Bill stirs up fight over online music royalties

A battle between Internet radio companies and the music industry over royalty payments is brewing on Capitol Hill.

Rep. Jason Chaffetz (R-Utah) is crafting legislation that would put Internet radio services such as Pandora on the same royalty-setting standard as other digital radio services.

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The proposal is stirring concern from the music industry, which has moved aggressively to protect its revenue as consumers shift to buying and listening to music online.

Internet radio services pay different royalty rates for streaming music than do cable and satellite radio stations. After years of legal wrangling, a deal was struck between record labels and Internet radio services in 2009 that set royalty rates for streaming music online, but the terms of that settlement are set to expire in 2015.

Chaffetz said the royalty rules discriminate against Internet stations by forcing them to pay much higher rates to stream music than do other digital radio services. He says his bill would simply level the playing field.

“It seems screwy that royalty rates change so dramatically based on the platform,” Chaffetz told The Hill.

“When you’re listening to music in your house or in your car, you may be listening to it on your iPhone, you may be listening on the satellite radio or the FM radio,” he continued. “Does that mean the royalties should be so vastly different? It doesn’t seem to make sense to me. We need to play catch-up here.”

Pandora is backing Chaffetz’s effort to reset the royalty standard for streaming music online and said he is leading the way to a level playing field. Pandora founder Tim Westergren is in Washington this week to meet with lawmakers about the bill.

“The current royalty rate structure clearly favors some providers over others, and the discrimination against Internet radio must come to an end,” said Westergren, also the chief strategy officer for Pandora. “Congress has an opportunity to enact legislation that will not only establish fair royalty rate-setting standards for Internet radio, but also drive more innovation in legal digital music distribution and treat artists as stakeholders.”

But a music-industry source argues Pandora is reneging on the royalty rate standard it agreed to in 2009 and trying to cut itself a better deal, even though the service went public last year.

“They’re making a lot more money, but they want a lower rate,” the source said. “If this bill actually passes, all it will do is take money out of the pockets of artists by letting them pay less.”

The source noted that Pandora issued a positive statement following the 2009 agreement that said the royalty rates agreed to would allow the streaming service to survive.

Westergren pushed back against those claims, saying Pandora’s “efforts to end royalty rate discrimination are entirely consistent with the discussions” from 2009.

“At that time the [record industry’s] demand was that webcasters should not be prevented from lobbying Congress for changes in the statutory process for determining rates in future proceedings as long as they do not advocate changes in the rates for the period 2006-2015,” he said. “The proposed legislation does not affect those rates — only those going forward following the next [Copyright Royalty Board] proceeding.”

Chaffetz’s bill, the Internet Radio Fairness Act of 2012, proposes to put online radio under the 801(b) standard of the Copyright Act, which is the same standard used by the Copyright Royalty Board when setting royalty rates for cable and satellite radio, according to a summary of the bill. That standard is also used when determining royalties paid by the recording industry to music publishers and songwriters.

According to the summary, the bill also aims to improve the proceedings process for rate-making cases and ensure judges on the Copyright Royalty Board have the same legal background and expertise as federal court judges who consider copyright cases.

The bill is still in draft form, and Chaffetz said he is soliciting input on the draft from other House Judiciary Committee members and industry groups. The bill isn’t ready for introduction just yet, Chaffetz said, but he’ll determine the next steps by the end of the month.

“We’ll probably get disrupted with the August break, but despite the present election, we’ll keep going forward,” he said.

The Utah Republican noted his staff has met with representatives from the music industry and said he is open to hearing out their concerns.

“We’ll flesh all that out. I have no doubt we’ll have a good, lively discussion on that,” he said. “There’s plenty of money to be made by all the various interests, it’s just I think moving toward parity is an important principle.”