ETHAN SMITH And CHRISTOPHER S. STEWART Wall Street Journal 06/06/12
The largest U.S. radio broadcaster and an independent Nashville record company said Tuesday they have reached a novel agreement that represents a major bet that radio’s future is online rather than over the air.
The deal revamps the way Clear Channel Media & Entertainment calculates the royalties it pays to play music distributed by Big Machine Label Group, the company behind some of the biggest stars in country music, including Taylor Swift, Rascal Flatts and Tim McGraw.
Though some details are arcane, the agreement represents a historic shift. Under the new accord, Big Machine and its artists will collect royalties when their songs are played on broadcast radio stations, something that has never been part of the U.S. royalty system but is common elsewhere. In the U.S., only songwriters and the music publishers who represent them collect royalties from airplay on the theory that having their music played on the radio benefits artists by promoting record sales.
Clear Channel, owned by CC Media Holdings Inc., CCMO -3.03% owns 850 radio stations. It webcasts their signals through a website and smartphone app called I Heart Radio.
As music sales crumbled in the Internet age, record companies became aggressive about lobbying for performance royalties from broadcasters. But it was an uphill battle given the broadcasters’ political clout.
Record companies have been able to collect performance royalties from some newer broadcasters, notably online and satellite radio. Those royalties are typically calculated as a fraction-of-a-cent fee each time a song is played. (On-demand Internet music services like Spotify AB aren’t covered by the current royalty structure and must negotiate licensing terms directly with record companies.)
Pandora Media Inc., P +2.80% the popular online radio company, blames onerous royalty payments to record companies for its inability to turn a profit.
A Pandora spokesman said, “It’s not a level playing field” because the Internet-radio company pays royalties for every track played. As a result, he added, Pandora’s royalty costs are equivalent to about 60% of revenue. Satellite-radio operators pay a lower, fixed royalty as a percentage of revenue, and royalties from traditional broadcasters are “negligible,” he said.
The Clear Channel-Big Machine deal is intended to address just that gap, Big Machine Chief Executive Scott Borchetta said. It will offer lower rates for playing music online, giving Clear Channel an incentive to build up its Internet music initiatives and offset the decline with the new broadcast royalty.
“The opportunity for growth is digital,” Mr. Borchetta said. Big Machine and its artists will get a percentage of revenue from Clear Channel’s various outlets both online and over the air. Terms weren’t disclosed.
With the growing ubiquity of smartphones and more cars that include Internet-radio options, consumers are spending more time listening to music online, escalating the royalty costs along the way.
“Someone has to go first, someone has to take a risk,” said Clear Channel CEO Robert Pittman. “If digital grows a lot, this will be a good deal. It’s a gamble. But you win nothing if you don’t take a chance.”
Now, 98% of Clear Channel users listen on terrestrial radio, and the balance listen digitally.
The system for compensating songwriters stretches back to 1917 and Oliver Wendell Holmes Jr.’s decision in the Supreme Court case Herbert v. Shanley Co. that in essence said that when copyrighted music is played or performed in a commercial setting or through a commercial medium, a royalty is due the composer.
“Back then the composers had more pull,” said David Suisman, author of “Selling Sounds: The Commercial Revolution in American Music.” “But for many decades, star performers have been calling to get paid.”
About the current royalty system, Mr. Suisman said, “If Elvis makes ‘Hound Dog’ famous, the songwriters of that song are due a royalty. Elvis as a performer would not have been entitled to any sort of performance royalty.”
Congress has looked at the performance royalty fee issue for decades but hasn’t acted. U.S. broadcast royalties to songwriters and publishers are valued at $500 million a year in the U.S., are collected and distributed by middlemen known as performance-rights organizations. On Tuesday, U.S. Rep. Gene Green, a Texas Democrat, said the new deal showed that Congress didn’t have to get involved: It “shows that the private marketplace works, and it is the best place for these negotiations to occur,” he said.