Clear Channel’s Giant Step

Originally published in the Jul-2012 of The Music Business Journal – Berklee College of Music

By Luiz Augusto Buff and Nicholas Spanos

The largest broadcasting group for radio in the US is Clear Channel Communications, and much of its holdings are in terrestrial radio.  It recently struck a special deal with Big Machine, the country music label whose artist roster includes, among others, Taylor Swift and Rascal Flatts. In a move that is a first in the US, Clear Channel will pay sound recording royalties on terrestrial performances to Big Machine.

Radio had always paid blanket broadcast performance licenses to ASCAP, BMI, and SESAC, and they in turn distributed the collected income to songwriters and publishers.  However, US law does not so far consider any payment by broadcasters on the sound recording right of a performance. This is unlike Europe and the rest of the world, where broadcasters do pay costs for sound recording rights and collection societies distribute such funds regularly to songwriters, publishers–and even sidemen in a recording.

In the US, broadcasters have justified not paying the sound recording right by arguing that radio airplay affords labels and performers much promotional value.  They have so far won, preserving the status quo despite continuous lobbying by the recording industry. Now, a free market solution that does not yet involve the drafting of new laws and regulations may be the seed of a new standard for royalty payments on broadcast radio.

Background

When streaming and listening to music over the Internet became a reality in the early 1990’s, laws were put forth to ensure proper payment of royalties on digital transmissions. For the new model of digital transmissions, the record companies were able to receive royalties for their sound recordings through a pay-per-play basis model, collected and then distributed by the collective management society SoundExchange, (which was created specifically for that purpose). This was agreed upon when streaming music was a very small portion of the music trade. And however much legislators were bowing to new developments, they also recognized that the ruling applied only to that incipient market.  In fact, they had no intention to transfer their exception on the treatment of music streams to the much larger market for terrestrial radio.

As Clear Channel’s terrestrial listeners are still 98% of the total (though there has been much growth in streaming music, both interactive and non- interactive), the conclusion must be that the pay-per-play basis for royalty payments on digital transmissions acted as a disincentive for Clear Channel to develop new online businesses.

The Deal

The deal that Clear Channel signed with Big Machine is in fact a beta test for a new standard of royalty payments that will allow the company to promote and advance its online services at lower costs; under the existing rules, the broadcasting giant cannot scale them down as it expands. The surprise over the deal is Clear Channel’s willingness to take a loss early on. The hope is that the rapid changes in this industry will save money in the long term, and help the company expand with new media.

The terms of the deal, and its novelty, are best appraised by comparison with the existing arrangement. Instead of paying the legislative mandated fixed rate of $0.0021 per song played on digital transmissions, Clear Channel has decided to share an undisclosed percentage of their advertising revenue – generated both from terrestrial and digital transmissions – with Big Machine Records. This gives them use of Big Machine’s music catalog in different radio platforms.

The deal bypasses the existing royalty structures for sound recordings, leaving SoundExchange outside of the collection process, with the broadcaster paying monies to Big Machine directly. Big Machine will then allegedly split the payments equally with their artists. Again, and as was mentioned earlier on, it is important to note that in the rest of the world the concept of paying sound recording performance royalties already exists, so Clear Channel and Big Machine are not inventing the wheel. Rather, they are pioneering the concept in the US.

The Future

The conflict between artists and broadcasters goes back, in the end, to the early days of radio. Yet it is possible that at long last radio can do more for talent than simply argue for their preeminent role in artists’ discovery and later success. Certainly, the parties involved in this bilateral and historical entendre see it as a forward-looking agreement. Above all, this is because the principle of a percentage take out of revenue is easy to work with. As Clear Channel’s CEO, Bob Pittmann, has said,  “I can’t build a business space paying money for every song I play, but I can [taking a] percentage of [the] revenue I bring in.” Ditto for Scott Borchetta, CEO of Big Machine Label Group: “Now, we can align our interest with radio in a predictable model based on ad revenue so that we can drive digital growth.”

It remains to be seen if other labels or artists will adopt their own agreements with broadcasters. Skeptics hypothesize that if this happened, indie labels and artists that were left behind could be cut out of radio playlists: if their content did not drive enough ad revenue, there would be no commercial advantage for Clear Channel or others to sign with them—clearly not the case with Taylor Swift’s Big Machine. If the value of indie repertoire suffered, it is suggested too that smaller radio stations might endure forced acquisitions. This, however, has not happened in Europe, although the broadcast sound recording right there is not negotiated on a piecemeal basis.

Europe and the US

Many have argued that expediency has trumped politics, for US legislators could not be expected to move fast and find a general market solution for the treatment of performance sound recording royalties. Europe has made progress on a country-by country basis, because each nation is a smaller market onto itself and speaks its own language. This brings affected parties to the negotiating table more easily, in part, because the broadcasting industry there does not have the weight that mass media can attain in the Anglo-speaking US. As a result, there are powerful stakeholders in the US that make this legislation difficult. Plus, the role of the state in Europe is generally more defensive of authors’ societies, and tends to intervene on their behalf and accelerate reform more than can be expected of the US government.

Conclusion

Musicians can be happy that America’s largest radio company seems to be taking the lead in finding a practical solution to its growth and recognizing a new right for music in terrestrial radio. It is possible that other labels will want to cut similar deals. If so, this will be the first step to a more sustainable industry wide solution that recognizes a fairer compensation for the use of artistic copyrighted materials created by performers and producers.

