Last fall, Linda Perry performed a special show for a very small audience. Her venue: a white-walled hallway outside a hearing room in the U.S. Capitol.
Perry is the songwriter behind “Beautiful,” the ode to inner strength popularized in 2002 by Christina Aguilera. Perry performed the pop ballad just before a meeting of a House subcommittee taking up the issue of Internet radio royalties. Instead of gospel singers, she was backed by a PowerPoint projection that read, “Beautiful was played more than 12.7 million times on Pandora and Perry's compensation equaled $349.16.”
Who created the formula that had Pandora, an Internet radio service, paying Perry just a few hundred bucks for millions of plays of a smash single? Not the fans. Not the industry.
Pandora pays royalties set by the U.S. government through the Copyright Royalty Board, or CRB. The same goes for Internet radio broadcasters such as Last.fm, Clear Channel's iHeart.com, and any radio station with an online broadcast, whether college or corporate.
Perhaps as much as any songwriter, agent, artist, audience member, or critic, the three judges of the CRB, appointed by the Librarian of Congress, determine the future of your music, one case at a time.
The little-known board has been around for about a decade, never developing anything like groupies outside niche legal circles. Its anonymity is enhanced by the fact that it meets—quietly—inside the Library of Congress, with an address on the fourth floor of the James Madison Memorial Building along D.C.’s Independence Avenue.
In real estate, homes have titles. In music, the corollary is copyright—a title to a song, if you will, which can be shared among several interests, including the songwriter, the artist, and a music label. That share determines how much in royalties others (other artists, for example) wind up with to pay the shareholders. That cash, in turn, runs the music business.
Undistorted, the relationship between the use of music and royalty payments to artists might produce something like a real free market in music. Fans would still argue about matters of taste, of course—Beatles or Stones? The Clash or Sex Pistols? Tame Impala or The Lumineers?—but their listening habits would translate in the marketplace, based on frequency, demand, and availability.
That’s not how it played out. Instead, distorted by federal regulators trying to manage the myriad relationships between buyers and sellers, the government system produces horror stories.
The story begins in 1976, when the feds first addressed copyright protections specific to sound recordings as part of an overhaul meant to address new technologies. Back then, that meant the spread of cassette recording. But compact-disc technology followed, and then came the rise of the personal computer.
Just two decades later, Congress was again playing catch-up, this time to account for the explosion of digital music copies on the Internet.
The result was a complicated, technology-specific system. A series of federal acts spelling out copyright laws (and therefore, royalty payments) for digital radio followed, including new standards for song-recording copyright owners and performers. Any discrepancies would be settled by the Copyright Arbitration Royalty Panel.
But even this system wasn’t enough. Technology moved more quickly than the regulators. So, in 2004, Congress created a new body—the three-judge CRB—to establish royalties for recordings played on Internet and satellite radio outlets. For each song created, copyrighted, and then played on one of these services, payments are supposed to trickle down in a gentle drizzle of cash and coin, percentage point by point, to performers, songwriters, and other rights-holders.
The result of the 2004 legislation was a tangle of copyright laws, the result of imposing the last century’s static regulatory structures on a constantly evolving music ecosystem. And it doesn’t seem to be working for anybody—the industry, the artists, or the consumers.
The Capitol Killed the Radio Star
This patchwork regulation has created an uneven playing field among broadcasters. Under its CRB-set royalty rate, Pandora paid rights holders a whopping 50 percent of its revenues in 2010. By contrast, satellite service Sirius XM paid 10 percent.
Terrestrial radio stations, which operate in a separate system, paid—and continue to pay—royalties to publishers and songwriters, but pay no royalties to performers at all.
If you’re looking for evidence of the government picking winners and losers, you need look no further.
The Internet Radio Fairness Act, proposed in the fall of 2011, would have brought Internet radio services like Pandora into the CRB’s lower rate structure for Sirius. It sounds fair for Pandora, maybe, but it would have cut back the royalties earned by artists.
Artists receive what amounts to fractions of a cent for each "listen" their song receives. Taken collectively, though, payments issued for the total number of "listens" received by every song and artist can really add up. In 2012, the nonprofit SoundExchange, which collects and distributes these royalties, doled out $462 million, up 58 percent from the previous year.
Very quickly, though, the government’s attempt to align players like Sirius and Pandora was bogged down in controversy. Along with “Beautiful” songwriter Perry, other creators, including Desmond Child, the songwriter behind Bon Jovi’s “Livin’ on a Prayer,” went to the capitol last year to lobby lawmakers. Whatever balance it might restore at the industry level, they argued that the new law would dent their own revenue. Dozens of artists—from Alabama to the Zac Brown Band—also came out against the new regulation.
