The Pressure Mounts On Terrestrial Radio

Imagine Joe Smith as the head of a small chain of radio stations somewhere in the US’s mid-west region. Despite the downsizing of his staff, dwindling ad revenue, and the growing uniformity of the station’s playlists, Joe could at least end the year on a positive note. He survived running a small terrestrial broadcast operation, which in and of itself, was quite an accomplishment. Later in the day, however, a stern record industry lawyer of the Recording Industry Association of America walks into his office and tells him that he would like to collect a first-time-ever royalty on the use of his playlists. The amount asked, Joe estimates, is about one-tenth of his existing revenues—and he barely broke even! Joe becomes depressed. While the lawyer meticulously walks him through the legality of the request, Joe can only think about being solvent. In fact, Joe Smith’s plight may not be unlike that of a thousand other small broadcasters who, on February 4th 2009, learned that a revision of the Performance Rights Act was being proposed to Congress and the new law asked for such royalties.

History of the Performance Rights Act

When it comes to musical works, there are two classes of expression that are governed by copyright law. The first, the rights to a composition, refers to the actual musical work (lyrics and melody; the second, the sound recording right, addresses the use of master recordings (the recorded product). Composition rights are typically held by the original composer or the work’s publisher, while sound recording rights are generally controlled by the performing artist or the record label that distributes the recording. Since the dawn of the terrestrial radio industry, broadcasters have paid royalties to composers and publishers for the use of their copyrighted compositions. In the US, these royalties have been collected and distributed to composers and publishers through three performance rights organizations: Broadcast Music Inc. (BMI); the American Society of Composers, Authors, and Publishers (ASCAP); and the Society for European Stage Authors and Composers (SESAC)—a misnomer that dates back to the 1930s.

If you’re wondering why record labels and performing artists, and their sound recordings, have been left out of the money pool, it is for good reason. The relationship that labels and artists have had with terrestrial radio has been immensely beneficial for both parties over time, despite the fact that no money ever changes hands. On the one hand, broadcasters enjoy the free, unlimited use of sound recordings, which draws in listeners and attracts advertisement revenue. But on the other hand, labels and artists reap the intangible benefit of free promotion to the mass consumer audience–a crucial element in popularizing new releases. A recent study for the National Association of Broadcasters, reveals that free radio airplay generates somewhere between $1.5 billion to $2.4 billion in annual music sales for the major record labels. In fact, labels have held radio to be so valuable over the years that, before they were penalized, they likely spent millions of dollars bribing disc jockeys to move their catalogues to the top of their playlists in a practice known as ‘payola’.

Over the past forty years, Congress has viewed this symbiotic relationship to be “mutually beneficial” and refused numerous attempts to impose royalty payments on sound recordings–first in 1971,when it granted copyright protection for sound recordings, and then in 1976 when revisions were made to the Copyright Act. The Digital Millenium Act of 1998 recognized a Sound Recording royalty for subscription and non-subscription services over the Internet, but no reference was made about payment from broadcasts via traditional airwaves. The RIAA now argues that technological change requires that a new exception to encompass terrestrial radio be written into the Performance Rights Act.

Consequences

Enactment of the Performance Rights Act could stand to drastically upset the balance that’s been established between labels and broadcasters. The proposal would create a compulsory license that would require radio stations to pay set royalties to labels for the use of each sound recording that’s broadcasted. This would create an entirely new set of expenses (in addition to royalties currently being paid for compositions) on an already beleaguered terrestrial radio industry.

With the new legislation, small-range independent radio stations would be forced to pay a flat fee that would vary in size depending on situational factors, but would be capped at a maximum of $5,000.00 per year. While this may seem manageable, larger stations will not be getting off as easily: stations above a specified annual revenue mark will be required to pay a percentage of their total earnings as royalty compensation for the use of the sound recordings. Rates have not yet been determined, but royalty fees for satellite radio are currently hovering around 7.5% with the expectation of an 8% rise by next year.

Considering the current state of the economy, and the multitude of digital, streaming, and satellite competitors that are beginning to absorb market share, the Performance Act really could not be coming at a worse time for terrestrial radio. On average, local stations have watched their ad revenues slip between 10% to 50%, depending on the market. Moreover, the radio industry as a whole has experienced an 18% decline since 2009. This tightening of receipts has already forced well over three-hundred radio stations nation-wide off the airwaves.

