S.A. Sebastian: A View From The Bottom

According to a new study which takes the stand against performance royalties, being examined by congress, says that the more radio play a song gets the greater the album sales.

“There is a direct correlation between the number of ’spins’ (plays on free, local radio) and the sales of albums or singles,” the report concluded. “It is this promotion - free advertising - that drives record sales and represents just one of the many ways local radio provides value to artists and contributes to their financial and commercial success.”

The study analysed airplay and sales for “17 artists covering all genres and varying levels of success such as Velvet Revolver, U2, Rascal Flatts, Linkin Park, Green Day, Bruce Springsteen, The White Stripes, Taylor Swift and Josh Groban,” and come up with the conclusion that playing songs on the radio encourages people go out buy the records they are on, increasing album sales. Can you say, “Duh!”? Really? Playing songs on the radio leads to increased album sales? Who would have thought!

This is the latest weapon the National Association of Broadcasters is using against the RIAA, and recording artists, to prevent having to pay out performance royalties, and it makes sense. If people don’t know you exist - hear your music - they won’t know to buy your album. So, in a sense, yes, this is free advertising for the album. Conversely, you could infer that the songs sell the advertising for the radio station.

Radio is in the business of selling advertising. Why would they give away free advertising if they need to sell advertising? Look at the list of bands includied in the study; some pretty big bands in there. Those are some really popular bands that keep people tuned into the radio. And the more people tuned into the radio station, the more a radio station can charge for the advertsing. If they were playing bands like mine, and the bands I work for, they would have less listeners and have to charge less for advertising. This would continue until they were forced to change format or go out of business. So, who needs who in this case?

I think it is time we the artists, the RIAA, and the NAB, start looking at radio as we do television. The movies, sitcoms, game shows, reality show and other programming are various forms of content that networks buy or lease, for broadcast in order to sell advertising. The more successful a program is the more they can charge for advertising. The least successful programming, and failures, are canceled because they cannot charge more for advertising around them.

Technically radio works the same way, except they don’t buy or lease their programming. (Well, with the exception of talk show hosts like Howard Stern, Opie and Anthony, Imus, Rush Limbaugh and others. It’s perfectly OK to pay for them to pay for that content.) But why shouldn’t radio work the same way and pay for the content that is broadcast? If radio were to follow the television model they would be buying or leasing each song for x amount of time with the option to cancel if a certain ratings target, ad revenue target wasn’t reached.

The performance royalty is a cheaper alternative to this. The station pays a blanket royalty fee, at the rate set by the Copyright Royalty Board, for all programming, rather than on an a la carte basis. As content providers, I think if we position the arguement this way we stand a chance getting the performance royalty. Otherwise, we could try something daring and NOT grant radio stations a license to play our music. But, to work this would have to have serious buy-in by the bands cited in that NAB study -  Velvet Revolver, U2, Rascal Flatts, Linkin Park, Green Day, Bruce Springsteen, The White Stripes, Taylor Swift and Josh Groban. Sure, if enough of us independent bands did this we could shut down many college stations and small, local broadcasters, which would encourage change, but it is the conglomerates like Clear Channel and Evergreen that really need to feel the pain before things change. They are leading the charge on behalf of these smaller stations.

The RIAA is at it again, this time acting in the best interest of the recording artists. What’s happening now is that, on one side the RIAA is teaming up with the Music First Coalition saying that artists should get a performance royalty for radio play, while on the other side, they are saying that the current mechanical royalty rate of 9.1 cents per song paid out to songwriters against album sales, is much too high. The coalition of record labels wants to lower rates to as little as 5 cents per song per album sold, a rate that hasn’t been seen since the 80s.

According the Copyright Office the mechanical royalty rate was fixed at 2 cents per song sold from 1909 until 1977! That’s almost 70 years of the price of albums and tapes (even 8-tracks!) going up, but the payment to the songwriter staying the same.

The important thing to note is that this rate is paid to the people that write the songs, not the performers, and many times not the “artist.” so, for example, Britney Spears puts out a record, she gets a recording advance against record sales of several hundred thousand dollars, plus she gets paid 10-20% of album sales (depending upon the negotiated rate in her contract). That’s between $1-2 per album sold, while the songwriter gets their 9.1 cents per song per album. It is often the case with band’s like Atomic Brother, where the songwriter is the artist, so we would get the songwriter royalty and a percentage of album sales. Also, the songwriter usually splits their royalty 50/50 with a publishing company, which in many cases is the record company. So that 9.1 cent rate is halved to about 4.5 cents.

