While there are a seemingly infinite number of ways to share and discover new music, few are as mythologized as the mixtape. From Nick Hornby’s romanticizing of the format in High Fidelity to Library of America editor-in-chief Geoffrey O’Brien’s assertion that the mixtape is “the most widely practiced American art form,” no other amateur medium commands the same level of respect from fans and critics alike. While the general principles of mixtape making continue to live on in even the post-iPod era, with the exception of a few purist holdouts, most mixtape curators stopped using magnetic audiotapes long ago, in favor of the more convenient CD-R. Recently, however, even more advanced tools have emerged on the web, allowing would-be mixtape traders to widely disseminate their tastes while easily tapping into those of their friends.
One such site, Muxtape, allows users to upload, sequence and stream 12 MP3s in order to create virtual mixtapes. Web radio services like Pandora, meanwhile, allow users to discover new music–as mixtapes once did–based on their existing tastes. And social music sites like Last.fm allow users to broadcast their tastes automatically, by generating radio stations based on the user’s listening habits. All of these technologies provide fans with new ways to interact with and discover music and have the potential to generate quite a bit of excitement for both independent and major label artists. That last fact seems to be lost on the recording industry, however, which, as usual, is too busy trying to stuff the genie back into the bottle to know a good opportunity when it sees one.
The Performance Rights Imbalance
We’ve been hearing predictions of the death of web radio for a while and it now appears that web broadcasters could start going silent in the next few months. At issue is the Internet radio royalty hike, which was enacted in March 2007. The new royalty rate, which was set using a “willing buyer, willing seller” approach, requires Internet broadcasters to pay song royalties per song per listener. In practical terms, this means that Web broadcasters often pay nearly double what satellite radio broadcasters pay and significantly more than terrestrial radio broadcasters, which are exempt from paying a performance license for the use of sound recordings.
At a Senate Judiciary Committee hearing this past July (RealVideo stream), members of Congress attempted to address this disparity between various types of broadcasters. Terrestrial broadcasters have long argued that they are rightfully exempt from paying a performance right because radio airplay provides artists with free publicity, thereby allowing them to sell more albums. True though that may be, the same argument could be easily extended to satellite and Internet broadcasters as well. That being the case, shouldn’t there be some sort of parity between the royalties that various types of broadcasters pay?
Major labels, SoundExchange and artist representative groups sure seem to think so. These groups have long argued that terrestrial broadcasters have denied performers access to a legitimate revenue stream and often illustrate this point by carting out sob stories about destitute artists and their families. “Our artists and copyright owners deserve to be fairly compensated for the blood and sweat that forms the core product of these businesses,” Mike Huppe, general counsel for performance rights organization SoundExchange, recently told the Washington Post. While it’s hard not to agree with that statement, anyone who possesses even a basic understanding of the American recording industry knows that lopsided major label contracts have cheated artists out of more money than a performance rights hike could ever hope to atone for. That aside, performance rights parity could be quite beneficial for performers–as long as the license fees are fairly split between artists and labels.
Reports of Web Radio’s Death Have Not Been Greatly Exaggerated
While performance rights hold the potential to more fairly compensate artists for their work, the desire to squeeze every last cent out of radio airplay must be balanced with fair license terms that encourage innovation. This is made extremely clear in the case of Internet radio broadcasters, many of whom are currently facing extinction in the face of exorbitant licensing fees. At the aforementioned Senate hearing, Pandora President and CEO Joe Kennedy illustrated this fact by noting that under the current regime, his company would have to pay some $18 million in licensing fees for this year alone. Given that his company’s yearly operating budget is only $25 million–most of which, mind you, is venture capital–Pandora would have no choice but to shut its doors if these licensing fees were enforced. And given the fact that Pandora is currently the nation’s largest Internet radio service, with some 1 million listeners a day, there’s little question as to whether smaller broadcasters stand a better chance at survival.
Immediately following these comments, Senator Dianne Feinstein (D-CA) asked Kennedy to explain exactly how the licensing structure allowed for such massive fees. Oddly enough, Kennedy failed to elaborate satisfactorily but even then, most of the lawmakers present appeared to side with him. Senator Arlen Specter (R-PA) remarked that “There’s little doubt that legislation has not kept up with the technology” and blamed partisanship for Washington’s inability to adapt to a changing technological climate. Senator Sam Brownback (R-KA) agreed, criticizing the flawed “willing buyer, willing seller” standard and calling the Internet radio royalty hike a “death sentence” for web broadcasters. And Senator Ron Wyden (D-OR) acknowledged the need to provide musicians with additional revenue opportunities, “without putting a stranglehold on new technologies with old rules”.
