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Coalition Opposes Reducing Royalties for Web Radio

Record labels, artists, others fight to protect lucrative Internet royalty rates on digital music streams

Ludacris, meet Grover Norquist.

The rap star and the anti-tax activist are among a strange-bedfellows coalition lining up against legislation that would reduce the royalty rates that Internet radio stations, such as Pandora and iHeartRadio, pay to play songs.

A group of 125 celebrity recording artists — including Billy Joel, Jimmy Buffett and Britney Spears — signed a letter that appeared in Billboard magazine complaining that the legislation would gut artist income. Even more persuasive for lawmakers may be the opposition that has emerged from labor unions, which are concerned about musician pay, and Norquist, who is balking on free-market grounds.

Record labels are the driving force behind the coalition being assembled to stop the proposal, sponsored by Rep. Jason Chaffetz, R-Utah, and Sen. Ron Wyden, D-Ore.

“A bill that might have seemed to be a somewhat noncontroversial bill is now very clearly controversial, with significant segments opposing it that appeal to both parties,” said Ted Kalo, executive director of the musicFIRST Coalition of artists and record labels.

Although the music industry push-back is no surprise, the vigor of the campaign at this early stage in the policy discussion demonstrates that the stakes are high. Digital music streams are becoming increasingly popular, as evidenced by Pandora’s more than 1 million listeners, and record labels want to protect the lucrative online royalty rates they currently enjoy.

Traditional over-the-air radio stations have long broadcast songs for free, and record companies have failed for years to get them to give up their legacy exemption and pay royalties. Meanwhile, cable and satellite radio providers, such as SiriusXM, have struck deals to secure low royalty rates.

But Pandora and other Internet radio providers pay the highest rates; about half of their revenues go to royalties. Those companies expect their rates to increase during upcoming negotiations with the record labels if Congress does not intervene, as it did three years ago by passing legislation (PL 111-36).

Pandora CEO Tim Westergren said the agreement prompted by that law helped online radio survive, adding, “The short-term solution is about to expire, and we believe there should be a permanent fix.”

Radio providers and record labels are expected to sit down within the next two years to negotiate royalty fees for 2015 and beyond. The Copyright Royalty Board, a three-judge panel appointed by the librarian of Congress, determines the rates if the two sides can’t reach a deal.

Westergren argues that artists could actually make more money under lower rates, because more Internet radio stations would emerge and prosper. He contended that the nascent Internet radio industry could go under if rates are not reduced, although Kalo’s coalition questions whether that is true, given Pandora’s market success.

Norquist, whose Americans for Tax Reform group has considerable influence among conservative lawmakers, wrote in a letter to lawmakers last week that the Chaffetz-Wyden proposal attempts to control prices rather than allow labels and radio outlets to negotiate in the free market. He urged lawmakers to “move toward a market solution.”

“Government should extract itself from this debate to allow an environment to develop among broadcasters, record companies, artists and other interested parties,” Norquist wrote.

The AFL-CIO and NAACP are also opposing the measure because reduced royalties could hurt struggling artists and musicians. Both warn of “a race to the bottom in performers’ compensation” if the legislation is enacted, a fair-pay argument that could sway Democrats against the bill.

The House Judiciary Committee is expected to discuss the rate disparity between Internet and other radio stations at a hearing next week.

In addition to the Chaffetz-Wyden bill (HR 6480, S 3609), Rep. Jerrold Nadler, D-N.Y., is likely to bring up a competing proposal, aligned with record industry interests, that has not yet been formally introduced. The differences between the two approaches are stark.

Chaffetz and Wyden, both of whom frequently back Internet companies in such fights, introduced their measure in September. It would require the Copyright Royalty Board to evaluate Internet radio stations using the same standard as applied to satellite and cable radio providers, which, in effect, would lead to lower rates for the Internet stations. Terrestrial radio stations would continue to have free access to songs.

Wyden said at a conference last week that he hopes the legislation will allow Pandora and other Internet radio stations to compete on equal footing.

“It is the job of policymakers to ensure that the law and public policy doesn’t favor one business model over another, and doesn’t favor incumbents over insurgents,” the senator said.

The National Association of Broadcasters tacitly backs the Chaffetz-Wyden effort, but the trade group has not formally endorsed it.

Nadler’s proposal, on the other hand, would leave current digital rate structures in place. The bill would require terrestrial radio stations to make up for their free access to music by paying extra if they decide to run accompanying online stations. Nadler has criticized the Chaffetz-Wyden bill for attempting “to achieve parity at the expense of artists.”

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