By George Howard
(Follow George on Twitter)

Hell occasionally does freeze over, apparently. Continents shift. I have to say that I never thought I’d see a day where the terrestrial radio stations paid a performance royalty to the owner of the sound recording.  Now, to be clear, this tectonic shift did not occur due to new new legislation, but, apparently, occurred via free-market negotiations.

The implications of this deal between Clear Channel and the Big Machine Label Group (home to, among others, Taylor Swift) are potentially huge, and not just for performers/labels with respect to finally being paid when their copyrighted material is publicly performed, but for the industry as a whole.  It signals a move towards transparency, which could/should lead to new participants entering the music industry.  As such, we may finally see some innovation.

This is exciting.

Let me step back for a moment to frame the issue. As discussed frequently on these pages, when an original song is created and fixed in a tangible form (written down or recorded), the author of that song is immediately granted a copyright for that song.  The copyright that is created is for the tangible manifestation of the “idea” of the song (the lyric and melody).  Now, when a label (whether that’s a third party, or the artist herself acting as her own label) releases (either as a physical good (CD, LP, etc.) or download) a recording of this song, the label owns the copyright to the release; this is the copyright to the sound recording.  For ease of understanding, we’ll apply industry-standard nomenclature and refer to the copyright in the sound recording as (P), and copyright to the song itself as ©.

One of the exclusive rights that the copyright holder of the song (the ©) automatically is granted is the right to publicly perform the work.  This means that the copyright holder is the only one allowed to perform the song in a club, but it also means that no radio station, restaurant, or any other public place, can play these songs (via radio, etc.) without the copyright holder’s permission.

In order to expedite the process of getting the necessary permissions, and compensating the copyright holders when their songs are publicly performed, clearinghouse agencies— known as Performance Rights Organizations (PROs)—were created. In the United States there are three: ASCAP, BMI, and SESAC.  Each of these entities represents songwriters. These songwriters grant the PROs the right to negotiate with entities (radio stations, TV stations, clubs, restaurants, etc.) on their behalf, and issue licenses to these entities.  These licenses give these entities that desire to publicly perform the copyrighted material of the artists represented by the PROs, the right to do so.  The PROs charge a fee for these licenses, and, after deducting their costs, distribute the net collected money to their affiliated writers based upon the amount of public performances the respective artists have over a period of time.  It’s a complicated formula, but, in a nutshell, songwriters whose music is publicly performed more often and to more people, get more money than those whose songs are publicly performed to fewer people and less frequently.

As one can imagine, one of the largest revenue streams with respect to public performance revenue, is money paid to the PROs from radio stations.  Every time a radio station plays a song, the writer of that song is owed money.

Here’s where things get interesting, and where recent developments make things really interesting.

While the songwriter gets paid (i.e. the person who holds the ©), the owner of the sound recording (i.e. the label/person who holds the (P)) does not get paid when their copyrighted material is publicly performed on terrestrial radio.

The United States is one of the very few countries that does not legally mandate a right of public performance in the sound recording (the (P)) for terrestrial radio broadcast.  This means that in nearly every other country in the world, when a song is played on the radio, both the person who wrote the song (the owner of the ©) and the label (the owner of the (P)) who released the song get paid.  Additionally, this payment in the sound recording (the (P)) tends to be broken up so that not only does the label get paid, but also the performer of the song gets paid too.

To put it into context: In the United States, when Whitney Houston’s version of Dolly Parton’s song “I Will Always Love You” gets played on the radio, only Dolly Parton (the author of the song—the © holder) gets paid a public performance royalty.  Neither Whitney, nor the label that released the song and owns the copyright to the sound recording (the (P)) gets a dime.  In nearly every other country, both Dolly Parton and Whitney Houston’s estate get paid.

There has been ongoing effort by various policy organizations to change this anomaly, and make the US consistent with the rest of the world, by having broadcasters pay a public performance royalty to owners of sound recordings, but—for a variety of reasons, largely political—these efforts have failed.

Progress, of course was made when the Digital Performance Right in Sound Recordings Act of 1995 and 1998’s Digital Millennium Copyright Act (DMCA) granted owners of Sound Recordings exclusivity for public performance via digital transmission.  This means that when a song is played on Internet radio, satellite radio, etc., the owner of the sound recording (and the performer) is paid a royalty. For this type of public performance (specifically, non-interactive digital transmissions, i.e. streams), an entity called SoundExchange administers licenses and collects; in other words, SoundExchange does what ASCAP, BMI, and SESAC do, but only on behalf of the owner of the sound recording (the (P), and only for digital transmission).  Even with this legislation, there has been no modification to the law with respect to terrestrial broadcast.

