The performance royalty debate: what may happen


Battered by the growth of file sharing technology, the music industry has set its eyes on radio as a way to open up any desperately needed revenue streams. And there is one untapped reservoir in the radio field: performance royalties. 

Theoretically the music industry has a good argument. Performance royalties make sense. After all, performers should be entitled to a compensation for the airing of their performance. However, because this is an area regulated by Congress, and because the record industry is a wounded dog backed into a corner, there are all kinds of political and economic games happening. The result is a brewing battle royal that is set to pit the radio and music industries against each other.

The radio royalty debate is actually two separate issues. One involves a look forward to the future of radio and music, namely internet and streaming radio. The second provides a look back to terrestrial stations.

As has been widely reported, Congress has been debating performance royalties for digital audio – i.e. streaming, playlists, internet radio, etc. Terrestrial radio does not pay a performance royalty because of a long standing “agreement” that radio offers promotion for the artists, so therefore should get a break on this royalty. However, with the record industry suffering from illegal file sharing, they decided several years ago not to extend this break to digital transmission of music. The thought being that it is this digital medium that got them into this problem, so it should be what gets them out of it. Ironically, these days, internet radio is probably a better vehicle for music discovery than traditional radio, yet its viability is being put in jeopardy by this royalty. What makes this an even stranger point, is that streaming audio is not the problem for the record industry. Its peer to peer file sharing – which is very different than internet radio. Have you ever heard of anyone stealing music off of an internet radio station?

In the same vein there has been a low-key but growing discussion about lifting the performance royalty exemption on terrestrial radio. There has been some debate as to why this is happening – especially when the radio business is apparently under so much financial pressure. Some people think it is to blunt the digital broadcaster argument that applying a performance royalty on digital is unfair because there isn’t one on terrestrial radio. Other’s believe that terrestrial radio was the target of the record industry all along – and that digital was just the first step in taking back this exemption.

In most situations, it would be ideal for the market to work it out. A compromise could be easy, with an agreement for a small royalty, (say $.0003 cents per song play) on performance. This cost would recognize radio’s impact on record and concert ticket sales, but also pay for the right to use the content.

Then, if the record industry doesn’t want radio – terrestrial or digital – to play their songs without paying a big “tax”, the radio industry can negotiate directly with artists, cut deals on a label by label basis, or enact a pay to play scheme where they only pay music from artists that pay them to play their music.

However, since these two industries are mature and have hundreds of thousands of jobs and billions of investor’s capital in them, there is a deep political interest in keeping them both stable. And, with so many different individual players involved, there is a strong incentive to fight the issue out in Congress rather than give. Instead, what is likely to occur is this:

1. Internet radio suffers through a painful royalty rate. It may improve a bit from where it is now, but this will happen.

2. Internet radio will start to look a bit more like terrestrial radio – with more ads and more royalty free content. The good news is the personalized and niche programmed radio everyone loves will still be available. The bad news is you will probably be hearing about 4-5 minutes of audio ads per hour of programming to pay the bills. This is still less than half the ads heard on terrestrial stations, but a far cry from the commercial free experience found on Pandora and imeem.

3. Internet radio will get serious about ad targeting. In order to generate the most money from the ads they run, internet radio will tap into all the targeting tools of internet advertising and ultimately create an ad that is much more valuable than a terrestrial radio ad. If they have less than half the number of ads running, they will need to create two times the value to make the same dollars. Thanks to the internet’s ability to follow the listener, this is very feasible.

4. Terrestrial radio will win the current royalty battle with the record labels. This will happen because of politics. Quite simply, big radio is more powerful than the big labels. Not only does the radio industry employ more people than the music industry, but radio execs are much more politically savvy. Their business has always been in partnership with government – the FCC, local zoning laws, political advertising, issue oriented talk, etc., so they know the players and are in a better position to influence the decision makers. And government won’t let the record industry drag down the radio industry – especially in an economy that is teetering on the brink of collapse. The record industry has already imploded, but the radio industry, despite the much publicized decline in ad spend. is actually a healthy, profitable business.

We can count on the radio groups continuing to fight this royalty tooth and nail, though at the same time they should prepare for the demise of the royalty exemption. Eventually the music industry will win that part of the battle. The growth of streaming radio, which is becoming a larger and larger part of radio’s distribution, will allow the industry to opt out of free play. They may never overturn the legislation, but the same technology that they blame for the death of the profit margins will carry the day.

Doug Perlson is CEO of TargetSpot, Inc., ( an end to end advertising marketplace specifically designed for streaming audio