What does the record company get? All the rest! That’s a big hunk of pie leftover that they are crying about. What do you think is fair? Are the songwriters being burned? Is this really in the best interest of the artist?

Today the NAB released (NAB, FMQB) a “mock invoice to some 13,000 local radio stations, demonstrating the devastating impact of a performance tax.” The invoice, available for viewing as a pdf, isn’t a mock invoice in the sense that it gives examples of how the so-called “performance tax” might actually affect broadcasters, but it is an invoice that mocks “the privilege of promoting the record labels music free of charge and lining recording industry executives’ pockets.”

While cute, and sends their message to NAB member stations, it really doesn’t get to the point. It says that stations will be charged 10-35% annually, costing hundreds of thousands of dollars. I’d like to see some real numbers. Why don’t they put out a mock invoice that demonstrates the actual cost to NAB member stations. And, while they are at it, why don’t they also start mentioning that not all the performance royalty goes to “lining recording industry executives’ pockets.” The portion of the royalty that goes to the executives, also goes to many artists who own their own copyrights, not the labels!

Today I got the Harris Radio (harrisradio.com) playlist in my email. Normally I just scan through to see If my band, or anyone I know, was in the week’s playlist and move on, but this week I was startled.

Here’s how the email started:

“THE GOOD NEWS: Harris Radio is still streaming! A last minute intervention by Congress is keeping Internet radio on air. Congress encouraged a negotiated agreement between webcasters and SoundExchange, an organization controlled by the major labels that has consistently attempted to kill Internet radio.

THE BAD NEWS: Sound Exchange is negotiating in bad faith! Well, that’s a surprise, isn’t it? It always has done!”

It’s statements like these, by broadcasters that make me think that they really have no idea what is going on, what Sound Exchange is and how things will really affect them. Is Sound Exchange really the “bad guy” the Internet broadcasters make them out to be? Is Internet radio just going to be shut down by Sound Exchange?

First of all, Sound Exchange is an independent, non-profit, performing rights organization, designated by the Copyright Office to collect royalties, like BMI, ASCAP and SEASAC. As a PRO, Sound Exchange represents the copyright owners, producers and performers, while ASCAP, BMI and SEASAC represent the publishers and songwriters. The membership of Sound Exchange includes major and independent record labels and thousands of performers.

Secondly, Sound Exchange cannot shut down Internet radio, and is not out to shut down Internet radio.

Thirdly, while it’s true Congress encouraged Sound Exchange to negotiate license fees with Internet radio, they have been doing this without the insistence of Congress for months. I don’t believe that anybody is doing anything in “bad faith.” The difference this time is that the fees were going to be put up for a vote in Congress, but Congress decided to go on vacation for a few weeks and leave everyone a few more weeks of negotiating. If the new rates are not successfully negotiated by then they will go to vote.

I wonder if stations like Harris Radio looked at the changes. They should be excited that there is very little change. And they don’t have to pay the rate commercial Internet broadcasters pay. Here’s what all the excitement is about.

The Copyright Royalty Board sets the performance royalty rates for commercial music broadcasts at:

• 2005 $.000762 per performance or .0088 per aggregate tuning hour with a maximum of $2500 annually
• 2006 $.0092 per performance
• 2007 $.0127 per performance
• 2008 $.014 per performance

The big deal is the change from 2005 and 2006, which is the removal of the maximum fee and the ATH for commercial broadcasters, and the increase of .0035 for the”per performance rate.” A performance is counted as one song played to one listener. This is in addition to the license fee collected by ASCAP, BMI and SEASAC. Radio and Internet Newsletter says that “Because a typical Internet radio station plays about 16 songs an hour, that’s a royalty in 2006 of about 1.28 cents per listener-hour.”

If you do some math using the RAIN example, if a station has 500 listeners at 1.28 cents per listener hour that’s $6.40 and hour, $153.60 a day, 56,064 for the year. Multiply that by 10,000 stations (5 million listeners) you get $560,640,000 to cover all theLiv365 broadcasters. That’s a lot of cash. But Live365 isn’t collecting and paying the royalty on behalf of all their member stations, only the one’s that opt for the PRO “Royalty included” package, which covers Sound Exchange, BMI, ASCAP, and SEASAC for about $300 and $500 per PRO station per month. Everyone else has to deal with Sound Exchange directly, but BMI, ASCAP and SEASAC are covered at the rate of $48/month (or $576/year) per station, as long as their revenue is under $1200 a month. At this rate it’s more than likely that the individual commercial broadcasters will have to pay between $10,000 and $50,000 a year.

