Meet the Internet Radio Fairness Act, a law that could be a massive financial boon to Pandora

Pour yourself a cup of coffee, this is slightly complicated. Today, two Representatives, Chaffetz and Polis, introduced the Internet Radio Fairness Act in the House, the lower chamber of the US Congress. In a timed stroke, Senator Wyden put forth a similar bill in the Senate. Thus, we have three Congressional members with two bills for two houses.

The act is designed to lower the royalty rates that online radio providers pay, bringing their costs to deliver music to consumers in line with what cable and satellite radio stations pay. As it is widely known, terrestrial radio stations pay nothing to spin tunes. Thus, Internet radio providers pay the most, cable and satellite in the middle, and normal radio nothing.

If that seems unfair, that’s because it is. Thus, the Internet Radio Fairness Act. To put this into perspective, The Hill has a few figures on the cost of delivering music amongst the different methods:

According to statistics provided by [Rep.] Chaffetz’s office, Internet radio services pay more than 55 percent of their revenue in royalty fees, while cable and satellite stations pay between 7 and 16 percent.

Keep in mind that for the normal FM radio that you tune in to assuage your soul during your crushing commute, no money is going to those artists. The founder of Pandora, Tim Westergren, wrote a column for the Huffington Post earlier this year in which he detailed exactly how much his company shells out to artists:

Consider this: last year Pandora generated $274MM of gross revenue, and paid $136MM of performance royalties — approximately 50 percent of the total revenue. In the same year, SiriusXM, on revenues of $2.7B paid $205M in royalties, or 7.5 percent. Radio delivered over cable television pays 15 percent of revenue. Radio delivered over the FM/AM spectrum pays nothing to performers.

Problems

Not all are in favor of the bill, as you may have expected. Those who directly benefit from the revenues that Pandora and the like send their way are quite opposed to having the rates lowered for Internet radio some want to raise the rates of the other radio varieties, boosting the overall cost of radio in the lower tiers.

In fact, there is a bill, the Interim FIRST ACT, that would force each radio variety to pay the same amount. The bill calls for the establishment of “market-based, technology neutral rate standard parity for all services.” You can read the full text of the proposed law here.

For what it’s worth MusicFIRST, an industry group, praised the idea: “The only real solution is for Congress to create a legal performance right, but raising terrestrial radio’s digital royalties is an important interim step towards that goal.”

Thus we have a bill that seeks to lower what Internet radio pays, whilst another wishes to raise rates for the other two forms of radio, and create an equal rate for all.

Muddle

This isn’t a small issue. Ray Hair, president of the American Federation of Musicians outlined exactly why the debate here appears to be continuing along two, utterly disconnected lines, with some wishing to push Pandora’s rate down, and others wishing to raise other rates [Bold: TNW]:

Yet new legislation in Congress known as the “Internet Radio Fairness Act” could set us back decades. Instead of ensuring that terrestrial radio stations pay musicians fairly – just as many digital radio stations already do – it would allow the digital platforms to pay musicians less too, at rates far below market value. The bill would effectively unleash a race to the bottom, with radio platforms competing to see which can pay musicians the least.

Now, there is a problem here. If the issue is that digital radio stations pay fairly, why are online radio stations required to pay more? It seems more that Mr. Hair in this case is more irked at the lack of income from terrestrial radio than he is at the disparity in royalty rates for digital v. online radio.

However, the differing perspectives could perhaps find a middle ground: let online radio pay what cable and satellite radio pays, and bring up terrestrial radio to that point as well. That would broaden the base, and make for a fair playing field. Even more, it would help Pandora greatly by lowering its royalty burden.

There are those in favor of the bill besides Pandora, such as the Consumer Electronics Association:

Under today’s outdated rules, Internet radio providers are forced to pay a significantly larger percentage of royalties than their competitors. In some cases, Internet radio providers pay half of their annual revenues in performance royalties, while other music providers pay less than 10 percent. This irrational and unfair royalty system hinders investment and innovation in Internet radio.

That statement goes on to praise the bill. In short, there are a number of competing ideas bouncing around at the moment, and the battle lines have been drawn.

Next steps

As we head into the weekend, TNW doesn’t expect much action on this issue for at least a few days. The current legislative environment is hardly conducive to quick action, but we will keep you posted as things move along.

Top Image Credit: Serendipiddy