Congress, beware of the Copyright Royalty Board

Most members of Congress probably don’t realize the Library of Congress employs administrative law judges who set the rates performers receive when their work is played on digital music services such as Pandora or Sirius XM. Fewer still realize these judges soon will determine the future of the music streaming industry.

But if the Copyright Royalty Board, the three-judge panel that sets those rates, doesn’t get it right when it announces new rates later this year, Congress will know quite a lot about the board.

{mosads}The big digital music outfits – Pandora, Spotify, iHeartRadio and others – are not moneymakers. SoundExchange, which represents the record labels, wants to increase what it charges the streamers by as much as 40 percent.

In many cases, more than half the revenues of these companies goes to purchasing content. A 30 percent price hike will mean a lot of static on the radios of the nearly 100 million Americans who listen to digital music. And that will mean a lot of static for Congress as voters call Washington demanding to know what happened to their music.

The board, which reviews and updates the rates every five years, currently is wrapping up a trial that will set rates for 2016-2020. The board’s decision is expected sometime in December.

The rates for music streamers vary. Broadcasters streaming their content over the Internet pay as much as 25 cents per 1,000 streamed performances, and pure play services such as Pandora now pay 13-14 cents per 1,000 streamed performances.  

The recording industry wants to raise the rate to 30 cents per 1,000 performances. Current rates represent mere fractions of a cent each time a song is streamed to a listener, but last year, Pandora’s 80 million users listened to more than 20 billion hours of music.

The recording industry says it needs the extra money to cover up for losses in other areas, such as CD sales. But this is not stealing from some secondary revenue source; music streaming now is the market. This is where the lost customers are going. This is how music will be consumed in coming years. It is the new golden goose. If the rates are set too high, a lot of consumer demand will end up on the cutting room floor, which won’t help listeners, performers or music companies.  

After all, the streamers continue to lose money. In 2014, Pandora lost $45 million on $920 million in revenue. It paid $450 million for content. Spotify also lost money — $80 million on $1 billion in revenue. XM/Sirius has never had a profitable quarter.

These firms in particular have spent enormous sums to build a massive web-based infrastructure that has benefited artists. But now, if the recording industry gets its way, the biggest expense on their balance sheet could climb by as much as 40 percent. An industry on the cusp of blossoming could be wiped out just as it is preparing to grow and generate much more money for artists.

Raising the prices substantially now will drive streamers out of the business. It won’t eliminate it – Google, Apple and other giants can hang on to it as a loss leader – but it will kill the aggressive, innovative, eager-to-please heart of the industry and send customers in search of their congressional representatives.

It will lead to more piracy as those who lose their legal options will look for other avenues to obtain free music.

The more libertarian among us may ask: Why are judges setting the rates by which willing sellers and willing buyers do business anyway? Can’t they work out something on their own that will leave both at least viable?

Why, yes. It’s already happening. Pandora and iHeartRadio both have direct deals with music labels, and according to testimony before the board. And these deals suggest a market price far less than the rates previously set by the government.

The Copyright Royalty Board has evidence before it that buyers and sellers can and have hit a sweet spot that moves product, is at least sustainable by both bottom lines and reflects economic reality. The board should embrace what the marketplace clearly has shown to be the value of music – even if it is a departure from previous court assumptions.

If the Copyright Royalty Board ignores clear market evidence and grants the record labels a larger part of the pie, we all may find the pie itself has become much smaller.

McNicoll is a conservative columnist and freelance writer based in Alexandria, Va. He is a former senior writer for The Heritage Foundation and former director of communications for the House Committee on Oversight and Government Reform.