When a terrestrial radio station plays a song during its over-the-air broadcast, the artists and their record labels receive no compensation for the sound recording right.
Yet radio’s digital competitors — including streaming services and satellite radio — do pay performance royalties to performers and their labels for the sound recording.
Terrestrial radio’s cost-advantage is not the result of marketplace deals or competitive forces, but from a statutory preference granted to radio broadcasters.
Legislation aimed at leveling the playing field has been strongly resisted by broadcasters based on the claim that radio provides a promotional effect, or free advertising, for record labels and performers.
However, a new report from Phoenix Center, an Inside The Beltway non-profit organization that studies law and economics of the digital age, says that’s hogwash.
The report, “Promotional Effects and the Determination of Royalty Rates for Music,” concludes that any promotional effect “is fully internalized in a marketplace bargain between the music and radio industries.”
As such, the Phoenix Center finds that any alleged promotional effect provides no basis for federal law to mandate the free use of music by the terrestrial radio broadcast industry.
“If the promotional effect is large enough to justify a zero royalty rate, then the music industry will voluntary accept a zero rate in a negotiation with broadcasters,” said study co-author and Phoenix Center Senior Fellow Professor T. Randolph Beard. “If not, then a positive royalty rate will be established.”
Study co-author and Phoenix Center Chief Economist Dr. George S. Ford added, “Promotion provides no basis for federal law to mandate the free use of music by the radio broadcast industry. Promotional effects, even if present and strong, are not a type of market failure requiring a legislative or regulatory fix.”
Phoenix Center Senior Fellow Professor Michael Stern, another study co-author, added, “Our analysis shows that a market-negotiated royalty rate balances the income derived by commercial users of music and any promotional effect those users provide, revealing that any promotional effect is fully internalized by the parties. In layman’s terms, this means that if you use music to make a profit, then you should have to negotiate with the right holders for the right to do so.”
The study sparked an immediate response from the NAB, which will fight any fees assessed to AM or FM radio stations by the recording industry.
EVP/Communications Dennis Wharton said, “NAB is pleased that Congress has long rejected a job-killing fee on America’s hometown radio stations while recognizing the unique promotional value that local radio provides record labels and performers. Every week, local radio jump-starts careers of new musicians and exposes 265 million listeners to legacy artists, all for free.”
He added, “Our stations are proud to be a primary platform for new music discovery, and NAB will strongly oppose RIAA-backed legislation that would transfer hundreds of millions of dollars from local radio to mostly offshore record labels.”