11/07/2012 09:35 am ET Updated Jan 07, 2013

A Common Sense Approach to Internet Radio Royalties

The debate over royalty rate-setting for Internet radio is generating plenty of hyperbole -- including specious claims that the Internet Radio Fairness Act before Congress involves reverse payola schemes, would rain antitrust lawsuits down on artist organizations and give Congress the power to fire copyright judges and replace them with political appointees. Any reasonable person should question the truth of these assertions, and a quick read of the Bill proves that none of them are actually true. In light of all the mischaracterizations about the Internet Radio Fairness act, intentional or not, it seems important to establish some facts about what Internet radio fairness is and why a diverse coalition of organizations is pushing for it.

It helps to understand how Internet radio royalties are set today: Royalty rates are established under a relatively new, controversial standard often referred to as the 'willing buyer-willing seller' standard, a standard that is ONLY applied to internet radio. No other form of digital radio -- and in fact no other music use at all -- comes under this rate-setting standard. Since this royalty standard was adopted, many of the earliest pioneers of Internet radio, including AOL and Yahoo, have abandoned the industry in search of more viable business opportunities. The reason for their departure is simple: This unique standard that is applied only against Internet-based radio services results in crushingly high royalties that often exceed 50 to 75 percent of an Internet radio service provider's gross annual revenues.

Internet radio companies that are forced to pay so much of their gross revenues in sound recording performance fees have little to no money left over to hire additional employees or reinvest in innovation and future growth of their companies.

What's most striking and unfair -- and what this Bill is really about -- is that rates for cable and satellite radio are determined by a completely different standard; one that uses a four factor test and is often referred to as the '801b' standard. The Internet Radio Fairness Act would apply this same standard to Internet radio.

The benefits associated with the '801b' standard are undeniable. For copyright owners, the standard guarantees that owners will receive a fair return for their creative efforts. For licensees, the '801b' standard promises that the use of such works will be able to yield a fair income. Finally, for the general public, the standard guarantees that copyright-protected works will be made available in a way that maximizes their use and enjoyment by all Americans.

That's a fair and reasonably balanced approach, but recently, a handful of critics have surfaced to take issue with the use of the '801b' standard. Their argument suggests that the longtime standard should be cast aside because it produces "below market rates" for copyright owners. This line of reasoning should be met with a fair amount of skepticism for the following two reasons:

First and foremost, the '801b' standard has been in existence and widely used for nearly half a century -- and before webcasters even existed or requested parity, none of the current objections concerning below market rates had ever been expressed. Indeed, for a couple of decades prior to the advent of Internet radio, '801b' had been consistently relied upon to determine the royalty rate that licensees would have to pay for the reproduction and distribution of musical compositions -- and not once during those years did copyright owners attempt to replace the standard with a new "market-based" approach.

Secondly, there's a bit of hypocrisy at play here. The very same critics who are opposed to the notion of relying on the '801b' standard to establish sound recording royalty rates have never expressed any concerns with the use of the standard when they license musical compositions. Why the difference? Well, in the case of compositions, these critics are licensees, and therefore the ones making payments to copyright owners. But in the case of sound recordings, they're licensors, and therefore receiving the payments. It is simply a plain case of: "Do as I say, not as I do."

The Internet Radio Fairness Act simply seeks to eliminate the historical discrimination against Internet radio by placing webcasters under the same rate-setting standard that's currently used for cable and satellite radio.

Ensuring Internet radio fairness, in the end, is about more than guaranteeing the future survival of a struggling industry. It's also about protecting an important new medium that offers up-and-coming recording artists a chance to become the stars of tomorrow. Space on traditional radio is limited. Internet radio changes this equation by offering working-class musicians exposure and earnings potential -- provided the system is fair.

A healthy and competitive market for Internet radio, which includes royalty payments set under fairly-applied standards, will help ensure that innovative media companies can continue to help music fans connect with artists that they otherwise wouldn't, paving the way for more players in the industry, more choices for more consumers, greater royalties for artists, and overall growth of the music industry.