Monday, June 25, 2007

'Save Net Radio' or 'Save the Free Market'?

I am a big fan of Internet radio on the grounds that it offers a wide choice of genres and can be listened to over one's existing computer hardware without the special equipment that satellite radio requires. The problem is that net radio is about to be destroyed by the government.

Here's the rub as I understand it: the royalty rate for songs broadcast over Internet radio is not set by the free market. Instead, the government-run "Copyright Royalty Board" (administered by the Library of Congress) determines the royalty paid to music copyright-holders (or more specifically, the government-created monopoly that represents copyright holders). This spring, the CBR ordered a 300% to 1,200% royalty rate increase on net radio, far in excess of what other transmission mediums are required to pay. Furthermore, the CBR eliminated the ability for webcasters to pay royalties as a portion of their revenue; in effect, it mandates a draconian one-size-fits-all solution that is likely to force most Internet radio stations to shut down their services.

It gets even worse. The webcaster-supported alternate proposal to the CBR's rate increase is a bill before the Congress that mandates a flat-rate revenue sharing model. While the bill restores parity between net radio and satellite services, it fails to address the fundamental problem plaguing the broadcast of intellectual property; that is, it fails to protect the property rights of all parties by abolishing government intervention in the music broadcast industry. Instead, the proposed legislation merely resets the terms of the government's intervention. Talk about unsatisfying reform to save an industry that I otherwise value.

After all, let's look at the issue philosophically. A new technology is developed that promises to enhance people's lives for the better. This nascent technology requires a complex business transactions involving many parties and many interests. Classic "I Pencil," right—complex in form, yet simple in principle. Yet here we have each and every party lobbying for the government control the terms of the transaction. Practically no one argues in favor of voluntary negotiations and voluntary exchange; here everyone seeks to compel everyone else.

So how then did coercion come to define new media? How did the ideas animating this industry become so corrupt that solution is little better than the problem? In my view, the net radio debate underscores one of the most vexing problems of our times: almost every transaction has an element of coercion attached to it and practically no one has a problem with it. In fact, it seems the more novel the transaction or new the technology, the more likely someone will demand the right to impose his will upon others without consent. We live in an era where web-browsers and search engines are scrutinized by government regulators, where medicines are authorized for use only after some regulator gives his blessing, and the royalty paid to a copyright holder is determined by the czars of royalty payments.

I can't blame net radio for this. They are responding to the status quo in intellectually property and government regulation thought, not setting it. Nevertheless, their mantra "save net radio" rings a little hollow for me. Their real headline ought to be "save the free market."


Darren said...

Hi Nicholas, I'm one of the few people who have been arguing against the "Internet Radio Equity Act." I totally agree with you that the issue should be "Save the Free Market," and I wish the argument was centered around the issue of the individual rights of the all parties involved.

There is one other fact I'd like to add to the description of the issue you gave. You are right that the government sets a royalty rate for broadcasting music online. What I'd like to add is the fact that it does so by offering webcasters an option to broadcast music without obtaining permission from the copyright owner of every piece of music they play. Webcasters and copyright owners are still able to negotiate and set rates and terms that are different than the government option, just as they would in a free market. If a webcaster cannot agree to terms, though, he has the option to bypass the copyright owner and pay the government-established rate.

The restrictions the government is placing on the market are one-sided against the copyright owners. The government has taken away their right to set the royalty rate for their own music. In a way, the government has almost created a price-ceiling for online royalty rates. Would a webcaster ever agree to pay more than the government rate?

Dismuke said...

Thank you for your nice article bringing attention to this issue. As an operator of an Internet radio station this is an issue that is very important to me and one which I have been following very closely.

I agree with you that the solution is a free market and that the Internet Equality Royalty Act is VERY flawed in many respects. And, unfortunately, the webcasters arguments before the CRB were profoundly philosophically flawed and only dug their plight further in the hole.

But, as you point out, it is hard to blame rank and file webcasters - they have the same philosophical flaws that participants in any other legitimate industry in our culture are likely to have. Most are "music geeks" and can hardly be expected to be better off philosophically than the rest of the culture. It also needs to be pointed out, however, that while webcasters properly SHOULD be supportive of a free market, such a approach would NOT be able to be implemented in time to save stations from impending retroactive bankruptcy as that would require a major rewrite of our copyright laws and major changes to the Digital Millennium Copyright Act which has implications far beyond just webcasting. One way or another, unfortunately, as of June 15 the rates webcasters pay will be set by the government. The only question is how high will they be.

The one exception I take to your article is when you describe the SoundExchange monopoly as one that "represents copyright holders." It does not. It represents the RIAA which is NOT a spokesman for all copyright holders and whose interests, in fact, are very much contrary to a vast number of copyright holders whose potential competitive thread the RIAA seeks to keep in check by means of the pending rates.

I support the Internet Radio Equality Act - not because I think it is a good bill but because it is far less evil than the alternative. The alternative is the pending rate increase which was pushed through by the RIAA in order to artificially protect it from the flood of new competitors who finally have a means through Internet radio to make themselves known to new audiences.

