RIAA plays both sides of the street in music royalty debate

Readers will no doubt be shocked—shocked—to hear that the RIAA works for its own self-interest, but a recent Public Knowledge piece suggests that the organization is being more than usually self-interested in two current debates. On the one hand, the major labels think that webcasters should pay a flat rate for every track streamed, even if this means that a webcaster's total bill for music exceeds revenues in any given year. On the other hand, the RIAA does not want to pay a flat rate for its own music, suggesting that a percentage rate of the kind that webcasters were denied is the way to go.

Confused? Let's break it down.

No hobgoblins here

If consistency is the "hobgoblin of little minds," as Emerson put it, then the music industry must have a collective brain the size of the moon. Contradictions and paradoxes abound. For instance: why does satellite radio pay artists and songwriters for playing their songs, but terrestrial radio only pays artists? Why do webcasters also pay both, but at a different rate?

When it came to setting webcaster rates last year, the webcasters wanted to pay a percentage, just like satellite radio services do. But revenue is hard to come by in the webcasting business, so SoundExchange (an RIAA spinoff that collects the money and redistributes it to labels and artists) pushed for a flat fee per stream per user. And it got it last March when the Copyright Royalty Board set the fee at $0.0011 per song streamed.

You may recall that this touched off a heated debate over webcasting that escalated to the floor of Congress, as legislation was introduced to overturn the new rates. Eventually, SoundExchange cut separate deals with both large and small webcasters, though the CRB's official rates remain unchanged and SoundExchange could enforce them if it wanted to.

Enter the RIAA

The RIAA finds itself in a similar situation, though one that's been dragging on for a century now. Back in 1909, Congress set up a "mechanical royalty" to be paid to songwriters when a physical copy of a sound recording of their work is made. This rate has been upgraded over time, and today stands at $0.091 per track.

That sounds cheap, but it means that a ten-track CD can cost the labels nearly a buck just for the songwriting fees. And because this is a fixed cost, it becomes harder for the labels to pay as the price of music drops and revenues plunge.

So during the most recent CRB "trial" to fix these rates, the RIAA said that it wanted to move to a percentage model as well. Cary Sherman, the RIAA boss, reveals in his filing that Cat Stevens' "The First Cut is the Deepest" is one of his favorite songs; instead of paying $0.091 to Stevens every time an RIAA artist sells a CD with a cover of that song on it (as Sheryl Crow did recently), Sherman suggests that the label pay a percentage instead.

This would solve problems that arose a few years back with "DualDiscs," where CD audio might be on one side of the disc and DVD-Audio on the other. In that case, the music publishers (who represent the songwriters) argued that they deserved to be paid twice, once for each side. But that would come to 18 cents per song, which could be nearly $2 per album. Since DualDiscs didn't command much of a price premium, this was unworkable to the labels.

In Sherman's view, a percentage model would make these problems go away. "I have increasingly come to believe," he said, "that the only rate structure that makes sense is a percentage rate that can be applied readily to all products in the marketplace."

Other filings from executives at EMI and Sony BMG make clear that the labels think the current setup horribly unfair. As their own revenues tank, the music publishers (and the songwriters they represent) continue to rake in that same mechanical rate. As EMI's Colin Finkelstein put it, "Record labels bear almost all of the risk." Songwriters are shielded from that risk by the fixed nature of the mechanical rate.

What's good for the goose...

All of this begs the question: why should the RIAA get a percentage deal for itself but insist on a widely-despised flat-rate deal for webcasters who want its music? That's what Public Knowledge staff attorney Rashmi Rangnath asked this week. "Is it fair that RIAA/SoundExchange switch to a percentage of revenue model for music sales while holding back the small webcasters from taking advantage of the same for streaming?" she wrote.

Rashmi Rangnath

Part of the issue is that the RIAA and SoundExchange are separate entities (though SoundExchange began life as an RIAA subsidiary) and their interests are no longer exactly aligned. SoundExchange now includes numerous non-RIAA board members, though it is still the focus of intense debate as to exactly how beholden it is to the major labels.

While Emerson may have downplayed the importance of consistency, it certainly seems like a bit more would be welcome in the music business... and it's exactly this argument that the RIAA is using its concurrent push to get radio stations to pay up (radio, webcasting, and satellite should all pay a consistent set of fees). Too bad SoundExchange and its RIAA backers didn't push the CRB to do the same thing for webcasters.

Original here