Funny How Recording Industry Only Likes A 'Free Market' When It's To Their Advantage

from the that-free-market-appears-slightly-tilted-in-one-direction dept

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.

Reposted from the Disruptive Competition Project

Filed Under: , , , , , , , ,
Companies: iheartmedia, pandora, soundexchange

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Comments on “Funny How Recording Industry Only Likes A 'Free Market' When It's To Their Advantage”

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KeillRandor (profile) says:

'Free market'?

Given how often people over there like to use those words, I’m surprised that anyone even truly knows what they mean anymore – are they truly used for anything more than just propaganda?

(There’s never really any such thing as a free market with minority control over the economic multipliers, let alone monopoly control over such pieces of information.)

(It started with farming, and civilization exists because its produce was regulated for the benefit of the majority, freeing them up to be more productive in new and different ways.

That’s why the main purpose of central government is economic regulation – the regulation of such produce. (Defence? How can you have an army without feeding, training and equipping them?)

But an understanding of this has been lost, and so the minority now, for all intents and purposes, rule over the majority. This is how civilization will ultimately end – when everyone starves, because the minority no longer cares to feed the majority. It’s also why starvation/famine are the main symptoms of failed states and civil wars.)

Anonymous Coward says:

Yeah, "DisCo"... Go to home page and you'll find it gushing over "current" facial recognition even while giving dark warning:

“When the average consumer thinks of facial recognition technology, a Jason Bourne-esque scenario probably comes to mind, with high-tech devices constantly scanning crowds, identifying individuals, accessing vast databases, and using that recognition information to some nefarious end. Present use of facial recognition technology is far more benign and useful to consumers than some would have you think. The emergence of new photo sharing and storage apps like Google Photos and Facebook’s Moments demonstrates that current facial recognition tools are better suited to helping users categorize and share their photos, rather than populating an ominous law enforcement or commercial database.”

That’s a deliberate (though here clumsy) propaganda technique of cognitive dissonance: mention hazards then say don’t worry about it (hedged here with “current”). Of course Facebook and Google are two biggest violators of privacy ever, so advising legislators (as DisCo pretends to do) on that line cannot be good for the public’s privacy.

Now, what’s this dullness about? … Who cares? There’s no such thing as a free market when some are born into high advantage. They always dominate without conscience. Free markets are achieved only by limiting the born rich, as used to be done. Otherwise it’s literally feudalism.

Next pro-corporate pro-globalist puff piece, please.

Wyrm (profile) says:

Cognitive dissonance? Nothing new there

Lobbyists, particularly (but not exclusively) copyright lobbyists, have never bothered with consistency in their speech. They say whatever suits them at the very second they say it, even if they contradicts themselves seconds later. (They sometimes contradict themselves in a single sentence.)

Is there any surprise that they can both advocate a free-market, then pretend a free-market is bad for them a few months later?

They can boast about their fantastic box office records in a conference, then complain about the rampant piracy that cripples them… a few lines later in the same speech.
They can go to EU parliament to explain that they need law to protect them because they are a very large part of the EU economy and beg to the same persons for more EU subventions because they are in danger of being bankrupted by those nasty pirates.
They will mix the concepts of physical copies that they sell and licences that they rent depending on what point they want to make.

The only few times they don’t move much in the concepts they use are how copyright is a “property” (which it isn’t) and by extension how copyright violation is “theft” (which it isn’t either) unless they are the ones violating some copyright or other. In that case it can range from “mistake in good faith” (yeah, right) to completely ignoring the issue at hand.

They lie, they cheat, and they are few, but rich. And that’s precisely the kind of people most politicians listen to.

Wendy Cockcroft says:

Re: Free market

Indeed. In this case, some entities appear to have been making deals on a mutually agreed basis without using a middleman. That’s not evidence of a free market, it’s trading. A free market presupposes equal entry and equal opportunity for both the buyer and the seller. There has never been any such thing; the supply side usually has the advantage due to artificial scarcities.

That said, I’d like to see the market being opened up and made more free by putting an end to anti-competitive practices. Of course, this will require some regulation. I can already hear the howls of consternation from across the aisle. But here’s the problem: these monopolies are sponsored by the state. It’s not regulation that’s the problem, it’s the wrong regulation.

Sexualized Elephant Trunks says:

This deal shouldn’t be used as a bench mark of a comparable “free market” because Merlin, while getting paid lower rates, is also getting artist promotion as part of this deal. This $$ -value of promotion needs to be taken into consideration. (a) Statutory licensing doesn’t offer any promotional benefits, and (b) this type of promotional/lowered rate deal can’t be offered to everyone in the marketplace (i.e.”encouraged Merlin music to be played more, and thereby the music of major labels to be played less”)

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