Sell More for Less, or Less for More?

Peter Ferrara
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Posted: Jul 17, 2015 12:01 AM
Sell More for Less, or Less for More?

I know from experience that I can charge $2,500 per speaking engagement, and get about 5 or 6 such engagements per year. Or I can charge $20,000 per speaking engagement, and get zero each year. Or, should Congress appoint a board of experts to make this decision for me? That is what Congress has done for the newly developing digital music industry. But do the experts have any idea what they are doing?

The music recording companies used to be happy recording music on CDs, and selling them for $15 to $20 each. The performers singing or playing the tunes used to make good money doing that as well.

But technology passed this business by. Tech savvy younger people, who spend the most time and money buying music, found that they could skip the CDs altogether, and find much if not most of the music they wanted online for free. This started to wreak havoc on the music industry, as CD sales plummeted, and singers and other performers began to learn the virtue of property rights when they had trouble finding ways to sell their recorded performances.

Federal law provides copyright protection for those who file their recordings with the Library of Congress. That means no one can broadcast the recording without getting permission from the producer, which generally means paying a fee.

This is where the Copyright Royalty Board comes into play. The Board sets rates by which materials with copyrights, like music recordings, can be leased by anyone who pays the fee to the copyright owner. The music recording companies have established a joint operation, the Sound Exchange, to collect the fees for all recordings played on websites and radio stations, and distribute the money to the music companies and the performers as previously established for each recording.

The Board is conducting an administrative proceeding this year to set new rates for 2016 to 2020. By law, the Board is supposed to set rates that reflect what a “willing buyer would pay a willing seller.” But the Board is neither a willing buyer nor a willing seller, and has no way of knowing what price would be set by willing buyers or willing sellers in competitive markets.

For example, what if in my case mentioned at the outset, the Board decided I was being underpaid for my expertise at $2,500 per speaking engagement, and $20,000 would better reflect the quality of my pathbreaking speaking. My speaking income would fall to zero as a result.

Today, broadcasters streaming recordings over the Internet pay as much as 25 cents per 1,000 streamed performances. Pure music streaming services like Pandora pay 13-14 cents per 1,000 played performances. IHeartRadio and Sirius XM pay so much for played performances because of market distortions that their business model is already not profitable.

But the music recording companies want to increase their rate to 30 cents per 1,000 performances, which would double what the digital music companies are now being charged. The music recording companies say they need to regain revenue they have lost from CD sales. But the digital music companies are losing big bucks at the current rates. Pandora lost $40 million last year, Spotify lost $80 million, Sirius XM has never made money in this business.

If the recording companies get the rate increases they want, the leading digital music companies will go out of business. The recording companies and the performers will lose everything from what is their newly developing market, just like my income from my zero speaking engagements at $20,000 each.

But some big broadcasters, such as Google, Amazon, and Apple, are perfectly happy to stream recordings as a loss leader to attract customers to their much bigger operations on their websites, and drive less well-endowed competitors out of the market. If the Board would set more modest rates, however, that could provide the incentives for the broader market to flourish, with more, new, innovative companies arising, maximizing income to the music recording companies, and the performers.

The law, however, does not bar digital music companies from cutting their own deals directly with the music recording companies, and bypassing the Copyright Royalty Board altogether. Pandora and iHeart have done exactly that. And their directly negotiated fees indicate market rates would be well below the Copyright Royalty Board fees.

At least those directly negotiated rates do reflect precisely what a willing buyer would pay a willing seller. Perhaps the Board would do best to withdraw from its rate regulation altogether, and tell all the parties to go negotiate their rates directly.