Spirit of the Internet Radio

First world streaming music problems.

Are you one of the 8.1 million people who stream music over the internet on a weekly basis? I am, along with most people I know. Recently Rep. Jason Chaffetz (R -UT) and Jared Polis (D -CO) introduced bill H.R.6480 into the Senate, dubbed the “Internet Radio Fairness Act”. This bill targets the percentage of royalties when it comes to internet radio services and their various providers.

To understand what this bill is trying to solve, you need to know a bit about how music royalties work. Songs have two types of copyrights: one for sound recordings, which are usually owned by the artists and labels; and one for musical composition (words in the song). These are usually owned by the person who wrote the song and the company that published it.

What’s even more confusing is that the sound recording copyright rates change based on who is actually playing the song. Satellite companies like XM radio paid 8% of their gross revenues in 2012. AM and FM stations pay nothing for their sound recording royalties, while internet radio providers like Pandora shelled out 50% in 2012. The laws that shaped these percentages were based on a bill written in 1998, when internet radio was just an idea. John Villasenor at Slate wrote:

“Under the Digital Millennium Copyright Act of 1998, noninteractive digital audio services were partitioned into two categories based on, among other things, a snapshot of the digital music broadcasting industry taken on July 31, 1998. Companies such as Sirius and XM (now Sirius XM), Muzak, and Music Choice that were providing satellite or subscription services by that key date were grandfathered in and given access to the 801(b) standard. Internet radio, on the other hand, falls under the willing buyer/willing seller standard.”

In 1998, technology couldn’t support the bandwidth that would allow this type of streaming to the masses. The Internet Radio Fairness Act would change Pandora and iHeartRadio style apps into the same legal classification “801 (b)” as XM radio  instead of “willing buyer, willing seller.”

Opposition to the Internet Fairness Act

Richard Greenfield wrote an article opposing this new law on the basis of Pandora’s low volume of advertisements. Greenfield feels that Pandora should be using the same advertising mix (several minutes per hour, instead of a few 15-second spots) as terrestrial radio to create revenue, rather than asking Congress to get involved. He wrote:

Just consider how crazy this Internet Radio Fairness Act really is: Pandora chooses to not generate as much advertising revenue per streamed hour as it could to enhance the user experience and is capture share from terrestrial radio (based on lesser ad load), satellite radio and music downloading/playlist sites (iTunes).  So Pandora is effectively asking the government to intervene and reduce its cost structure, helping it remain a viable business because it knows its business model only works while running limited advertising.  Why should the US government allow musicians to be harmed simply to help Pandora and its investors generate enhanced returns?

As to what’s more fair, I’m conflicted. I love music, and it’s something I depend on daily to function. Personally, I don’t pay much attention to ads, so Greenfield’s argument doesn’t bother me much. But it also ignores the point that radio currently pays no sound recording royalties. I think that the playing field should be more level and fair to all services, and that musicians should be able to share and profit from services based on their work. Truthfully, I’m not sure that either the status quo or the Internet Radio Fairness Act would result in a fair or efficient system by that intuitive standard.

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