Will Internet Radio Raise or Shrink Royalties?

Two bills seek to equalize royalties paid by Internet Radio to Sound-Exchange.

(from Billboard Magazine, October 13, 2012)  The stage is set for a conflict regarding internet radio royalties in the coming year.  In the most basic terms, the conflict’s major players are internet radio provider Pandora and Sound-Exchange, the organization responsible for collecting royalties due to artists and recording owners.  Currently, Pandora pays 63.9% of its revenue to Sound-Exchange, while other digital music sources like SiriusXM and Music Choice pay only 8% and 2.5% respectively.

Two bills in Congress seek to remedy this inequality.  The first bill, sponsored by Representatives Jason Chaffetz (R-UT), Jared Polis (D-CO), and Senator Ron Wyden (D-OR), would achieve parity using the 801(b) standard.  The 801(b) standard is already used to set royalties for non-internet digital media such as satellite radio and cable.  In other words, Pandora’s royalties would be lowered to the same level as SiriusXM and MusicChoice.  The opposing bill, the Interim FIRST Act, accomplishes the same goal by a different means.  Drafted by Representative Jerrold Nadler (D-NY), the Interim FIRST Act would use the “willing buyer, willing seller” standard to cable and satellite radio, raising royalties of these sources to the same level as Pandora.

Interim FIRST has already gained the support of both Sound-Exchange and the RIAA.  Sound-Exchange President, Michael Huppe, summarizes their position as “It’s the artists’ and the record labels’ product that forms the core of their [internet radio] product.  The least that can be done is to compensate those people at a fair market value.”

Another consideration is lower royalties could grow the internet radio market.  John Villasenior, a senior fellow at the Brookings Institute in Washington D.C., says “I personally believe with the combination of increased rates from SiriusXM plus market growth from Pandora, Sound-Exchange will see substantial increases in what it collects.”  Pandora founder, Tim Westergren, agrees, saying lower royalties would free up money for new innovations which would bring artists and listeners closer together.  The counterclaim by Interim FIRST supporters is a lowered royalty is basically a subsidy benefiting Pandora for its own growth.