This supposed "solution" is a bizarre one for several reasons. It doesn't address the much greater issue of the $.0008-to-$.0019 per song per listener rate that, minimums or no minimums, makes webcasting financially unviable for almost everybody. And it has no impact at all on certain types of webcasters (e.g., streams of AM/FM stations, Internet-only services that aren't massively multichannel, etc.), so it's not really any kind of industry-wide "solution" at all.
But last week, journalists revealed that SoundExchange had hidden two key terms from Congress and the press: (A) The maximum cap was offered only through 2008. (B) The offer was conditional on webcasters giving up their lobbying efforts in Congress to have the underlying law changed.
Solving the mystery of Farpoint Station
So I've been wondering, why those two secret conditions?
What good does it do Pandora (or Live365 or whoever) to tell them, "You may pay royalties of a few million dollars a year for now, but on January 1, 2009, we want a check from you for $9 billion?" (My math: That's assuming Pandora has approximately 9 million users and that the average user has set up two channels.) (That, by the way, is an insane amount of money: $9 billion is about 50 to 100 times more than all of the venture capital money Pandora has raised to date, and I suspect it's more than 100 times more than their total annual revenues will be that year.)
It's taken me a week to figure it out SoundExchange's strategy behind this "offer," but I think I've got it:
Although SoundExchange has been hammering on the theme of "fair payments for artists" as the messaging behind their PR efforts, the effect of these two conditions would be the exact opposite.
Specifically, the offer seems designed to force webcasters to sign "direct deals" with major labels to stay alive.And if webcasters sign direct deals, artists (and independent labels) get 100% screwed.
Here's how it works:
Under the CRB rates, let's say AOL Radio (to switch examples) would owe around $66 million a year in royalties. (That's an untenable amount, by the way; it would probably be 60% to 120% of their total annual revenues for the year in question. (Math available upon request.))
When that amount is paid under the statutory license, after 10% is deducted for SoundExchange administrative costs, half of the money, by law, has to be distributed by SoundExchange to artists and half (in this example, about $30 million) to labels. According to SoundExchange, the big four labels currently get about 67% of the label money (in this example, about $20 million).
This set-up makes it possible for EMI, Warner, Sony-BMG, and Universal, sometime before 2008, to go to AOL Radio en masse and say, "Tell you what we can do: Sign a private deal with us, promise to play our priority records, and we'll only charge you $24 million a year! (And we'll won't charge you any per-channel minimum fees.)"
If webcasters had in fact accepted SoundExchange's proposed "solution" from last week, what else could AOL Radio do in 2008 but accept? They'd be looking at bankruptcy otherwise... and they'd be prevented from going to Congress for help!
But see how this works? Since the labels own the copyrights to the sound recordings, under a direct deal there's no legal obligation to pay the artists anything. (Actually, there may be a small obligation in their contracts with artists, but it's charged in a "recoupment deal" against the artist's advance from the label, which means the artist will probably see nothing.)
So in offering to discount AOL Radio's royalty obligation from $66 million to $24 million, the big four labels could not only get increased airplay for their priority acts, but they could actually increase their royalty take an additional 20%! Sweet!
But because it's not a statutory license, the artists would GET NOTHING!
And as for the independent labels, most of them want airplay. If this scenario plays out as I've hypothesized, the conditions that the major labels impose on webcasters might leave little room on station playlists for indie-label product anyway, so I would bet that the indies would eventually start offering waivers -- i.e., "Play our music and we won't charge you any royalties." In that event, they would also GET NOTHING!
Holy cr*p! Can this be true?
But how could SoundExchange do this? Aren't they supposed to be a collective representing big labels, small labels, recording artists, and even backup musicians? How could they make an offer that screws small labels, recording artists, and backup musicians?
