Wednesday, December 5, 2012

A Consumer-Driven Marketplace Has Been a Hallmark of Innovation

Pandora CEO Joseph Kennedy, NAB spokesman Bruce Reese, and venture capitalist David Packman recently testified before a House Judiciary Subcommittee hearing on music licensing, speaking in favor of bill H.R. 6480. To summarize their reasoning: current music licensing standards prevent select investors from making big money in internet radio.

Speaking against the bill were economist Jeffrey A. Eisenach, music producer Jimmy Jam, and SoundExchange President Michael Huppe. To summarize their reasoning: current music licensing standards enable the free market to get artists fairly compensated for use of their work.

The core issue of the debate over the bill, subtitled The Internet Radio Fairness Act (IRFA) of 2012, is whether "fairness" would be established by having services like Pandora pay less in music licenses in order to fix their unsustainable business model, or whether other services should pay more.

The statutory licensing model, under which a service pays a set percentage of its revenue in licensing fees for music content was established by the Digital Peformance Rights Act of 1995. The so-called Willing Buyer Willing Seller (WBWS) model, under which a commercial service pays a set per-play license fee, was introduced by the Digital Milennium Copyright Act of 1998. Services in existence as of 31-December-1997 were exempted from the new standard. Terms of the DMCA have been modified three times since passage to narrow the definition of services to which WBWS applies

So, currently, who pays what?
  • AM/FM Radio. $0. The USA is the only developed country that does not impose music performance license fees on over-the-air radio.
  • SiriusXM and Muzak. So-called pre-existing streaming services under the DMCA. Grandfathered to statutory license fee, currently set at 8% of revenue.
  • Microcasters. A microcaster is defined as a service with annual revenue < $5000 and that streams < 18,067 aggregate tuning hours (ATH) per year. (That is equivalent to two sumultaneous 24/7 listeners.) Microcasters pay a flat annual fee of $500 + $100 optional fee to be exempted from recordkeeping requirements.
  • Non-commercial Pureplay Webcasters (defined by their tax status per IRS Section 501). Annual payment of $500 or per-play royalty of $0.0012/play paid on monthly ATH in excess of  159,140, whichever is greater. (159,140 monthly ATH equate to roughly 200 simultaneous 24/7 listeners.) Stations that are CPB-supported or members of various Public Radio consortia do not have to file records. Under the terms of their settlement  agreement, NPR’s Public Radio Interactive is making those payments. These stations will be contacted by Public Radio Interactive with regard to their obligations.
  • Small Pureplay Webcasters (annual revenue < $1.25M). 12% on the first $250K in revenue and 14% on revenue > $250K. In exchange, the webcaster receives an ATH limit of 10 million monthly — essentially unlimited streaming — plus additional benefits. Payment obligation is subject to a minimum of 7% of operating expenses
  • Large Pureplay Webcasters (annual revenue > $1.25M). 25% of revenue or per-play royalty of $0.0012/play, whichever is greater. Unfortunately for Pandora, which falls into this group, a "play" is defined as a song delivered to an individual device running a its client app, including songs a listener skips after listening for a time and songs that are pre-fetched for playback, but never actually initiated. These inflate their play count. Reports estimate Pandora's total payments at $0.02/ATH, which works out to the average listener touching 16 songs per ATH.
Proponents of the IRFA argue that Pandora pays too much in licenses — more than 50% of revenue — relative to its peer services, amounting to a commercial disadvantage, and needs relief. Opponents argue that WBWS is the fair model for artist compensation, and should be extended to services like AM/FM radio and SiriusXM, ending their "subsidized mandate to exist." No one wants small and non-commercial webcasters unduly burdened by new license fees.

The debate will continue not only in  the U.S. House but in the U.S. Senate. "A consumer-driven marketplace has been a hallmark of innovation on the Internet and the same market forces should decide the value both of competing music delivery services and the music content they deliver."

Stay "tuned."

             Vinyl-to-Digital Restoration #47             

Artist: Chuck Mangione
Title: Children of Sanchez
Genre: Soundtrack
Year: 1978

Chuck Mangione composed this music for a film soundtrack in 1978, but it quickly took on a life of its own when it was released as a two-LP set. While the movie Children of Sanchez didn't make much of a commercial impact upon release in 1979, the music won Mr. Mangione both a Golden Globe® and a Grammy®, garnering fan loyalty the film never enjoyed. The repetitive themes necessary for a cohesive film soundtrack make end-to-end listening of the LP somewhat tedious. (Where is the skip button?) But the tracks in weightless digital form equate themselves quite well individually.

© 2012 Thomas G. Dennehy. All rights reserved.

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