·  by Matt Schruers

Competition, Regulation, and Market-Based Prices in Copyright Rate Setting

Originally Posted On: Project Disco

When it comes to the nexus between competition and regulation, competition is all too often cursed with fair-weather friends.  For today’s example, we’ll take a trip down the copyright regulation rabbit hole.

It begins with a Copyright Royalty Board (CRB) proceeding for setting webcaster rates under a statutory license in Section 114 of the Copyright Act.  The process, called “Web IV” because it is the fourth such proceeding under this section of the Copyright Act,[1] was announced late last year and should conclude by the end of 2015.  By mid-December, non-interactive webcasters like Pandora and iHeartMedia will know how much they must pay to stream (or “publicly perform”) recorded music to listeners from 2016-2020.[2]

These statutory license rates, part of a complex multi-tiered system that, as we’ve noted in the past, legally requires discrimination against new technologies, are set for 5-year periods and are paid to an entity called SoundExchange.  SoundExchange is designated to collect royalties under the statutory license for certain uses of sound recordings, including Internet radio play of music.

(Perhaps you’re thinking, “wait, I thought radio stations didn’t pay royalties to play records on the air?”  You would be right: traditional terrestrial radio does not pay royalties for playing sound recordings – which has historically been defended with the argument that radio play provides valuable promotion for sound recording owners.  But in another example of copyright law discriminating against new entrants, while conventional terrestrial radio is not compelled to pay for the public performance of sound recordings, Internet radio must pay to do the same, under Section 106(6) of the Copyright Act.)


The rate Internet radio services pay is supposed to represent what a “willing buyer” would pay a “willing seller.”  During the round of rate setting that governed 2006-2010, however, the CRB announced a fairly punitive “willing buyer/willing seller” rate, which was so high that it exceeded some webcasters’ total revenues.  The risk that the Internet radio industry would collapse led Congress to enact the 2008 and 2009 Webcaster Settlement Acts, under which most non-interactive music licensees directly negotiated settlements with SoundExchange for that time period.  An important wrinkle to this legislative action, however, was that Congress also directed that these settlements could not be used as benchmarks for future rates – which includes the current rate setting proceeding.

So, why is this relevant?  It matters because in the current Web IV rate setting proceeding, SoundExchange has argued that recent deals struck in the free market by non-interactive webcasters should not be used as the benchmarks for non-interactive rates.

Those deals include an arrangement between Pandora and the collection of indie labels known as Merlin.  The terms of that deal were lower than the existing statutory rate, and encouraged Merlin music to be played more (and thereby the music of major labels to be played less).  At the time, rights-holders openly criticized Merlin for entering in the deal, noting that it could become a benchmark, and might result in prices coming down.  It was a peculiar moment: despite all the cheerleading of moving toward a free market in music licensing of willing buyers and willing sellers, Merlin came under fire for actually being a willing seller at the best price it thought it could get.

SoundExchange previous said it was seeking “rates that reflect a fair market value for recorded music… based heavily on evidence of other deals that exist in the marketplace”.  Now, however, it argues that an analogous free-market deal with Merlin should be ignored, because it was in some way influenced and thereby tainted by settlements reached 6-7 years ago.[3]

This situation illustrates an issue larger than webcaster rate setting: there is cognitive dissonance about what it means to have free-market transactions in lieu of statutory licenses.  In parts of the music industry, there is hostility to the statutory licenses.  While statutory (or “compulsory”) licenses help overcome the enormous transaction costs of licensing millions of works from millions of rights-holders, they don’t allow rightsholders to say “no” to all uses.[4]  These statutory licenses, it is sometimes argued, are unfaithful to the notion of copyrights being property rights.  Such transactions would be better handled in the free market, the argument goes, and so statutory licenses should be repealed.  

Nevertheless, the free market enthusiasm disappears when a free-market deal was actually reached outside the statutory license.  To the dismay of other licensors, Merlin’s competitive price was *lower* than the statutory rate, and suddenly the free market doesn’t look so hot.  Hence, Merlin was criticized and now efforts are being made to expunge Merlin’s deal from the record.

There are numerous transactions cost-related reasons why — absent better copyright ownership records — it is impossible to have a completely free market in music licensing at present.  Still, insofar as anyone is going to champion competition as an alternative to statutory licenses, that means accepting prices that may be below statutory rates.  If “free market” means rates can only be higher than statutory rates, then we don’t have a free market; we have a price floor.  Or, stated otherwise: we’re not really talking about “willing buyers and willing sellers” if we’re only going to entertain market-based deals that come in above the statutory rate.

[1] Officially, “In re Determination of Royalty Rates and Terms for Ephemeral Recording and Digital Performance of Sound Recordings.

[2] The CRB only sets rates for “non-interactive digital music services”; interactive services like Spotify, which are “interactive” because users can determine themselves which music is delivered, fall outside the statutory license.

[3] The rationale for this is that Congress directed in Section 114(f)(5)(C) that Webcaster Settlement Act (WSA) agreements shall not “be admissible as evidence or otherwise taken into account” in a rate settlement proceeding.  Because SoundExchange contends the Merlin agreement resembles the 2008-09 settlements, considering the Merlin rate would be “taking into account” a WSA agreement.  Instead, SoundExchange contends that the benchmarks for non-interactive rates should be deals between interactive services like Spotify. When all the relevant apples are inadmissible, we’re left referring to oranges.

[4] In econ-speak, we would say that statutory or compulsory licenses resemble a liability rule more than a property rule.

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