Barely Legally

Confessions of a Moot Court Bailiff

Much Is Due About Royalties

There’s a problem with giving away someone else’s music for free. The people who made it want some money for making it. This is a less than unreasonable proposition. However, there is a storm a-brewing in the backyard of internet radio stations, who, like terrestrial radio stations, play music that you can listen to for free.

I won’t retrace the history of the process, but as it stands today, an internet radio station owes the record companies some money per song per listener. A terrestrial radio station (that is, the regular FM and AM station) pays no such fee based on play statistics. There are certainly fees to pay when you broadcast copyrighted material, but charging per song per listener is physically impossible with terrestrial radio: there’s no way to know how many listeners you have at any one point.

Computers, however, are powered by magic: on any given internet radio station, you know precisely how many people are listening to each song. As such, the digital age has obviated the need to guess how much a radio station owes a musician (or his record company). In theory, the two sides sit down and negotiate a fair rate for each song each listener… err… listened to.

No theory survives contact with reality unscathed, however. Pandora is one of the biggest internet radio stations, and because it can’t afford to pay the fees established to compensate the musicians and their record companies, they’re going broke. Currently, the royalty fee sits at eight-hundredths of a penny per song per listener. According to Pandora, this represents an annual cost of $17 million dollars in royalties alone. That’s 70% of their projected revenue this year. To make matters worse, in two years, the fee will go up to nineteen-hundredths of a penny.

You don’t need to be a mathologist to realize that this does not bode well for Pandora’s bank account. They’re trying to decide whether or not the situation is dire enough to close up shop. For smaller internet radio stations, the situation is already past “dire” and well into “burn the joint down and collect the insurance money” territory. Fortunately for insurance companies, you can’t burn down the internet.

sidebar: …or can you? Note to self: take out insurance policy on the internet.

The record companies are making $17 million this year in royalties from just one radio station. There are literally thousands of these prospective sources, and as the internet becomes an ever more ubiquitous part of our lives, the number of total listeners will only increase. This is literally free money: the music has already been made, it’s already been sold, it’s already being played on terrestrial radio, and there’s no added cost to the record company associated with getting the music onto the internet. (Hell, I think they spend a lot more money trying to keep their music off the internet.)

And yet, the federal agency that sets the fees keeps raising the royalty rates for internet radio. It’s in the best interest of the radio stations to keep the fees low, so they can stay in business and make money. It’s in the best interest of the musicians to keep the fees as high as the radio stations can pay. They should both be working together trying to halt the hiking of the royalty fees, but instead, negotiations seem to have stalled.

The internet as a mass-medium is still very much in its infancy. No one’s quite sure exactly how much money you can make on all this stuff. Billboards? Magazines? Commercial breaks? This stuff is down to a science at this point. But making money on the internet? Facebook is valued at $15 billion, but hasn’t turned a profit. YouTube still hasn’t turned a profit, almost two years after its acquisition for $1.6 billion. Some companies are doing very well, and some are not.

I applaud Viacom, Fox, and NBC for their experimentation with putting popular shows such as the Daily Show, the Colbert Report, South Park, and hundreds of other shows on the internet for free. I’m sure they have a rough idea that they won’t lose (a lot of) money. There are automated bean-counting machines at this point which can ensure that the ad revenue should at least cover the bandwidth and server operation costs.

Of course, these two situations aren’t perfectly analogous. Piracy of audio files is much more rampant than video files; record companies are right to be more wary of the digital age than television studios. But with internet radio as we know it being strangled, I can’t help but wonder if the record companies would be better served by experimenting with generating revenue on the internet, and not just trying to quash digital distribution because it threatens the traditional model.