Well, the law that led to the creation of SoundExchange (the DMCA) was proposed by the RIAA. (BTW, when I say "RIAA," I'm really referring to those big four labels that comprise most of the revenues of and power behind the RIAA.) The SoundExchange organization was set up by the RIAA. Most of its key executives came from the RIAA. Most of the board members representing small labels, recording artists, and backup musicians are individuals who were hand-picked by the RIAA. Most of the negotiating committee members are representatives of or closely associated with the RIAA. And, in fact, I believe the key negotiator for SoundExchange with large webcasters is in fact a full-time RIAA executive.
So it's not inconceivable that this proposed "solution" could be a deal that devolves to the benefit of the RIAA's big four labels at the expense of everyone else.
Does any other explanation make sense?
Here's the proof that I'm right: Is there any other explanation that makes sense?
Why else would SoundExchange propose a short-term reprieve that ends in 2008?
Why else would SoundExchange try to deny webcasters the ability to ask Congress for relief, unless the goal is to leave them no alternative than cut direct deals?
(Need additional proof? Note that two of the biggest-name webcasters who didn't participate in the "Day of Silence" a couple of weeks ago -- Last.fm and Slacker -- have both publicly announced that they're not worried about royalty rates because they're cutting direct deals with labels. )
So what do we do now?
Key members of Congress have been telling both webcasters and SoundExchange, "Work this out among yourselves. Come up with a rate that's fair and that keeps webcasting alive."
The CRB decision is not that: The CRB judges based their rates on a per-performance rate from the world of subscription-based, on-demand streaming -- not ad-supported! And not radio! -- because they needed to find a transaction in which they could see a "willing buyer" and a "willing seller." (And the CRB judges believed that their assignment, as given to them by Congress in the DMCA, did not obligate them to consider whether the rate was "fair" or doublecheck whether the webcasting industry could survive at the rate they picked.)
But what is "fair"? To the layman (i.e, a reasonable person)...
- "Fair" might be the same compensation that composers get for the "musical works" royalty from AM/FM, satellite, or Internet radio -- i.e, about 3% to 4% of station revenues.
- Or "fair" might be the same amount that AM/FM broadcasters or satellite radio operators pay for this "sound recordings" royalty -- i.e., either 0% or about 4% of station revenues, respectively.
- Or maybe "fair" could be the 7.5% of revenues that webcasters are proposing in the Internet Radio Equality Act.
- Or perhaps "fair" could be whatever decision the CRB makes in their currently-ongoing hearing to set the sound recordings royalty rate for satellite radio's next five-year period (in which the judges have been instructed by Congress to use the traditional Copyright Office standard that does, in fact, look at concepts like "fairness" and practicality).
I think it would be fair to say that it's time for SoundExchange to make an offer that is good for all of its members.
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P.S. I was naive
Until writing this essay today, I was naive.
When friends and journalists asked me, "Why is SoundExchange pushing for such high rates that they'll shut down the industry?," I told them I didn't understand it.
I thought maybe the deal was being driven by aggressive, take-no-prisoners litigators who only care about winning and not about the ultimate long-term impact on their industry. (I think that's what was going on when the record industry had Napster shut down, even though they knew it would unleash a much worse generation of P2P services; I also think that's what's going on with these P2P lawsuits against children and senior citizens.)
But I underestimated them! What I didn't see is (1) that the people at the big labels hate the entire concept of statutory licenses, with terms set by judges or arbitrators or legislators. They want direct deals -- ones that they can control and set the terms of. And (2) that the big labels are in control of the entire SoundExchange process.
With that perspective, everything becomes clear:
Bankruptcy-level statutory rates are perfect, because they force webcasters into direct deals with the big labels.The reason I missed this was a naive assumption on my part that SoundExchange was acting for the benefit of all of its members -- big labels, small labels, recording artists, and backup musicians -- the latter three classes of which would be massively hurt by direct deals.
But thanks to this "offer" ten days ago, the scales have fallen from my eyes: If SoundExchange is actually acting only for the benefit of the big four labels, then everything comes into focus and makes sense.
Ah, sweet clarity.
To reiterate my conclusion above: It's time for SoundExchange to make an offer to webcasters that is good for all of its members.
