There’s never been a better time to be a music lover. Gone are the days of having to buy an entire album to get the one track you actually like. Technology has empowered consumers through streaming music sites and other innovative services, but those gains are now threatened by a proceeding before the Copyright Royalty Board, a government agency that has the power to set the prices that streaming sites must pay to rights holders.
A decision from the CRB, which is scheduled to come before the end of the year, could affect millions of Americans who love streaming music over the Internet.
Rather than having market forces set prices, the CRB is empowered to determine the rates that artists, and those to whom they have granted the rights to their songs (the record labels), are compensated each time a song is played. While not ideal, this system was established due to antitrust concerns bolstered by the past behavior of the record labels.
The royalty rate is now up for renewal, with a decision expected in December, and a concerted effort is under way by the music companies to see that the rate is increased above what evidence suggests is the market price. If they get their way, it could cost consumers and threaten the economic viability of online music services.
Federal law requires Copyright Royalty Judges to establish rates that most “clearly represent the rates and terms that would be negotiated in the marketplace between a willing buyer and seller,” giving the judges that rule the board an undeniably tough job. Because the market is full of government imposed distortions, finding a free-market-based rate to charge companies per play is extremely difficult, and in the past has been nothing short of impossible. However, that task has gotten a bit easier lately thanks to the existence of real market-negotiated rates.
The judges now have 30 contracts that were established outside the bounds of the government pricing scheme when Congress passed legislation in 2008 and 2009 temporarily to enable online services that were struggling to stay afloat under the current royalty scheme to bypass the CRB and negotiate deals directly. In each one, the rate negotiated was lower than the government-set price. While those rates are also set to expire this year, they provide actual market-negotiated prices that should inform CRB’s decision.
Record company executives and lobbyists love to pretend they are supportive of market forces. They often demand “fair market” pricing and “market value” for the artists they represent. But when the market shows that the price is lower than the government sets, they do what any advocate of cronyism would do — they seek to bury the evidence. They want to exclude the use of the market-negotiated contracts from use by CRB, and hope instead to see royalty rates raised to a level that would likely put streaming services out of business.
Recently, a new issue has emerged in the process. Federal law does not provide for different rates for different types of licensors, but the CRB has asked the Copyright Office whether they can set varying royalty rates for different music suppliers. The law is clear and it establishes royalty rates and terms without regard to the specific characteristics of a particular licensor, such as their market share. The entity tasked with collecting royalties by Congress, SoundExchange, can’t serve both the independent labels and the majors if rates are allowed to vary, causing a major distortion of the market.
A ruling that potentially allows higher rates to major labels than independents would upend the industry. Why would artists stick with an indie if they could get more money for the same work through a major label? Such an outcome would undermine the very purpose behind Congress’ creation of CRB — to discourage market monopolization.
The record industry clearly wants the Royalty Board to stick it to the streaming companies, which have already been unable to turn a profit despite paying out hundreds of millions in royalties, by any means possible.
That’s unfortunate, because with more foresight they would see the value in a healthy, competitive market. By enabling innovative services that provide more convenient options for listeners, a single lower rate can expand both the market and revenues for artists in addition to benefiting consumers.