Air play and the Internet economy

The public hearing held last week by the Department of Commerce as part of its inquiry on Copyright Policy, Creativity and Innovation in the Internet Economy provided a great deal of debate on a large number of important issues, but unfortunately the inquiry ignored what is arguably the most fundamental consumer issue before us in the entire digital music sector – access to air play.  Since the passage of the 1909 Copyright Act that set the framework of music copyright in the modern era, copyright holders have been eager, even desperate, to get the public to listen to their music in the hope that after they heard it, they would buy it.  

In the days before radio, it was called “plugging.”  Copyright holders would pay people to plug their songs for live shows, so they could sell sheet music.  When radio came along, DJs were paid to play songs on the radio. It was called payola and deemed to be illegal, but it was so important to allow the public to sample music over-the-air that record labels kept finding ways to skirt the law.  Free over-the-air listening was essential to creating a mass market in music. Congress recognized the value of air play to music sales and did not allow copyright holders to demand royalties for the public performance of songs that would then be bought, if they pleased the audience. 

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In the digital age, Internet radio – radio that is free to the listener but programmed by the broadcaster – is becoming a primary way for the public to sample music, and listeners who hear songs on Internet radio are more likely to buy music. Unfortunately, the future of Internet radio is far from secure because Congress made a mess of copyright for digital media by looking for compromise between entrenched incumbent interests rather than worrying about the needs of new entrants or the emerging technology-driven market structure.

What kind of mess? The board that is responsible for rate setting took the very imperfect framework built by Congress and made the worst of it by making critical errors in setting royalty rates based on erroneous assumptions about the nature of Internet radio.  When the royalty rates for Internet radio were set too high, the vast majority of Internet radio stations were forced out of business.  Things could get even worse. The record labels demanded royalties that were five times higher than the regulators allowed and they are pushing to get rid of even the modest constraints that were imposed on Internet radio royalties.  

The rates were set too high because the board failed to recognize the promotional and informational value of webcasters like Pandora, which have a traditional, no-fee radio model that enables sampling and stimulates sales. The Internet radio model is much different than an on-demand, interactive subscription service like Spotify that charges people to people listen to what they already know they like, rather than find new things.  The subscription services have a much smaller audience that selects its own songs which means there is less discovery and sales from shorter playlists with fewer artists. 

The error can be corrected and we need not wait for the Department of Commerce concluding its inquiry.  Congress has the ability right now to fix the underlying copyright scheme by adopting a technology-neutral policy that promotes expanding access to digital distribution and restrains the potential for abuse of the record label market power.  Even better, the rate setting board has adequate authority to fix the problem based on a careful empirical evaluation of the development of the digital music ecology.  Establishing a royalty fee structure that ensures true Internet radio can flourish is a key step to accomplishing the Department of Commerce’s very worthy goals – for creativity, innovation and the Internet economy. 

Cooper is director of research for the Consumer Federation of America (CFA).