This image—artists arguing with lawmakers, lobbyists, service providers, fans, and one another—says a lot about what’s wrong with government attempts to regulate an industry.
"We Called It Punk Rock"
Lost in the fight over a certified payday for creators is the original intent of music copyright law: to ensure public access to works of art.
A few people spoke up for the possibility that the free market provides the best protection for art. Free-market advocates from the likes of Citizens Against Government Waste, Americans for Tax Reform (ATR), and the Center for Individual Freedom spoke out against the IRFA legislation on the basis that it expands government price-fixing.
“Pandora is free to choose which business model it pursues, and to adapt and modify its business model as the market dictates,” wrote Timothy Lee, the executive director of the Center for Individual Freedom. “But it should not be able to turn to Congress to intervene and reduce its cost structure in order to enhance or salvage a struggling business model.”
Grover Norquist from ATR chimed in, asserting that “both the existing and proposed models pick winners and losers rather than allowing free-market negotiations.”
How would free-market negotiations work in this case? For some artists, a simple exchange model of creating and selling hard copies of music is a not-so-distant memory. Damon Krukowski, of indie rock group Galaxie 500 and duo Damon & Naomi, has worked in the industry for decades.
He remembers not getting paid for his first album back in 1988—his label eventually went bankrupt.
But today, “the ways in which musicians are screwed have changed qualitatively, from individualized swindles to systemic ones,” Krukowski wrote in an opinion article at the indie-music website Pitchfork.
Krukowski said Pandora paid a total of $64.17 for use of the entire Galaxie 500 catalogue in a single quarter, for 64 registered tracks (under the CRB’s performer-rate structure). The band, a trio, also received a whopping 21 cents for 7,800 Pandora streams of a single song, “Tugboat,” through BMI royalty checks meant for songwriters.
Frustrated with the nickel-and-dime system, Krukowski said he now streams all of his recordings for free on sites like Bandcamp. He’ll get the same immaterial benefits from airplay—expanding a fan base and generating hard copy, ticket, or merchandise sales—without getting caught up in the game.
“But I have simply stopped looking to these business models to do anything for me financially as a musician,” Krukowski wrote. “As for sharing our music without a business model of any kind, that's exactly how I got into this—we called it punk rock.”
What a Free Music Market Might Look Like
Technological change may trigger regulatory avalanches, but there’s also the opportunity for the industry to blossom outside of that structure once creators like Krukowski take their business plans into their own hands.
If the industry were able to negotiate royalty payments outside the confines of government-set copyright laws, the system could naturally reset itself to reward artists and consumers. Such deregulation of the digital radio industry could put the industry on the right foot as it continues to grow, expand, and adapt to the times.
If you’re wondering what a free market in music might look like, consider Spotify—a streaming service that allows users to search for and play any song from any artist. This choose-your-own-playlist option is popular and growing: Spotify has more than 20 million users worldwide.
Spotify doesn’t play in the same regulatory arena as Internet radio. It negotiates individual licenses with record labels to use music, as well as unsigned (that is, independent) artists.
While the company doesn’t make the terms of those licenses public, several case studies indicate per-song stream rates at about half a penny. Some artists say Spotify pays too little, but others say the firm is actually quite generous; they point out that royalty payments consume about 70 percent of Spotify’s total income.
As Spotify grows its market share, it’s possible the company will use its power to push down royalties in order to increase profitability. At that point, artists might do better than appeal to federal regulators. They’ll move somewhere else.
They may join someone like Joey Flores, co-founder of EarBits, an online radio service that doesn’t pay royalties to artists. Bands can sign up for free, have their songs played on genre-based stations, and directly build an audience from EarBits listeners.
Flores says where 1,000 online radio streams might earn a band $1, on EarBits they’re “paid” (our word, not his) in a different currency: an average of nine Facebook friends. For a band looking to build an audience, that can translate into ticket, album, or merchandise sales.
Flores, a musician himself, founded EarBits with a fellow bandmate in 2010. He envisions the future of artist compensation involving other valuable assets, like listener data or mailing lists. These kinds of negotiations also happen outside the regulatory apparatus of Washington—and end up benefitting the artists behind the music.
Such a model could be a win for independent artists looking to make a living at music. And there are many more of those than there are Top 40 pop stars.
“It’s unfortunate,” Flores said, “that no one says, ‘Well, what else could we do that would be valuable for you?’ . . . I don’t know a band that wouldn’t pay a dollar for nine Facebook friends.”