Radio Performance Royalties

I have been getting a bunch of calls lately from reporters on my take on radio royalty issues, so figured I would put them out here for all to see. For those that are not familiar with the issue, there are 2 main debates raging right now. The first refers to the performance royalty for digital audio - i.e. streaming, playlists, internet radio, etc. Terrestrial radio does not pay a performance royalty because of a long standing "agreement" that radio offers promotion for the artists, so therefore should get a break on this royalty. However, with the record industry suffering from illegal file sharing, they decided several years ago not to extend this break to digital transmission of music. The thought being that it is this digital medium that got them into this problem, so it should be what gets them out of it. Ironically, these days, internet radio is probably a better vehicle for music discovery than traditional radio, yet it's viability is being put in jeopardy by this royalty. And streaming audio is not the problem for the record industry. It's peer to peer file sharing - which is very different than internet radio. Have you ever heard of anyone stealing music off of an internet radio station? There are a million other places you can do it more easily...

The second debate is related, but potentially has a much bigger impact. I am referring to the recent discussions about lifting the performance royalty exemption on terrestrial radio. There has been some debate as to why this is happening - especially when the radio business is apparently under so much financial pressure. Some people think it is to blunt the digital broadcaster argument that applying a performance royalty on digital is unfair because there isn't one on terrestrial radio. Other's believe that terrestrial radio was the target of the record industry all along - and that digital was just the first step in taking back this exemption.

Ultimately, it doesn't matter. Performance royalties make sense. I find it hard to believe that someone in good conscience can argue that the performer isn't entitled to a royalty for the airing of their performance. However, it of course, isn't that simple. Because this is regulated by congress, and because the record industry is a wounded dog backed into a corner, there are all kinds of political and economic games happening.

In most situations like these, I would support the market working this out. If the record industry doesn't want radio - terrestrial or digital - to play their songs without paying a big "tax", then the radio industry can negotiate directly with artists, cut deals on a label by label basis, or enact a pay to play scheme where they only pay music from artists that pay them to play their music. However, since these two industries are mature and have hundreds of thousands of jobs and billions of investor's capital in them (pensions, IRAs, mutual funds), there is a political interest in keeping them stable. If I had my way, I would broker a compromise that put a small ($.0003 per song) royalty on performance. Something that recognizes radio's impact on record and concert ticket sales, but also pays for the right to use the content. Unfortunately, (or fortunately, depending on your pov), I don't decide what happens here.

But here are my predictions on what I think does happen:

1. Internet radio suffers through a painful royalty rate. It may improve a bit from where it is now, but this will happen.

2. Internet radio will start to look a bit more like terrestrial radio. By this, I mean that Internet radio will have more ads and more royalty free content. The good news is the personalized and niche programmed radio everyone loves will still be available. The bad news is you will probably be hearing about 4-5 minutes of audio ads per hour of programming to pay the bills. This is still less than half the ads heard on terrestrial stations, but a far cry from the commercial free experience found on Pandora and imeem.

3. Internet radio will get serious about ad targeting. In order to generate the most $ from the ads they run, internet radio will tap into all the targeting tools of internet advertising and ultimately create an ad that is much more valuable than a terrestrial radio ad. If they have less than half the # of ads running, they will need to create 2x the value to make the same $. I think this is possible. (I know this is self serving because I run TargetSpot, but I REALLY believe it!)

4. Terrestrial radio will win the current royalty battle with the record labels. This will happen because of politics. Quite simply, big radio is more powerful than the big labels. Not only does the radio industry employ more people than the music industry, but radio execs are much more politically savvy. Their business has always been in partnership with government - the FCC, local zoning laws, political advertising, issue oriented talk, etc., so they know the players and are in a better position to influence the decision makers. And government, correctly in my opinion, won't let the record industry drag down the radio industry - especially in an economy that is teetering on the brink of collapse. The record industry has already imploded, but the radio industry, despite the much publicized decline in ad spend, over leveraging, etc. is actually a healthy, profitable business.

But, if I am a radio group, I would continue to fight this royalty tooth and nail while at the same time begin to prepare for the demise of the royalty exemption. Eventually the labels will win this war. If not through legislation, through streaming radio becoming a larger and larger part of radio's distribution.