The Quest for Royalties for the Use of Sound Recordings on AM/FM Radio: In Full Swing

Guest post by Owen J. Sloane (@osloane) and Rachel M. Stilwell (@rachelmstilwell)

As nearly two hundred artists, producers, engineers, and music professionals traveled to Washington DC for “GRAMMYs On The Hill” last week, now is a great time to review the status of an important and recurring issue facing recording artists. Artists and record labels, large and small, do not get compensated for the use of their recordings on AM/FM (“terrestrial”) radio. The recording industry would like to see a change in this area, so that working musicians (not just the superstars) can make a fair living making recordings that we as fans want to hear on our local radio stations. It costs money, time, as well as talent, to create great records.

As representatives of recording artists, we don’t want super-talented recording artists, session-players and background vocalists to stop making records because they can’t get compensated for the use of the sound recordings they create. Neither do we want our heritage artists, many of whom have made recordings for forty years, to be forced to go on grueling performance tours, when sick or exhausted, because they just can’t pay their bills if they don’t perform live. These are the very types of professionals, among others, who joined forces on Capitol Hill last week to advocate their long-held position that artists and record labels must be paid performance royalties in sound recordings for airplay on terrestrial radio.

Since both the record industry and radio industry have consolidated heavily in the last 15 years, artists and labels understand that they can no longer depend on AM/FM airplay to drive commensurate sales of the recordings that are broadcast. The promotional value of airplay on terrestrial radio is still substantial, but it has greatly decreased over time as some listeners decrease their time spent listening to their FM dial and spend more time listening to music through Internet radio, on-demand music streaming services, and satellite radio. Far fewer recordings are sold as a result of AM/FM airplay than were sold years ago.

In 2013, sales from CDs, vinyl and other physical formats dropped 12.3 percent from 2012 levels. Revenue from music streaming services in 2013 grew 39 percent over the prior year. While revenue from streaming sound recordings has increased over the last several years, artists and record labels have long complained that subscription music services cannibalize sales of sound recordings. Those services that provide streaming “on-demand” (like Spotify) eat into record sales even more than streaming services like Pandora that do not provide an on-demand option.

While revenue and promotional spins from streaming services have increased recently, these revenue streams do not make up for the marked decrease in music sales that has occurred in the past fifteen years. In the 1990’s, the promotional value that came from FM airplay sold albums—not just singles. While broadcasters argue that the music industry’s financial woes are not attributable to the terrestrial radio industry, and that broadcasters should not be tasked with the burden of making up for lost revenue in the record industry, that view ignores the fact that the marketplace for sound recordings has changed drastically such that the promotional value of radio airplay does not drive sales the way it once did.

Many in the artist community believe that it is no longer fair that media conglomerates pay nothing for the use of sound recordings, while those same companies generate enormous revenues from the exploitation of that content. According to Dennis Wharton, Executive Vice President of Communications for the National Association of Broadcasters (NAB), annual revenues generated by the U.S. radio industry have increased over the last several years to about $17 billion as of 2013.

Parity Among Platforms

Terrestrial broadcasters argue that due to brutal competition for listeners and advertising revenue, they cannot afford to pay for a new category of royalties, i.e., for sound recordings.

AM/FM radio stations already pay for the privilege of broadcasting musical compositions, although they do not pay for the use of sound recordings. Terrestrial broadcasters have long argued that they sell so many sound recordings through promotional airplay, that they already compensate artists and labels as a pure marketing platform. Broadcasters also point out that much of the recent decreases in record sales are attributable to consumer theft of recordings. Since theft-related revenue losses are not attributable to radio broadcasters, the broadcasters argue, why should they now be burdened with paying royalties on sound recordings to solve the financial problems of artists and labels?

The best analogy we have heard on this particular issue comes from Michael Huppe, President and CEO of SoundExchange, the non-profit organization tasked with collecting and distributing royalties applicable to use of sound recordings: “If I wrote a blockbuster novel and you wanted to make a movie out of it, it would be beyond dispute that it will promote my book, but nobody would ever suggest that you take my entire storyline for free and use it in your movie.” That same analogy would apply even in a situation where many consumers are unlawfully downloading films based on bestselling (or not so best-selling) novels. Streaming services pay for their use of sound recordings. So do satellite radio and cable radio. Why not terrestrial radio? The carve-out for AM/FM radio to not pay such royalties is an antiquated notion that has outlived its purpose and creates disparity among the financial obligations of music-playing services.

But what about smaller, independently-owned radio stations and public radio stations that lack the resources enjoyed by the vertically-integrated media conglomerates? Artist groups and label communities have always been willing, and remain willing, to negotiate favorable deals with smaller broadcasters, particularly public radio; we don’t want to unduly burden those independent and public radio stations who barely squeak by themselves, financially speaking.

Artists and record labels have long argued that the passage of legislation granting them a right to royalties for the broadcast of sound recordings would provide parity and “level the playing field” among music services, while helping to compensate artists and labels for the use of the sound recordings in which they invest substantial resources.

