June 2007

Royalty rates - Boycotts and pork or a business approach.

Royalty rates -Boycotts and pork or a business approach.

Now that the US "Day of Silence" by webcasters in protest at new rates for streaming audio has come and gone, it seemed to us reasonable to look from an outsider's point of view at what has happened so far.

From our vantage point of view it seemed like so many things in the US nowadays when any question of legislators is involved to come down to pork rather than principle, a combination of bullying and bribery rather than business albeit all the parties are claiming the latter and fairness as part of their argument.

So why do we take this view - because, despite the comments of SoundExchange in the full knowledge of the practical problems of this about negotiating individual deals, the basis of the argument is one about the pressures that can be brought to bear to alter the terms of what is effectively a government-enforced monopoly and in all cases the interests of the public are, quite reasonably, maybe, secondary to the interests of the parties making their arguments.

This is exactly where what is needed are statesmen or women rather than grubby politicians subject to the combination of bullying and bribery from powerful players who will either attack or withhold favours.

What are the ways out?

We rather doubt that until there are very significant changes in the general culture of the US and the deaths of a number of members of the Supreme Court - or a constitutional change that allow them to be thrown off it - there is any way in which the culture of pork, bullying and bribery can be changed.

That leaves to us only one area to explore - that relating to the way the business of copyright is organized and regulated in cases where there is essentially nothing close to a market with suppliers competing on price amongst other elements of their offering.

In that area we do see a potential way forward.

Multi-tier pricing for streamed or broadcast music?

The way forward in our view could be to take the sensible view that the one-price-fits-all model is clearly not a true market or business approach - the music industry certainly does not see it as such as can be seen when compilations are offered at bargain prices in the same way that bargain DVD sets of movies are fold - and look at constructive exploration of the idea not so much of individual deals but of a multi-tiered charging system.

We also feel that there is no logical reason to exempt terrestrial analogue broadcasts from charges, one of the few areas where we agree with the recording companies that the current US system is aberrant.

This would not prevent individual company to company deals but it would give much greater flexibility to webcasters or broadcasters within the discipline of a pricing structure and produce a much truer market reflection of the value of the music on offer.

How it would work.

Because the practicalities rule out small webcasters doing individual deals company by company there is clearly the need for a body or bodies such as SoundExchange that does the job of aggregating amounts due from royalties and organizing their collection.

We add "bodies" because we see no sound market argument that this task should be performed by one monopoly body and quite a few that competing bodies operating within the same legislative framework and required by law to offer all tiers would in fact provide an incentive for innovation and efficiency in the performance of these tasks. Because competition would provide an incentive to keep administration costs down we think that active consideration should be given to setting a reasonable base level to ensure that collection bodies are properly set up and can pay up or pursue those breaking the rules if random checks show significant problems and then requiring that the recording industry and groups make the same prices available to all such bodies, and then allowing the market to decide though broadcasters and webcasters opting which body to use.

From the point of view of such a body it is obviously administratively easier to deal with a single pricing structure but there is no sound market argument for this and computer technology has made it very easy to set up - and amend when needed - the charge for any item or service: Supermarkets do it on a much larger scale than the music industry every day!

Thus we see every reason for a tiered structure starting with a nil charge but mandatory credit and promotional requirement plus a music sale link that would appeal greatly to groups starting out and then rising in reasonable increments to a top level for the most popular artists of the moment.

For the benefit of smaller players we think there is a case for insisting on a reasonable amount of time before a charge change can be made - the technology would allow the collecting body if it wanted to change minute by minute but this would then destroy the whole point of a pricing structure from the point of view of a small webcaster whose interest is in enthusiasm for the music rather than making money from it.

We would therefore suggest that the copyright holders and copyright collection bodies be required to set their rates twice a year, a month before those prices come into effect. This leaves plenty of time to advise all concerned of the details: We would in fact anticipate that any collection body would be supplying appropriate lists and software to handle the logging by users of the songs they have aired in a format that then calculates the charges and provides appropriate data to be emailed, together with an electronic payment, monthly to the collecting body, thus ensuring that all parties are kept up to date and that there is no reasonable way in which a webcaster or broadcaster can get very far behind on payments.

The charging structure.

This should not bee too complex but should allow for decisions to be taken within a market discipline.
We would suggest that as a starting point there should be a total of ten tiers above the nil rate we have already suggested: This would enable the system to start with for example a bottom rate of USD 0.0003 and a top rate of USD 0.0030 per performance - 50% higher than the final 2010 rate set by the CRB.

Groups and recording companies would be required to price all recordings already available within one of these tiers - not necessarily the same rate - and all new recordings within the period from a group at a single per track rate. The rates would then apply for the following six months but notice of impending changes would be sent out after five months for the next period.

This in our view would not be that cumbersome - the software could easily be made to colour code all music - and it would offer the benefit of allowing those groups that came up with a "classic" to charge a higher rate but have a lower one for other or new material according to their judgment of how this would affect play- and thus any associated promotion and music sales through a link.

Webcasters would thus have an incentive to look through lists and cost what they intended to play whilst groups would have an incentive to consider how to maximize their benefit through the combination of payments from the combination of royalties, music sales and also - and potentially -very important for up and coming groups - through promotion of their concerts. The big players might also find benefits in considering this - we are after all talking in the terms of the tens of millions of dollars from performances for the very top players.

There is also the question of administrative costs and here we have already said we feel that the amounts SoundExchange propose to charge are unreasonably high. We suspect that were there a competitor body that webcasters could use to make their payments this could easily be brought down to USD 50 a year or even less through an efficient electronic system.

We cannot guarantee how smoothly such a system would work but we do think it is an approach well worth trying to get away from the politics of setting rates to a market driven approach that would ideally allow the market to determine what gets played and paid for.

Those who overpriced would find they got less play and this would either show that there was a financial payback from the promotion given or that the higher rate was justified.

New groups on the other hand would be operating in a situation where they could opt to maximise promotion in the hopes of increasing sales and tour income initially with the option of changing the balance towards royalty income later if they felt it made sense,.

Either way there would be no need to lobby or persuade legislators to take action: The "invisible hand of the market" would provide the relevant feedback and discipline, leaving it up to the royalty holders how they wished to balance the various factors.

What you think? Please E-mail your comments.

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