While the members of the Senate Judiciary Committee seem quite convinced, until recently, it was somewhat unclear whether or not the increased licensing fees would actually cause Internet radio providers to close up shop. According to an article in Saturday’s Washington Post, however, we could now be on the cusp of a mass extinction. “We’re approaching a pull-the-plug kind of decision,” Tim Westergren, founder of Pandora, told the Post. “This is like a last stand for webcasting.” According to Westergren, if a compromise isn’t reached soon between the recording industry and the broadcasters, Pandora will shut down, in order to avoid wasting its investors’ money.
With the Internet Radio Equality Act seemingly abandoned in committee, Representative Howard Berman (D-CA) is trying to broker just such a deal between SoundExchange and the webcasters. Unfortunately, chances seem slim that a compromise will be reached in time to save services like Pandora. “Most of the rate issues have not been resolved,” Berman told the Post. “If it doesn’t get much more dramatic quickly, I will extricate myself from the process.”
If Pandora is forced to shutter its doors, it’s worth pointing out that at least part of the responsibility may lie in the company’s own business strategy. As Ars Technica aptly points out, “most Internet radio stations like Pandora offer their services for free, or they offer accounts with more features at incredibly cheap prices.” While that may be a great strategy for pulling in users in the hopes of eventually getting acquired, it’s not exactly the most sound business strategy for a company facing tens of millions of dollars in licensing fees. To its credit, Pandora does feature some advertising on its website (though not on its popular desktop and mobile clients) and is starting to expand its advertising initiatives. This, however, could ultimately prove to be a case of too little too late. While webcasters like Last.fm, which is owned by CBS Interactive, may be able to weather the coming storm, independent services like Pandora could become unfortunate casualties of natural selection.
Make Me a Muxtape
Yesterday, visitors to Muxtape.com were greeted by the following message: “Muxtape will be unavailable for a brief period while we sort out a problem with the RIAA.” Unlike in the case of webcasters, the targeting of Muxtape by the RIAA doesn’t exactly come as a surprise. The site allowed users to upload their own MP3 files, which were then hosted on Amazon.com’s S3 service and streamed to listeners around the world. While there’s some speculation that this could all be a joke or publicity stunt on the part of Muxtape, it’s not hard to imagine why the site might find itself in the recording industry’s legal crosshairs: Muxtape, ostensibly, allowed users to share music without kicking a single cent in the direction of either record labels or musicians.
While the (hopefully temporary) shutdown of Muxtape is certainly an annoyance for users, it provides the recording industry with an excellent opportunity to create a new revenue stream without penalizing its customers. While there’s little doubt that musicians should be fairly compensated for the use of their music, users should be encouraged to interact with that music in exciting new ways that take advantage of advancements in technology. Why not negotiate a deal that allows Muxtape to stay in business while also paying a nominal performance right licensing fee? Sure, even with advertising on its site, Muxtape probably won’t be able to afford a license fee even close to what webcasters pay. But what’s the alternative? Shutting down the site completely? As in the case of Internet radio, that would simply destroy yet another opportunity to monetize the performance of music, thereby only exacerbating the recording industry’s downward spiral. Will the RIAA really cut off its nose to spite its face yet again?
Whatever happens to Pandora, Muxtape and the countless other music services online, more applications will eventually emerge to take their place. The Internet is here to stay and music fans have made it quite clear that they want to share music with each other online. And if the means to do so legally don’t exist, fans will more than happily take advantage of illegal services, which hurt everyone in the food chain. At the aforementioned Senate hearing, San Francisco-based songwriter Matt Nathanson observed–after apologizing repeatedly for his limited understanding of the intricacies of the recording industry–that independent musicians like him tend to approach things differently than their major label counterparts do. In Nathanson’s experience, major label artists generally attempt to maximize any and all potential revenue streams, while indie musicians are often willing to take a minor financial hit, in order to reap the promotional benefits that interactive music services provide. The recording industry would do well to take a more indie-like approach to online music services, lest it become the one facing extinction.