The RIAA is attempting to use the statist statutory royalties to protect a market influence it could no longer enjoy in a free market. The major record labels are technologically and economically obsolete middle men in a digital world whose primary historical functions are increasingly no longer necessary and can more easily handled by artists themselves to their significant advantage. The only real power the RIAA labels have left is their ability to promote recordings to a mass market via their historical lock on FM airplay which came about as a result of the technological limitations of that medium. Internet radio does not have such limitations and the fact that technology is starting to be introduced that will put Internet radio in peoples' cars will end FM radio's long time role of setting musical trends. That role will be taken over by Internet radio which is so vast and and offers THOUSANDS of stations which will enable niche genres and less famous artists for the first time ever the same access to radio airplay that the RIAA labels do. The RIAA makes almost all of its money by selling large quantities of a small number of mass market, lowest common denominator recordings. By bringing niche genres and less famous artists to the public attention, the Internet through Internet radio and websites such as is doing to the music industry what it did to news and information industry by scattering the audience concentrations once enjoyed by the newspapers and mass media outlets to a vast number of very diverse websites, including those such as yours. The purpose of the pending rates pushed through by the RIAA is to prevent a wonderful and rapidly emerging future from happening and to protect a marketplace relevance that the RIAA would be incapable of earning and maintaining otherwise.

The moral difference between the RIAA and the webcasters is this: The RIAA is a bunch of Luddites using the statist laws to kill off a wonderful new industry that it knows it cannot compete in. The webcasters, for all of their philosophical flaws, are primarily using the statist laws in order to push back an attempt to use statist laws to drive them into bankruptcy and off the air. I have yet to run across a serious and successful webcaster who is opposed to paying royalties which they have already been doing for several years now.

Furthermore, where in a free market are legitimate business owners and customers suddenly subjected to 300% to 1200% price increases imposed RETROACTIVELY? To survive in such a bizarre universe would require omniscience - and yet that is what the RIAA has consistently pushed for and demanded of webcasters.

As to what a free market royalty rate would look like - I think a very good case could be made that in a free market that such rates would have a negative value. My evidence is the fact that the word "payola" even exists in our language. The record labels and AM/FM stations are, in fact, subjected to irrational laws which make it illegal for labels to pay AM/FM stations for airplay. Those laws would not exist in the first place if labels were not willing to make such payments. Right now, AM/FM stations pay NOTHING for airplay of sound recordings - and, at the same time, the major RIAA record labels spend MILLIONS of dollars in promoting their recordings to AM/FM stations in order to receive airplay.

Is there any doubt that a similar situation might exist on the Internet? I doubt explicit payola, even if it were allowed by law as it should be, would be a factor because, as soon as audiences catch on, they would simply switch to one of thousands of other stations available to them that are focused on musical quality and not other factors. But the reality is that artists (who in the future will likely own their own copyrights) will spend a great deal of time and money in order to secure the wonderful publicity advantages that airplay provides. For the vast majority of artists and copyright holders, the dollar value of the publicity that airplay provides far exceeds any royalties that they might be able to earn from such airplay. The only exception to this is the handful of artists who are already so popular that they no longer need publicity or exposure - and even then, such an enviable situation is only likely to be temporary for them.

Yes, in a free market producers of goods and services have a right to demand whatever price they might wish to charge. But, in practice, they DO NOT usually end up getting the price that they actually WANT under ideal circumstances because their COMPETITORS have a major say in setting a limit to how much they would realistically be able to charge and still stay in business. And I don't know of a single industry in a free market that prices its products and services at a rate that is designed to force even its most successful and commercially viable customers out of business. No rational person familiar with the webcasting industry can assert that even the RIAA labels would be able to charge such rates in a free market. If it did, it would be suicide for them as they would have priced themselves out of Internet airplay and given major ground to their competitors. IF we are going to have the evil of governmental imposed rates, than those rates need to reflect a free market as much as possible. A percentage of revenue model makes sense in the present context in that it is the model that composers royalties have been paid to organizations such as ASCAP/BMI/and SESAC for DECADES. And such a model pays copyright holders in direct proportion to any economic value that webcasters derive from playing their works. In that respect, a percentage of revenue model at least has SOME objectivity and tie to marketplace conditions. A per song per listener rate, regardless of how high or low it is set is ultimately ARBITRARY - and, if priced artificially high as is the case here, does enormous damage to those whose copyrights are not economically worth such a rate in the exact same way that minimum wage laws harm workers who wish to engage in labor at rates less than the minimum wage.

I have, by the way, posted a proposal describing exactly how a free market alternative to statutory royalties might work. I have also put up additional postings on the issue of Internet radio royalties on my blog. Also, for those who have never listened to Internet radio, be sure to check out my station Radio Dismuke starting Wednesday and discover the wonderful popular music from the 1920s and 1930s decades - music you would have a very difficult time finding on your FM dial. Listen for a couple of hours and you will likely be addicted. But you will have to wait until Wednesday - today my stream is silent along with most Internet stations as part of a coordinated effort to give audiences a taste of the silence that awaits them staring July 15 if the pending RETROACTIVE government mandated rates are allowed to go into effect.

Dismuke said...

One additional note that I failed to mention in my previous comment:

The RIAA has been very politically powerful for decades. It has an army of lobbyists and has handed out vast amounts of money to a variety of politicians in Washington who have been very loyal in return. The RIAA has had a major hand in proposing and influencing a number of substantial changes to our copyright laws in recent years.

If there was any entity out there that was in a position to speak up for a free market alternative to the present system, it would be the RIAA far more than webcasters. Webcasting is a very new industry and one that is not yet profitable for most operators. The only political clout that webcasters have comes from their millions of loyal listeners. It is much more difficult for webcasters to stir their listeners up into pushing for the VERY substantial and rather radical changes to the copyright laws needed to achieve a free market than it would be for the RIAA to be able to do so behind the scenes via its lobbyists. Bottom line, of the two groups, it is the RIAA which is attempting to use the statist laws to destroy an emerging industry that threatens its entrenched position. Most webcasters merely seek to save their industry from such an assault and are not philosophically capable of grasping an alternative or recognizing the contradictions inherent in their approach to fighting back. In other words, one side is predominantly immoral and evil while the other side is predominantly ignorant and misguided.