Paying to play: The fight over online music

Compact discs have long-since lost pride of place as a way to acquire music, shoved aside by single-track downloads (both legal and otherwise) and, more recently, streaming. Since 2000, sales of CDs have fallen from nearly $14 billion per year in the U.S. to less than $5 billion today.

The decline of CD sales is only part of the story, however. Even with the success of iTunes, Amazon’s MP3 store and other digital retailers, personally owned recordings — copies — whether physical or digital, have begun to lose pride of place as a means of listening to music as well.

According to a report issued last by the NPD Group, the number of consumers who reported listening to music via CD in the previous three months dropped 16 percent, compared to the same period last year.  While some of that decline no doubt reflects the continued growth in mobile listening, where CDs are impractical, digital-format copies are also declining as a listening source. According to NPD, the number of consumers who reported listening to music from digital downloads declined 2 percent over the previous three months.

At the same time, reliance on music services as listening sources is soaring. According to NPD, 50 percent of Internet users (96 million consumers) tuned into an internet radio or on-demand music service over the three-month period. The audience for internet radio (Pandora) grew 27 percent year-over-year, while the audience for on-demand services (Spotify, Rhapsody, Rdio) grew 18 percent. Traditional AM/FM radio saw a 4 percent decline.

That shift in listening from recordings to streaming services marks an acceleration and amplification of the broader shift in the music business from a an economy based on the sale of goods to one based on access to performances. And it is fueling the fight now erupting on Capitol Hill over the royalty rates assigned to different types of performances.

Music performances, whether live or from recorded sources, are governed by a complex web of compulsory licenses, statutory royalties, collective licensing and direct negotiations. For reasons that are as much historical and political as legal or technological, however, performance royalty rates and calculations differ according to how the performance is transmitted to the listener.

Satellite radio services like Sirius, for instance, pay 8% of their revenue to the record labels and artists, while cable TV services like Music Choice pay 15%. Internet radio services like Pandora, however, pay a fraction of a cent each time a song is streamed. The difference is the result of the different standard under copyright law used to calculate the respective rates.

On-demand streaming services like Spotify and Rhapsody, meanwhile, are required to negotiate performance fees directly with the labels, while traditional broadcast radio stations pay nothing to artists and labels for playing their records on the air.

Pandora and other internet radio services think the current system leaves them with the short end of the stick and they have lined up behind the Internet Radio Fairness Act. The bill, introduced in September in both the House of Representatives and the Senate, would apply the same standard for calculating royalties to internet radio as to satellite and cable services. While the bill does not specify what the rate should be, Pandora believes the change in standard would lead to lower rates and level the competitive playing field.

Artists groups and the record labels fear the same thing — lower rates — and are pushing back hard. This week, a group of 127 musicians organized by the musicFirst coalition sent an open letter to Congress strongly opposing the bill and criticizing Pandora.

“Pandora is now enjoying phenomenal success as a Wall Street company. Skyrocketing growth in revenues and users. At the same time, the music community is just now beginning to gain a footing in this new digital world,” the letter states. “Pandora’s principal asset is the music. Why is the company asking Congress once again to step in and gut the royalties that thousands of musicians rely upon?”

The fight has also drawn in a diverse array of interests on both sides. Last week, the NAACP sent its own letter to Congress opposing the bill, saying it “fails the basic test of economic fairness and discriminates against singers and musicians by slashing the compensation they receive when their work is played over digital online radio.”

Anti-tax crusader Grover Norquist, president of Americans for Tax Reform, weighed in this week with a letter urging Congress to get out of the rate-setting business altogether and leave all royalties to private negotiations.

Underlying it all is a fear that a music economy based on performance rights fees will leave a smaller overall pool of dollars than a system based on the sale of copies. When the pie gets smaller, the fight over the size of the slices gets more intense.