Among those who have urged Congress to consider the importance of “parity among platforms” is Maria Pallante, Register of Copyrights with the U.S. Copyright Office. Ms. Pallante has urged Congress to rewrite federal copyright laws to grant a right to performance royalties in sound recordings on AM/FM radio.

Ms. Pallante points out that while artists and digital music services generally have opposing views with respect to what rates those digital services should pay for the use of sound recordings, there is another related subject on which these two groups entirely agree. Artists and digital music services share the belief that it is unfair that terrestrial AM/FM radio enjoys the use of sound recordings for free, while other music delivery companies must pay for the use of recordings. Explains Ms. Pallante:

[T]his an issue on which Congress has spent many years deliberating. Owners of sound recordings are disadvantaged under current law in that they enjoy an exclusive right of reproduction and distribution but not public performance. Moreover, because of the disparity in royalty obligations, there is an increasingly stark economic disadvantage for businesses that offer sound recordings over the Internet. Congress has done quite a lot of thinking on this already. How to craft a final resolution should be squarely on the table of comprehensive revision.

As representatives of recording artists, we agree with both the Register of Copyrights and the music streaming services on this issue for two reasons:

  • Artists and labels (indie and major) are now unfairly deprived of being compensated for the use of the sound recordings in which they invest time and money; and
  • Digital music services, who also help promote music, are at an unfair competitive disadvantage to terrestrial radio with respect to bearing financial burdens.

In other words, while artists and digital music services generally disagree about whether artists are fairly compensated by Pandora, Spotify, SiriusXM and other such music services, they agree that it’s unfair to both artists and digital music services that terrestrial broadcasters pay nothing for the use of sound recordings.

Parity Among Nations

The United States is one of few industrialized countries that don’t recognize performance rights for sound recordings. As Ms. Pallante has noted, the United States Copyright Office has long supported the idea of amending federal copyright law to create a right of public performance for sound recordings in AM/FM radio, “commensurate with the rights afforded to other classes of works in U.S. law and provided for in virtually all industrialized countries around the globe.”

In most countries, over-the-air radio broadcasters pay royalties to artists and owners of sound recordings. Almost all such countries adhere to treaties that grant rights to royalties for their broadcast of sound recordings, even if those recordings were created by artists and labels in other countries. But this system is only applicable to sound recordings created in countries that also adhere to the same treaties, on a reciprocal basis. Since the United States does not have a law that grants the right to performance royalties in sound recordings for use on terrestrial radio, we cannot become a signatory to the applicable treaties that would enable us to collect vast sums of foreign royalties that would otherwise be available to our artists and record labels.

The United States’ failure to pay royalties and agree to this reciprocal arrangement collectively costs U.S. performers and labels a massive amount of money annually. According to Michael Huppe from SoundExchange, testifying at a hearing before the House Subcomittee on Intellectual Property, Competition and the Internet, not only do artists not share in the billions of dollars in annual revenues made by the radio industry off of the fruits of artists’ labor, but also, because we do not have a right in this country to collect royalties on sound recordings played on terrestrial radio, “there are hundreds of millions of dollars overseas collected on behalf of American artists but don’t ever work their way to American artists because we lack the reciprocity.”

If the United States were to become a signatory, it would be required to adopt laws that create rights for artists and labels to collect royalties for sound recordings broadcast on terrestrial radio. At such point, if any, that the United States passes legislation granting such rights, the United States could at last be privy to reciprocal payment agreements with signatory countries, and collect hundreds of millions of dollars per year that now is uncollected by our artists and labels.

Some have argued that even if the United States were to sign the treaty, U.S. performers and labels may not reap as much as Huppe suggests. Under Article 12 of the Rome Convention (one of several intertwined treaties involved), a signatory country may “opt out” of the treaties’ reciprocal agreements at any time. Because the U.S. exports far more sound recordings than any other country in the world, some member countries would face a huge outflow of new royalties to the United States the moment we become a signatory. Such countries that lack a robust recording industry may owe more to the U.S. than they could collect worldwide for their own artists. Such a country may opt out of a reciprocal agreement to pay royalties.

However, many of the countries that choose to opt out of the reciprocal treaty arrangement are likely to be smaller countries without sophisticated AM/FM broadcasting systems. Thus the amount of revenue we would have collected from these countries with respect to these royalties is likely relatively small. If they opted out, we wouldn’t miss their royalty pool very much.

Moreover, many countries do have robust recording industries and recognize a right of public performance in sound recordings. Such countries have a significant interest in collecting performance royalties from countries besides just the United States. These countries would likely not opt out even if the United States passed legislation and agreed to international reciprocity. Thus, artists and labels in the United States sacrifice an enormous amount of revenue that they would otherwise reap from international sources.

The Free Market Royalty Act

In September 2013, Congressman Mel Watt (D-NC) introduced the Free Market Royalty Act (FMRA), a bill supported by artists and record industry trade organizations, and opposed by the National Association of Broadcasters. If passed, the FMRA would eliminate AM/FM radio stations’ exemption from copyright laws that require satellite radio, webcasters and cable radio broadcasters to pay royalties for the broadcast of sound recordings.

