What is IRFA and why do we need “radio fairness” anyway?

The past weeks have seen a debate rage over competing bills working their way through the US Congress that would affect the royalty rates payable for streaming music. Both the Internet Radio Fairness Act, as sponsored by Representative Jason Chaffetz, and the Interim Fairness in Radio Starts Today (FIRST) Act, introduced by Representative Jerry Nadler, would seek to change the ways that internet radio royalties are calculated. The first bill has garnered a lot of press for being publicly supported by Pandora while the competing one is supported by musicFIRST.

For artists, the income streams affected by this legislation are from digital streaming public performance royalties. There are actually two: one for “non-interactive” services like Pandora, and one for interactive services, like Spotify. The difference is that “non-interactive” services offer users no ability to choose what is played (and thus are closer to terrestrial radio) while “interactive” streaming services offer what amounts to on-demand streaming.

Essentially, Pandora and IRFA supporters want to change the current law and replace it with a statutory rate. There are arguments that this would lower payments to artists. Nadler’s bill however, would seek to change the law to provide for a rate based on a “willing buyer / willing seller” model whose proponents say would raise royalties paid to artists.

Pandora’s argument is based in part on the fact that SiriusXM (another “non-interactive” service) pays a lower royalty and that this legislation would level the playing field. Besides potentially driving the royalty down, what is not being said is that the lower rate was instituted in 1998 to help nascent digital radio companies (like Sirius, XM—they were separate at the time—and MusicChoice) survive in the marketplace until they could all pay under a market-based (negotiated) standard. (A good history of this can be found in this piece on Slate.)

The basics here are that it was only in 1995 that artists were granted a “digital public performance right” for the first time. Note that it is only a digital right; there is still no public performance right for other transmissions of sound recordings in the US. This is the reason that terrestrial (AM/FM) radio does not pay the copyright owner of the master recording while they do pay the songwriter. (And note that the US is the only industrialized country that does not grant this right to owners of sound recordings.)

Confusing? Yes. The bottom line is that action is required to institute a public performance right for terrestrial radio and then to harmonize all of these royalties so that artists and record companies can be paid fairly and licensors don’t get sweetheart deals. It’s my hope that this debate will help bring about a rational solution that will end the years-long inequality in public performance royalty payments.

What Streaming Services Pay Artists Doesn’t Matter. . .Yet.

What do streaming services pay out, anyway?

Everybody is trying to answer this question for every streaming service. I’ve seen articles about the amount that Spotify and Pandora pay out in royalties and how that number breaks down on a per-play basis. Yet for every article that talks about how these services represent growth in a new marketplace, there are articles showing the opposite. I’ve even seen a graph showing data indicating that Spotify’s model is unsustainable.

The conversation about streaming services is everywhere. It reached a fever pitch last Thursday night, with reports that Apple is working to launch a streaming radio service. There must be money in it, right?

I've been reluctant to weigh in on the question of how much streaming services pay artists because of the complexity of the discussion. Each service is experimenting with its model, its pricing, and its offering, and each has different statutory rates to use. All of these variables result in different royalty calculations. Also, because they are licensing content from record companies and music publishers, the payments they make are often not disclosed. Additionally—and to make things even more complicated—regardless of what the label or publisher gets paid, the payment to the artist is still dependent on their individual label or publishing deal. Together, these factors make it nearly impossible to compare services.

I tend to think of streaming services as radio replacements. When you think of them in this way, two truths emerge:

First—regardless of the payout—streaming income represents a step forward for artists. This revenue stream was not previously part of the mix of products and services they could capture. In fact, terrestrial radio stations (like "non-interactive" services) don't pay record companies or recording artists for the recordings they play. Only the songwriters are paid royalties in connection with what is on terrestrial radio. (The reason for this stems from the long-established premise that radio airplay represents “free” advertising that drives record sales, and therefore no statutory rate exists.) Any payment derived from streaming represents a new revenue stream. That’s good news at a time when other revenue streams are shrinking.

Second, when you consider the reach of a radio station in a major market, you get some perspective on the difference between one radio play with an audience of millions versus one person streaming a single song. The reason that radio remains a powerful promotion vehicle is because of that reach, and currently the audience on streaming services just doesn't compare. Therefore, the “low” payments we hear about are simply due to the fact that there aren’t enough plays to generate more income. Despite the inability to compare these numbers, however, as the audience for streaming services increases, so will the revenue, and likewise, the per-stream rate.

My radio analogy might not be entirely accurate, given that some streaming services (Spotify, Deezer, Rdio) are “interactive”, allowing their consumers to choose the songs they want to hear, while others (like Turntable.fm and Pandora) are “non-interactive”, playing songs without direct intervention on the part of the customer. (For a good discussion of all of these terms, check out this post.) But this will likely change as well.

As I've discussed before (here and here), I think that Spotify is immensely important. It is transitioning consumers to an access-type subscription model by normalizing the process of streaming for music fans used to buying physical products, while at the same time legitimizing streaming for those who previously pirated music.

How this all plays out remains to be seen, but the proliferation of services demonstrates that startups are experimenting in this space. These companies—and the VCs who fund them—see promise in the model, even if the current situation is not particularly stable. That promise means that the situation will improve, and payments to artists will too.