RAIN argues that:

“In 2006, a well-run Internet radio station might have been able to sell two radio spots an hour at a $3 net CPM (cost-per-thousand), which would add up to .6 cents per listener-hour.

Even adding in ancillary revenues from occasional video gateway ads, banner ads on the website, and so forth, total revenues per listener-hour would only be in the 1.0 to 1.2 cents per listener-hour range.”

Crunching these numbers a commercial broadcaster that operated like this will end up using all their revenue just to pay the royalty. With or without these new rates any commercial Internet broadcaster would be trying to monetize their station to their maximum ability. Otherwise they would be operating non-commercial.

For 2005, the small, non-commercial, hobbyist Internet broadcasters had to pay a minimum fee of $500 ANNUALLY, plus a statutory rate of $.00251 for each hour exceeding 146,000 ATH (aggregate tuning hours) per month. For 2006 the rate is 159,140 ATH per month. So, they were given additional broadcast time with a rate hike to $.0123. If the station plays 160,000 ATH per month, exceeding the limit by 860 for 2006 and 14000 for 2005, then they will have to pay a $10.57 penalty at the 2005 rate and $35.14 at the 2005 rate.

While everyone is calling Sound Exchange the bad guys for wanting to pay royalties to the copyright holders and performers, entities like Live365 are not exactly angels.

Creating a Live365 radio station is not free. What? You thought Live365 was free? No way. You have to pay to be a broadcaster. The Live365 Internet broadcasters each have to pay a monthly fee (Live365 pricing) for the privilege of running a station. The fees run from $9.99/month to have 10 simultaneous listeners up to 84.95/month to have more than 100 simultaneous listeners and other Professional Broadcasting packages go from $75-$750 per month. We can’t know the distribution of the Live365 broadcaster membership, but for the sake of argument let’s say that there are 5000 paying the low end at $9.99 and 5000 paying the high end at $750. That should make for a good average for this example. Live365 would make about $3,799,950 per month in broadcaster memberships totaling $45,599,400 for the year. Then you have to figure in listener membership fees. Like their broadcast membership numbers, Live365 doesn’t disclose their listener numbers. They do say that they have over 4 million unique visitors per month. Again, without having the real data, if we assume that even just a fraction of that, 5% are members at the 7.95 price point then that’s an additional $1,908,000 per year. Then you figure in the revenue from advertising and sponsorship opportunities, some of which are paid to broadcasters as incentives. This might be a million more.

Sample sponsorship rates from the Live365 media kit.

• Homepage Sponsorship (per day) $5,000
• Listen Page Sponsorship(per month) $10,000
• Free Music Page Sponsorship (per month) $10,000
• Monthly Newsletter - Broadcasters (150×40 flat fee) $1,000
• Monthly Newsletter - Listeners(150×40 flat fee) $1,000
• Contest / Giveaways (per month) $10,000

Using these numbers that’s more than $48 million in revenue, a small percentage of which gets paid to member stations.

I’m not exactly sure why all the independent not-for-profit broadcasters are rallying around this and sending out inflammatory emails. Looking at all the evidence, they seem to make out all right, continuing to pay small license fees with small penalties, while the commercial guys get their bottom lines hit the most with fee increases, with no maximums, more in line with their revenue models. Not-for-profit, non-commercial stations like the owner of Harris Radio state that they operates according to a “for-loss business model. It costs me $ to run this station, but I get no revenue for it.” Live365 broadcaster Russel Rebman is “proud to say my station has a 100% negative cash flow. I purchase 99% of what you hear on my station. And the other 1% is provided by indie artists and what few labels I have arrangements with.” They would pay the $500 minimum plus any penalties, while the big commercial guys pay $10,000 and up.

I have a hard time trying to digest that Harris radio and others don’t want to continue to pay $500 towards a royalty pool to pay the performers of the music that they broadcast. They claim they do what they do for the love of music and to support their favorite bands. By not supporting Sound Exchange and the CRB fee increase they might as well just kick each member of their favorite band in the balls.