Recently, however, there has been movement.  As reported recently in Billboard, Clear Channel, the largest US owner of radio stations, has agreed to pay a public performance royalties for sound recordings (the (P)) to the Big Machine Label Group and its artists.

Lots of interesting details here.  First, because Clear Channel has made a deal directly with a label, and negotiated their own rates rather than relying upon statutory rates (set by the government), they bypass any clearinghouse agency.  As Clear Channel not only broadcasts terrestrially, but also online, this means that SoundExchange has been cut out of the equation.  This means at least one thing for sure: the label will get more money, as there’s no intermediary (SoundExchange) to take a cut.

Further, the Billboard article states that Big Machine will split the money they receive with the artist.  I have questions about this.  First, I assume that Big Machine will only split this money with the artist if the artist is recouped.  Second, I assume that there is some pretty great tracking and accounting going on in order to be able to determine which play (for which artist) resulted in what income.

The implications of this deal for the industry are uncertain; could this be the spark that ignites the dynamite of change, or will it simply be an anomaly? However, there are implications to be drawn with respect to the way the business is changing.

For instance, Clear Channel CEO Bob Pittman, in explaining his rationale for doing this deal, stated: “What we are really trying to do is come up with a predictable model.” I’ve been proclaiming for quite some time that one of the biggest obstacles standing in the way of moving the music business forward is the lack of transparency, and thus the lack of predictability.  No rationale person would invest in a business model where they cannot understand/assess the risk/reward due to a lack of transparency.

The confusion around payments for public performance (both terrestrial and digital) is a GREAT example of a business model with no predictability.  Smart money (i.e., investors, entrepreneurs) is standing on the sidelines of the music business, and keeping their money on the sideline until a more predictable model emerges.

One sure-fire way to improve predictability (and, related, transparency) is to do what Clear Channel and Big Machine have done: strip out the intermediaries, and do deals directly.  In this manner, Clear Channel knows precisely what they will have to pay in order to broadcast—digitally or terrestrially—to the owner of the Sound Recording: Big Machine.  Similarly, Big Machine knows what to expect in terms of payment for their Sound Recordings.

Hey record business: this is how you run a business! You own an asset, and you exploit that asset for a fee, and, over time, certain elements of predictability emerge.  This predictability allows you to forecast, and adjust your business accordingly.  It’s somewhat shocking that this even has to be stated, but, apparently, it does.

What should be very clear, and very unsettling is that this cannot end just with payment for public performance of the Sound Recording (the (P)).  By this I mean, just as SoundExchange has been disintermediated with respect to the Sound Recording, ASCAP, BMI, and SESAC could/should be taken out of the equation with respect to collection/distribution of fees for public performance of the copyrighted songs (the ©).

To be clear, this direct licensing approach works best (and maybe only works at all) with labels that have substantial rosters/catalogs.  Big Machine is able to make a deal like this because they have artists like Taylor Swift, Reba McEntire, Jewel, the Mavericks, and Tim McGraw.  Neither Clear Channel, nor any other broadcaster, is going to have the time or interest in negotiating licenses for public performance for thousands/millions of individual artists, and thus intermediaries are necessary.  However, what this deal shows is that there is room and need for new ways of doing things.  TuneCore’s Worldwide Publishing Administration is a prime example of this.

What’s most exciting about this deal between Clear Channel and Big Machine is that it shows not only a rare gesture of innovation in an industry that innovates all-too-infrequently, but also a move towards predictability and transparency.

This increased predictability and transparency will attract an increasing amount of new money and new approaches to the record industry.

The net effect of this will be that old, ingrained customs—ones that no one can even remember where they came from (Why don’t we pay a performance royalty in sound recordings for terrestrial broadcast? Why aren’t movie theaters required to pay any public performance royalties?)—will finally be called to question.

So too will institutions and entities who have operated under a veil of obfuscation and confusion and lack of predictability.  When it becomes clear that there is really no Wizard behind the curtain, we’ll finally be able to make some progress towards creating a more equitable, transparent and predictable business. Can’t wait.

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George Howard is the Executive Vice President of Wolfgang’s Vault. Wolfgang’s Vault is the parent company of Concert Vault, Paste Magazine, and Daytrotter. Mr. Howard is an Associate Professor of Management at Berklee College of Music

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