Lawmakers clash on Internet royalty bill

While House Judiciary Committee members did not see eye to eye on whether existing royalty rules for Internet radio services like Pandora should be reformed, lawmakers on both sides of the aisle on Wednesday argued that broadcasters should start paying royalty fees for playing songs on over-the-air radio stations.

The focus of the Judiciary Committee's intellectual property subcommittee hearing on Wednesday centered on weighing the merits of a bill -- the Internet Radio Fairness Act (IRFA) -- sponsored by Reps. Jason Chaffetz (R-Utah), Jared Polis (D-Colo.), Darrell Issa (R-Calif.) and Zoe Lofgren (D-Calif.) that proposes to put Internet radio services on the same royalty-setting standard as cable and satellite radio. Pandora, a major backer of the bill, hopes this will lower the rates of its royalty payments so they're more level with the royalty fees paid by cable and satellite radio services.

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Time and again during the hearing lawmakers hammered broadcasters for not being required to pay a performance right to artists for playing their sound recordings on AM/FM radio.

Rep. Mel Watt (D-N.C.), the ranking member of the IP subcommittee, criticized the IRFA for failing to address this issue. He said the bill "at best nibbles around the edges of the challenge."

Rep. John Conyers (D-Mich.), the top Democrat on the full Judiciary Committee, also took a critical view of the IRFA, yet he argued that it would slash the royalty payments that recording artists and musicians receive for their work being streamed online. Conyers joked that "a more appropriate title" for the bill "might be the 'paycheck reduction act' ” because it would lower the royalties that webcasters pay to artists "by more than 85 percent."

However, Conyers also noted that the bill "may well be the catalyst to formulating an AM/FM performance right" and later pointed out that every industrialized country requires broadcasters to pay royalty fees for airing songs on terrestrial radio.

Pandora CEO Joe Kennedy argued that the IRFA was needed because it would ensure that all radio platforms are treated fairly, noting that the company pays higher royalty rates for streaming songs on its radio service than cable and satellite radio companies do. Over half of Pandora's revenue this year will go toward paying royalty fees, while satellite and cable radio will pay just 7.5 and 15 percent of their revenue, respectively, for royalty payments, he said.

Congress could fix this inequity with the passage of the IRFA, which would help the Internet radio market thrive, Kennedy argued.

"I hesitate to frame this as a Pandora-specific issue," he said. "The rates that exist today in Internet radio prevent every broadcaster from entering the market -- or for those that are there, from making any profit."

That message was echoed by David Pakman, a partner at venture capital firm Venrock, who said investors are skeptical that Internet radio services can succeed under the existing royalty rate structure.

"The companies trying to deliver these innovative services are unsustainable under the current rates," Pakman said.

"Regretfully, I cannot point to a single standalone business that operates profitably in Internet radio," he added.

Chaffetz, the lead author of the IRFA, noted that several prominent companies such as Microsoft, MTV and Yahoo have tried to launch Internet radio services, "but all had to exit because it doesn't work financially."

"Congress enacted the royalty rate standard 14 years ago, when Internet radio was barely a concept," Chaffetz said. "It's well past time to correct the mistakes."

Chaffetz later gave the opponents of his bill a tough grilling about the state of the Internet radio market, which led to several heated exchanges between the Utah Republican and the witnesses. He asked SoundExchange President Michael Huppe to name an Internet radio company other than Pandora that's successful, which Huppe struggled to do.

Hubbard Radio CEO Bruce Reese, who also testified on behalf of the National Association of Broadcasters, argued that Congress needs to step in and help fix the current royalty rules for Internet radio. He noted that Hubbard's local radio stations stream their broadcasts online but struggle to raise enough money via advertising to make this service profitable.

"The alternative – inaction – risks stifling the growth of Internet radio to the detriment of broadcasters, listeners and artists," Reese said.

But lawmakers took issue with Reese's argument that Congress should not enact a mandate that would require broadcasters to pay royalty fees for playing songs on over-the-air radio. Reese said that radio stations play an "important promotional role" for distributing recording artists' new music.

"You want to talk about parity without discussing the ultimate inequity," said Rep. Howard Berman (D-Calif.), who is leaving Congress at the end of the session after he lost his reelection race against fellow California Democrat Rep. Brad Sherman. Berman, who has been a key ally of the entertainment industry during his tenure, received a standing ovation during the start of the hearing for his work on the Judiciary Committee.

"Free doesn't work anymore when it comes to incentivizing creators," Berman told Reese. He added that the "huge albatross" around the IRFA's neck is to ignore the performance right issue for over-the-air radio stations. 

SoundExchange's Huppe made a similar argument, saying that not dealing with the "biggest elephant in the room is a big mistake."

Songwriter Jimmy Jam urged lawmakers to oppose the IRFA because Pandora is "trying to lower the earnings of artists" via the bill. He argued that Congress should focus on closing “the corporate radio loophole" instead.