Future of Music Coalition Policy Conference

May 2, 2007

Volume CVII, No. 7/8July, 2007

John Conte and Joel LeFevre

You can watch the FMC Policy Conference for yourself here:
Future of Music Coalition Policy Conference

Fundamentally there is a shift in the way music is consumed. In the US cd sales are off over 10% a year for three years, in some European Union countries cd sales are off by over 50% in just two years. (EU countries mandate broadband speeds to be 5 to 20 times faster than in the US.) XM radio, Rhapsody, I Tunes and internet broadcast radio are increasingly the way music is consumed.

The conference, held at the offices of the American Constitution Society for Law and Policy in Washington DC, consisted of three topic panels entitled Radio Waves, The Net Effect and Stocking the Celestial Jukebox with individual speakers. The panels consisted of four industry types and one artist advocate and a moderator or four artist rights organizations or advocates and one industry advocate and a moderator. This framework brought out different views on each topic. In addition, Congressman Mike Doyle of Pennsylvania, the head of the Consumers Electronics Association; and a supervising attorney at the US Patent Office addressed the standing room only crowd and took questions.

A bit of background is in order here. In the US there are two types of copyright royalties collected. One is for the use of music, often referred to as the publishing rights and a second form of copyright for the broadcast use of a recorded performance, which may be either visual or audio or both often referred to as performance rights. Broadcast radio in the US is exempt from performance royalties. However, internet broadcasters must pay for a general license covering both publishing and performance royalties. Congress set the rates and mandated Sound Exchange as the collection agent covering both forms. From this royalty 50% goes to the copyright holder (often a record company), 45% goes to the featured artist, and 5% goes to the other performers. This amount is paid to musicians and other performers through the joint AFM-ASCAP Fund. If you are on music being webcast or downloaded you should register with the fund. You can do so here: AFM AFTRA Digital Rights Fund.

Two legal rulings were issued just prior to the conference on May 2nd. The first was a Special Royalty Panel (SRP) which issued the ruling for the US Patent Office on the rates that internet music providers must pay for a general license to use copyrighted material. The rates and the panel of judges were mandated by Congress in 2002. The ruling is very contentious. The small operators have to pay the same rates as the largest operators retroactive to Jan 2006. The rates that the SRP judges decided on, effective retroactively through the beginning of 2006 are as follows:

2006: $.0008 per performance
2007: $.0011 per performance
2008: $.0014 per performance
2009: $.0018 per performance
2010: $.0019 per performance

A “performance” is defined as the streaming of one song to one listener; thus a station that has an average audience of 500 listeners racks up 500 “performances” for each song it plays. The small operators previously were allowed to pay a royalty that was a fixed percent 3 to 8% of their gross income instead of the flat rates according to their size. According to the US Patent Office representative the judges followed the law and the only changes would happen if congress acted.

It should be noted that internet broadcasters get their income from individual subscribers and very little from advertising. Congress viewed the percentage of gross income business model as a temporary solution and told the copyright royalty panel to come up with a permanent solution which was not to be the percent of gross receipts business model. After an acrimonious hearing process and almost two years after congress acted the judges issued their ruling.

The panel on the status of current trends in technology conference panel included representatives from Sound Exchange the mandated collection agent for the payment of internet use royalties, Counsel for the AFM, a musician involved in using the internet radio to make a living, an artist representation attorney and the president of the Paragon internet radio site. Rate structures set up in 2002 included a % of income model for small webcasters instead of the flat rate per use. The SRP ruling orders the internet radio sites to pay back to Jan 1, 2006 by July 15, 2007 at the full rate for all webcasters. According to the small webcasters industry that will take 75% to 100% of their income instead of the 8 to 12% they pay now and will put them out of business. Sound Exchange reported that 40% of webcasters are non-compliant with the law today. Since the conference Sound Exchange has announced support for a continuation of the current business model for the current period of 2006 – 2011.

Like most pieces of corporate legislation in the neo-con era the name of the legislation is often wonderful ” The Internet Radio Equality Act”, sounds terrific. Who wouldn’t support that? Well, musicians for one. This bill would cut royalty payments for the largest webcasters and XM and Sirius Radio by about half. Today’s internet radio royalty rates cost a listener about 66 cents to listen to 40 hours of music a month. Bad policy in the form exempting broadcast radio from performance royalty payments followed on by bad proposals to cut payments to artists and performers for internet streaming goes against the interests of musicians.

Unlike the EU broadcast radio in the US does not pay performance royalties. Even thought there are digital performance copyright laws, US broadcast radio will still not pay when they go to all digital transmission. This is a testament to the power of the National Association of Broadcasters(NAB). The NAB had themselves written out of the law. US broadcasters do not pay performers while in the EU 30% of broadcast music across is from US artists and about $80 million dollars in performance and use royalties is collected but it is never paid to US artists performers and copyright holders because there is no reciprocal agreement to collect for EU artists in the US.

Within a week of the discussion of this unfairness to artists and musicians the Broadcasters started lobbying Congress denouncing the idea of new taxes in an economy already burdened by too many taxes. Never mind the idea that taxes go to the government and royalty payments go to artists, performers, creators and record companies. No, no don’t get hung up on facts here.

Also just prior to the conference, the Federal Court in New York issued a ruling which found against ASCAP. The court held that a download is not a performance entitling a copyright holder to a payment. So the hope of getting any additional payments via the courts is dead.


Another panel with high interest were the speakers on the Save the Net initiative. The lobbyist from Verizon was notable for the anger he was able to project while acting insulted as he sowed confusion about plans to make the internet vastly more profitable for the giant cable and wire corporations than it is today. Watching him work was like watching a hate radio talkshow host in person. Right now internet broadband is pretty much a business class service. Everyone is the same kind seat while traveling. But as fiber optic connections increase the telcos’super premium T1 and T3 customers are starting to wonder why they pay so much for wide pipes. It is easy to see a scenario where paying much more for priority direct communication gets that corporate class of customers’ e-mail through systems like it does now and when you or I send an e-mail it arrives ten hours later having been bumped several billion times by higher paying digital 1st class passengers. So while the industry lobbyist pooh-poohed criticism of such plans as left wing fantasy the Dolan family, who also own radio City, who are the majority shareholders of Cablevision were putting the final touches on a $6 billion dollar offer to take Cablevision private and not have to share enormous future profits of price-tiered next generation broadband with shareholders.

This campaign has a lot of oomph and will need to sustain it to prevent the Telco’s and cable barons from permanently changing the internet. You can find out more by going to Rock the Net.

The additional panel on the state of distribution technology offered some fascinating tidbits that the reader can review on the conference website. As we noted in Allegro, we want to note with pleasure that the biggest round of applause in the day came at the end when Patricia Polach, the AFM attorney, noted that if the country doesn’t figure out a way to allow musicians to make a decent living and feed their families the creative levels of today – which feeds all the new distribution – won’t last.