The FMRA would establish a right to royalties for the use of sound recordings by AM/FM radio, such that terrestrial radio stations would be required to compensate artists in some fashion; but it would “let the market decide” on the applicable royalty rates by requiring the interested parties to negotiate those rates privately, on an industry-wide basis. Under the FMRA, the interested parties would be required by law to negotiate the amount that broadcasters must pay for the privilege of broadcasting sound recordings. The FMRA would also make sure that artists retain a “fair share” of royalties collected (so that the royalties don’t all just go to the record labels). The bill would ensure that featured artists are paid directly through SoundExchange. Forty-five percent of all royalties would be paid by SoundExchange directly to featured performers. Five percent would be shared between sidemen and background singers, paid through AFM and/or AFTRA. The other 50% would go to the owners of the copyright in the sound recordings. Some of those labels are huge conglomerates, but many are independent, privately-owned labels.

Although there have been quite a few privately negotiated deals between certain broadcasters and record labels in this arena—such as deals between Clear Channel and Warner Music Group and Big Machine Label Group—-these deals don’t create a performance right for the use of sound recordings at radio. The combined artist/label communities have long sought to privately negotiate an industry-wide deal with the NAB. The two sides came close to reaching a deal in 2009 after the Performance Rights Act (the predecessor to the FMRA) passed both the House and Senate Judiciary Committees. But after reaching what was thought to be a mutually agreeable deal, the NAB rescinded its assent to the terms of the deal. Since then, only piecemeal deals have been made with individual labels and broadcasting companies.

The FMRA would, if passed, get the NAB back to the negotiating table. While artists and labels were hopeful about the passage of this bill last Fall, many in the industry now believe that we can’t depend on this particular bill passing, solely because the bill’s sponsor, Rep. Mel Watt, left his position in Congress earlier this year to run the newly formed Federal Housing Finance Agency. So, although many in the music community praised this bill for its simple and elegant solution to the otherwise thorny problem of rate-setting procedure, the Free Market Royalty Act may not be the performance royalty bill that ultimately gets enacted. But not all is lost….

Copyright Reform Ahead?

Artists enjoy support from several key members of Congress who are expected to further Congress’ conversations on this issue. In the next several years, Congress, with the assistance and encouragement of the U.S. Copyright Office, is expected to study and debate whether and how to accomplish a comprehensive overhaul of the Copyright Act of 1976—including but not limited to the issues discussed in this article.

The U.S. House Judiciary Committee, chaired by Rep. Bob Goodlatte (R-VA), is reviewing the Copyright Act of 1976 in its entirety for potential changes, with the encouragement of the United States Copyright Office. The Committee is expected to continue hearings, including several related to performance royalties for sound recordings. Many copyright experts believe that Congress can be expected to start drafting legislation in the next year or so, after hearings have concluded. This is true even though the NAB boasts that 200 lawmakers have expressed support for its bill, the so-called “Local Radio Freedom Act,” a resolution opposing “any new performance fee, tax, royalty or other charge” on radio stations. That resolution is nonbinding, and was introduced prior to the hearings that are expected to be part of Congress’ review of the Copyright Act.

Rep. Jerrold Nadler (D-NY), who is replacing Rep. Watt as ranking member of the House Judiciary Intellectual Property Subcommittee, supports the implementation of performance royalties for sound recordings. This Subcommittee can be expected to have further hearings on the subject of performance royalties for sound recordings. Rep. Nadler has long been a friend to the independent record label community. We had the pleasure of being introduced to Rep. Nadler at The Recording Academy’s Entertainment Law Initiative Luncheon earlier this year during GRAMMY Week.

Rep. Judy Chu (D-CA), a co-sponsor of the FMRA, co-founded the bi-partisan Creative Rights Caucus to educate lawmakers about problems stemming from a lack of fair compensation to creators, as well as copyright infringement issues. As Congress takes on whether–and how–to enact broad reform of the Copyright Act of 1976, Judy Chu’s Creative Rights Caucus can be expected to continue its education of members of Congress about the importance of fair compensation to recording artists and owners of sound recordings.

With growing support for establishing an obligation for terrestrial radio to pay royalties for their use of sound recordings coming from influential sources—and with much of Congress in accord—it is hoped that new legislation will be forthcoming soon. In the meantime, we urge everyone in the music community to write to his or her Senator and Representative, expressing support for legislation creating a right to royalties in sound recordings played on AM/FM radio.

For more information: 

Owen J. Sloane
 Osloane [at] gladstonemichel [dot] com 

and

Rachel Stilwell 
 Rstilwell [at] gladstonemichel [dot] com

© 2014 Gladstone Michel Weisberg Willner & Sloane, ALC. Reprinted with permission.

[Photo:  ”Radio Transmission towers” by FastLizard4 licensed by CC-BY-2.0]

Comments

2 comments posted

This really helps clarify

Submitted by Mari D (not verified) on April 14, 2014 - 8:30pm.

This really helps clarify that we need a right to collect these royalties from overseas. Every dollar counts, and we are just leaving this money on the table.

It seems like the FM radio

Submitted by lorysinard (not verified) on April 22, 2014 - 11:53pm.

It seems like the FM radio stations are doing really well in this high trouble time. How do they make huge money? I don’t get it.

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