Internet Radio and Copyright Royalties: Reforming a Broken System

In recent weeks, an increasingly agitated community of music aficionados has been mounting a vocal campaign to save Internet radio. On March 2, 2007, the Copyright Royalty Board (CRB) announced its decision to increase the rates of the statutory license for sound recordings paid by Internet radio stations. Webcasters immediately cried foul and stated that these fees would force most webcasters to cease broadcasting. While some of their comments have certainly been hyperbole, if the new rates take effect they will have a deleterious effect on Internet radio.

There are two core problems with the current system. First, the current system fails to produce competitive rates for the statutory license. In the absence of a competitive market the recording industry is able to pursue monopolistic pricing. SoundExchange, a performance rights organization, negotiates a single royalty rate with webcasters for all music on behalf of the recording industry. Since SoundExchange has a monopoly on sound recordings, it exerts too much market power to be a fair negotiator. In addition, the current system does not allow record labels and artists to set competitive prices for their music. Instead of allowing the market to create competitive pricing, the government has imposed a single royalty rate for all music. Finally, in their most recent ruling the CRB established rates for all non-interactive webcasters based on contracts between large interactive webcasters and the recording industry. The decision did not account for price adjustments that the recording industry and small, non-interactive webcasters would negotiate.

Second, the system discriminates against Internet radio. Although Internet radio and terrestrial radio are competing technologies, Congress has exempted terrestrial radio from paying royalties on sound recordings. The entire premise that Internet radio should pay an additional royalty violates a core governing principle of the new economy that policies be technology-neutral. Ultimately, the system is broken because no judgment from the CRB proceedings would have produced the optimal outcome: a system where copyright owners can set competitive prices for their recordings and get compensated fairly regardless of the technology used to broadcast their music.

Congress needs to enact legislation to reform the current system. First, Congress should grant the same performance copyright to all broadcast technologies. If terrestrial radio is exempt from the sound recording performance copyright, then Internet radio should also be exempt. If Congress wants to impose this royalty then both should pay. Second, Congress should modify the statutory license to allow copyright owners to specify separate royalty rates for each sound recording. This change will promote more competitive pricing and ensure the market can respond to foreign competition. Third, Congress should allow copyright owners to assign separate royalty rates to small and noncommercial webcaster groups. These policies will promote innovation, consumer choice and international competition. As a result, consumers will enjoy more listening options and copyright owners will receive fair compensation for their works.