09/30/2013 05:58 pm ET

Ranking Member Mel Watt Makes a Bold First Step in Freeing Creators From the Government's Heavy Hand

I've been writing about -- well, OK, a blaringly vocal advocate -- for getting the government out of the music business for quite some time. Unsurprisingly, I'm quite pleased with the Free Market Royalty Act introduced today by Ranking Member Mel Watt (D-NC) of the House Judiciary Committee's Subcommittee on Courts, Intellectual Property and the Internet.

As described, the bill does a couple of very important things -- it gets rid of the compulsory license for webcasting and satellite radio, and it establishes a regime for applying the public performance right to sound recordings on over-the-air (or "terrestrial") radio.

Quick -- do you think that artists get paid when their records are broadcast over your car radio? If you said yes, you'd be wrong. Actually, you'd be right in every country of the world except China, North Korea, Vietnam...and the United States.

Except for Internet based and satellite radio in the US, which do enjoy a compulsory license mandated by the government as well as sub-market royalty rates. These rates are the object of considerable lobbying on the part of the big Internet companies, most recently Pandora. In fact, Pandora has gone running to Big Nanny every time they felt they weren't quite making enough money, most recently with the ill-fated Internet Radio Fairness Act last year (aka "IRFA").

The IP Subcommittee hearing on IRFA clearly demonstrated just how fed up many of the committee members are with being dragged into setting rates for the now-publicly traded Pandora. Sometimes there are particular moments when you realize that things are about to change -- such a moment came during questioning at the IRFA hearing by former Chairman James Sensenbrenner.

Chairman Sensenbrenner asked the then-CEO of Pandora a question that foreshadowed todays bill -- what would happen if the Congress just did nothing. That is, what would happen if the current regime expired and there were no compulsory license.

And here you have the answer in the Free Market Royalty Act.

Clear Channels Direct Deals Are Distorted by Compulsory Licenses

You have probably read about the several direct deals that Clear Channel has closed with labels that pay for public performance of music on the hundreds of Clear Channel stations. (Other broadcasters have done the same.)

There are some big problems with the Clear Channel deals, but the good thing about them is that the market is clearly demonstrating that radio recognizes that they need to pay artists and labels for radio broadcast over the air -- even if the law doesn't require it.

But the problem is that these negotiations are heavily colored by the compulsory license rates for Internet radio that are set by the government in a very cumbersome process. The Clear Channel rates are necessarily expressed with reference to the government mandated rates for compulsory licenses on Internet radio.

We will never know whether the free market would have produced a higher or lower rate, but we do know that as long as the government rate is out there for any sector, the natural inclination is to lock in a rate that is even lower than the government rate. This has a tendency to make these rates into a hole that artists will have to dig out of for a very long time.

In fact, the only thing that lasts longer than a government royalty rate is government cheese.

The Blanche Dubois Method of Royalty Auditing

Blanche Dubois, Tennessee Williams character in A Streetcar Named Desire famously said that she always relied on the kindness of strangers. This is essentially what happens for each label that makes a deal with Clear Channel as far as we can tell from the outside. Individual labels are unlikely to audit (except perhaps the Warner Music labels who have a single contract with earnings that would justify an audit).
Watt's bill allows payment through SoundExchange, a single licensing body that can license--and audit--on behalf of all artists.

Direct Payment of Artist Royalties

One of the concerns I've long voiced about direct deals with broadcasters (Clear Channel, Sirius, or anyone) is that a license by a record company allows the label to collect both its own share of royalties and the artist's share. That means artist royalties could be applied against unrecouped advances given last week or 30 years ago. That defeats the purpose of the royalty.

Under the current regime, artists get paid their share directly by SoundExchange -- a nonprofit organization with an equal number of independent and artist board members and major label representatives.
Watt's bill preserves that direct payment requirement while getting rid of the compulsory license regime. This makes the new proposal so much more attractive for artists -- all artists, not just the famous ones -- than the old regime.

Next Steps for Greater Market Freedom

We will see how this legislation fares and how serious Pandora et al are about rate fairness -- let the market actually decide. So what's next?

First -- expect tremendous pressure from Clear Channel to close deals before the market sets the rate. Artists and labels have to make their bets as to whether it is better to take the king's shilling now or wait until you get freed from the government mandate.

But while I'm excited that Rep. Watt took this bold first step, we can't ignore the fact that songwriters and their performing rights organizations -- ASCAP and BMI -- are still subject to an antiquated regulation by the Federal Trade Commission and the Department of Justice.

Pandora has raised hundreds of millions in the public markets in both an IPO and a follow-on offering, yet still goes running to Big Nanny to set the rates for songwriters. Pandora gets the benefit of the compulsory license on the sound recordings it uses, but also gets what is essentially an equivalent compulsory license on the songs in those same recordings.

And if that's not getting seconds on government cheese, I don't know what is.