While the growing loss of these stations is certainly a concern, broadcasters also argue that the diversity of their programming will be compromised. Fewer will fight for the same pool of listeners, and indie, experimental, and locally produced music will be sacrificed. It is possible too that many stations might abandon music all together in favor of the popular talk-radio format. Stations who could afford the levy would re-stream popular radio shows that have proven ratings and the tried-and-true top 40 would be the most rotated material.

Terrestrial Radio Today

Nevertheless, the radio business generally appeared to be doing quite well in the last quarter of 2010. With industry giants like Clear Channel and CBS venturing further into digital territory, listenership seems to currently on the rise for the first time in years. This is music to the ears of the recording industry.

Yet, the devil may lie elsewhere. According to Arbitron & Edison research, an estimated 43 million Americans (one in six) listen to Internet radio on a weekly basis. Broadcasters now say that streaming accounts for 10%-15% of total listening for some stations with 10%-25% of that occurring on mobile devices. Given these trends, CBS Radio relaunched its radio.com service in July of last year. In partnership with last.fm, the platform creates a Pandora-esque experience for listeners, allowing them to program their own non-interactive channels based solely on their own individual musical preferences. Clear Channel also added some additional web-only channels to its platform last year, including artist branded pages for groups like Linkin Park and Nikki Sixx. Many of these new channels are offered commercial-free with a paid subscription service.

Riding on advancements like these, digital radio has seen a year-on-year ad revenue spike of 22% according to the Radio Advertising Bureau. In an estimate made by SNL Kagan, receipts are projected to double by 2015 from $552m to $1 billion. These uplifting figures aren’t just limited to digital radio either; terrestrial radio enjoyed a 25% gain last September compared with the same month period in the year prior.

Yet it is remarkable that Pandora still outperforms much of the current radio market. In the past year, its listenership expanded a staggering 140% thanks to its user friendly, total programmability model. Moreover, the technological disparity between streaming and terrestrial radio is made apparent in the same Arbitron & Edison survey quoted already. Out of the core music age bracket (12-34), Pandora out performed terrestrial radio listenership by more than double (13% compared with 6%) and 8 out of 10 (78%) respondents said that terrestrial radio was simply too difficult to personalize (they must have assumed they could!). Finally, Pandora has signed a number of very lucrative deals with Ford Motor Company and Mercedes-Benz to include its service as an added feature in their new lines of automobiles. With such a formidable foe on the rise, terrestrial radio and digital streaming services alike must compete to hold market share.

The Future of Radio

On the whole, it’s interesting to note that since its debut in the early 1900’s, terrestrial radio has gone relatively unchanged from its original format. More than hundred years later, live or recorded programming is still being transmitted, and the listener hears what is chosen for her. Instead, the last twenty years have witnessed much change. Consumers have been conditioned to expect instant access and total programmability with zero interruption all the time. To illustrate, XM Radio can ensure crystal clear and commercial free reception across all States. Terrestrial radio is finding it harder to compete.

Satellite Radio and Pandora are slowly phasing terrestrial radio out of cars, offices spaces and shopping centers. last.fm and other services like MOG are now offering streaming radio channels that are fully customizable–down to the individual artist and the percentage of deviation from that particular style. And as with almost everything else on the Internet, social networking is fully integrated and has opened the new paradigm of musical discovery and online radio listening.

But the concept of terrestrial radio will be alive for a while. The need for hands-free, playlist-oriented programming is still very real, but terrestrial radio must compete with many other options and the medium has to be perceived as more flexible.

In the meantime, the dispute about the new terms of the Performance Rights Act continues into its second year, with little movement since the latter part of 2010 and no clear outcome. If the fortunes of terrestrial radio improve, the broadcast industry will likely come under more pressure. After all, the Digital Millenium Act of 1998 brought the US in line with European legislation that recognized that record labels could exercise their sound recording right and collect from broadcasters. Back then, however, the US recognized the sound recording right more narrowly and allowed the labels only to collect from webcasters (i.e. internet radio and others). Record labels, no doubt, have more of a chance to win a more fundamental revision of the Performance Rights Act with a better economy.

By Evan Kramer

Comments