some sort of legislation is needed to harmonize the outdated licensing regime with the reality of how billions of people worldwide consume music.
(1) See 17 U.S.C. §§ 102(a)(2), (7) (2006).
(2) Many labels today do require their songwriter-artists to enter into publishing agreements with the label’s publishing designee, giving the label-affiliated publisher a portion of the composition ownership, the income derived therefrom, or both.
(3) Of course, with nothing driving physical sales these days, that rationale is outdated.
(4)See 17 U.S.C. §§ 106, 114 (2000).
(5) For those compositions not controlled by one of the PROs, a direct license with the composition copyright owner is required.
(6) The license is “compulsory” because copyright holders cannot opt out of it even though services like Pandora and SiriusXM are still free to pursue direct licenses.
(7) Spotify’s licenses are beyond this article’s scope. However, Spotify pays approximately .007 dollars per play. Because the terms of the direct licenses Spotify strikes with copyright owners are private, transparency is an issue for Spotify. Moreover, some major copyright owners receive large bonuses for licensing their catalogs to Spotify. How much of that money gets passed along to artists is debatable.
(8) Like PROs, SoundExchange offers “blanket” licenses that cover all songs. SoundExchange also pays “featured performers” on the songs it licenses, something that no other PRO does.