By Luiz Buff and Nicholas Spanos

Resources:

Christman, Ed, “Exclusive: Clear Channel, Big Machine Strike Deal to Pay Sound-Recording Performance Royalties To LabelArtists”; Billboard,  May 5 2012

Sisario, Ben, “Radio Royalty Deal Offers Hope for Industrywide Pact”, New York Times, June 10 2012

“Clear Channel and Big Machine Make Royalty Deal”, Rolling Stone,  June 11  2012

“Come Stream With Me”, The Economist, June 16 2012

“Performance royalties for terrestrial radio broadcasters back on the US music-industry agenda”, Music & Copyright, June 13 2012

A Bundle of Mechanicals

Originally published in the Jul-2012 issue of The Music Business Journal – Berklee College of Music

Legislators have tried to adapt copyright law to new inventions since the time of piano rolls. This is because creators beg remuneration in new media. In the Copyright Act of 1909, the exclusive right of the copyright owner to make mechanical reproductions of music was secured through the provision of a mechanical license, a term that is now used as well for electro-acoustical and digital reproductions.

In 1995, bowing to the pressures of the Internet era, Congress passed the Digital Performance Right in Sound Recordings Act. It broadened mechanical licenses to include digital phonorecord deliveries online. According to section 115 of the US Copyright Act, publishers and songwriters are obliged to issue mechanical licenses to companies that follow proper procedure and pay the rates set by law for songs that were previously recorded and released. These royalty rates, commonly known as statutory rates–as well as the terms, and the different categories in which music can be distributed–are defined by the Judges of the Copyright Royalty Board (CRB) every five years. In 2008, the CRB defined new regulations effective through 2012.

In April 2012, main music industry stakeholders led by (i) the Recording Industry Association of America (RIAA) representing the record labels, (ii) the National Music Publishers Association (NMPA) for the publishers and songwriters, and (iii) the Digital Media Association (DiMA) for the  digital service providers—all reached agreement on rates and terms for the next quinquennium and defined new standards to support five prior unlisted categories of digital distribution. The effort was meant to jump-start potentially novel music business models.

This agreement maintains the eight categories set in the past, extending the same rates through 2017. This means that for physical copies and permanent digital downloads the rates are still 9.1 cents per track or 1.75 cents per minute of playing time per unit distributed; for ringtones, the rate also stays put at 24 cents a track. The complicated formulas and structures for the preexisting subscription and ad-based interactive streaming services like Spotify also remain in place. The parties in the agreement confirmed as well that non-interactive, audio-only, streaming services do not require reproduction or distribution (mechanical) licenses from copyright owners.

The five new categories are for businesses operating with Mixed Service Bundles, Music Bundles, Limited Offerings, Paid Locker Services, and Purchased-Content Lockers. The legislation will bring more clarity to these providers, enabling them to better plan for their intellectual property costs. Moreover, new investors should come forward, for the risk of unforeseen legal developments hurt them too. All the categories above have their rates based on either a percentage of the service revenue or a percentage of the payments made to record companies for sound-recording rights, whichever is greater. There is at last some basis to exploit the new consumption of music.

On closer look, the agreement defines Mixed Service Bundles as the combination of locker services, limited interactive services, downloads and ring tones with other non-musical products such as a mobile phone, a consumer-electronics device, or Internet access. Music Bundles are defined as a packet of music products such as CDs, ring tones and permanent digital downloads. The third category, Limited Offerings, are usually subscription-based and offer access to certain genres of music or specialized playlists at reduced prices, and for that reason have a slightly lower rate than the other categories. Paid Locker Services, encompasses subscription-based cloud music storage for streaming and download, such as those offered by Apple, Amazon, Google and a growing list of technology companies. Lastly, Purchased-Content Lockers, are defined as those services that offers free cloud storage for digital music previously bought by the user as a permanent digital download, ringtone, or CD.

The agreement was sent to the CRB. It then published the proposed regulations to garner public comments and objections until June 18, 2012. Since the CRB encourages parties to agree on terms and rates, the agreement will likely turn into federal law, with minor changes after a review of the US Copyright Office.

Recognition should be given as well to the recording and publishing companies that are clearly taking digital-music providers more seriously—and coming to terms with them. After the dimming of physical music sales, this may not surprise (although sales have been falling for quite some time). This new business represents only a small fraction of the music industry’s income, but its potential is what likely brought all the parties together.

It is important to mention that although this new agreement has extensively covered the mechanical licenses issued by publishers and songwriters for the reproduction and distribution of their copyrighted material, this is only one of the elements of the royalty obligations of digital music services.  They still need to factor in their calculations the royalties paid to record companies for the use of their masters, as well as the public performance rights that are covered by blanket licenses from ASCAP, BMI and SESAC.

By Luiz Augusto Buff and Nicholas Spanos

 

Resources:

Federal Register / Vol. 77, No. 96 / Thursday, May 17, 2012 / Proposed Rules – LIBRARY OF CONGRESS – Copyright Royalty Board 37 CFR Part 385 [Docket No. 2011–3 CRB Phonorecords II] -Adjustment of Determination of Compulsory License Rates for Mechanical and Digital Phonorecords

“Meeting Of Minds: New U.S. Publishing Rates Deals”, Susan Butler’s Music Confidential,April 13, 2012.

Us Music-Industry Groups Agree On Mechanical Royalty Rates And Standards For New Digital-Music Services. Music & Copyright, Issue 456. April 18, 2012.