Manage for Success: Performance Royalties, Newsletter #76, August 2007


"Manage for Success" is a free monthly newsletter for record label executives who want to operate their companies efficiently and successfully. It's published by Keith Holzman of Solutions Unlimited, a management consultant, troubleshooter, and trusted advisor, and is based on his many years as a senior executive in the music industry.


Copyright 2007 by Keith Holzman, Solutions Unlimited. All rights reserved.


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For years radio airplay was the primary method for marketing almost all genres of music. Although that's no longer strictly the case, what's remarkable is that recording artists and record labels have never received any form of payment for this usage -- not a single penny! Yes, publishers, songwriters and composers receive compensation via annual fees paid to ASCAP, BMI, and SESAC by radio stations. These fees are then apportioned to publishers based on the number of times songs are played as logged by the stations and monitored by the performing arts societies.


But no performance royalty to labels and artists has ever been paid in the U.S. for over-the-air broadcasts, and this situation has existed for many decades, in fact since the first commercial broadcast in 1922!


Let me digress for a moment.


Popular music has always received some form of radio play, but until the 1940s it was fairly negligible. A lot of radio was network-syndicated comedy and variety shows, with occasional radio dramas. Smaller stations used transcription disks, and most of the music broadcast was from "live" orchestras and dance bands. In the mid-1950s, when radio was threatened by the rise in television viewing, stations started relying increasingly on playing pop music to garner listeners.


1955 saw the development of the Top-40 format at a station in New Orleans. What was unique was that the most popular songs were the ones they would play most often. The idea caught on and was quickly adopted by many stations throughout the country. The last half of that decade saw a huge increase in radio station profits and concurrent sales of phonograph records.


The resulting symbiotic relationship of radio airplay and record sales was great for both industries, but over the years stifled a lot of creativity because labels tended not to record or release music that they didn't think would or could get played on the radio. Many labels' talent signings were thus indirectly and inadvertently controlled by the broadcast industry.


End of digression.


Last month, an organization was formed that calls itself the Music First Coalition. This strange assortment of bedfellows includes SoundExchange, the RIAA, the American Federation of Musicians and the Christian Music Trade Association. Founding artists include the Dixie Chicks, Brian Wilson, Aimee Mann, Los Lonely Boys, Judy Collins, Don Henley, Tony Bennett, and John Legend. They want radio stations to pay performance royalties.


Their website statement pretty much says it all: "For 80 years, Corporate Radio has refused to compensate artists when they play their songs on the radio, even though radio makes billions on ads from listeners and music fans."


Since 1995 the U.S. Copyright Office has authorized SoundExchange to collect and distribute digital performance royalties for recording artists and record labels when their sound recordings are performed on digital cable and satellite television, the internet, and satellite radio. Remarkably, this doesn't include over-the-air broadcasting.


On July 31st, at a hearing of the House Judiciary Subcommittee on Courts, the Internet and Intellectual Property, its chairman, Rep. Howard Berman (Dem.-California), said he plans to deal with this matter by writing legislation that would pay record labels and performers for music played on the radio. "I've wanted to hold a hearing for a very long time, not only because of my constituents but because as a policy matter it is time for Congress to re-evaluate the limitations of the current performance right for sound recordings….I will come right out and indicate my bias -- I have supported the expansion of the performance right for over 20 years, with two caveats: one is that by extending this right it does not diminish the rights and revenues of the creators of musical works and second, that terrestrial broadcasters, large and small, remain a viable source of music"


The United States -- along with China, North Korea and the Congo -- is one of the few countries that exempts over-the-air radio from paying a royalty to performers. That's some company to be in!


Radio stations in almost all other major nations do pay performance royalties, but some countries are withholding payment to American performers to protest the lack of payments made to foreign artist whose music is played in the U.S. These countries include Canada, Japan, Australia, and all of Europe!


Marybeth Peters, the Register of Copyrights, told Berman's committee that changes needs to be made, not only to make American law fairer, but to allow artists and labels to recoup royalties from other countries. She indicated that, despite strong efforts since 1976 to include a performance right in the Copyright Act, it wasn't done, a fact she attributed to the "effectiveness of the broadcast lobby."


"The U.S. has limited its obligation for protection to only certain digital transmissions and specifically has exempted over-the-air broadcasts," said Ms. Peters. "The United States stands out as the most prominent industrialized country without this protection," and estimated that American labels and performers lose about $70 million a year in potential foreign performance royalties.


Charles Warfield, president of ICBC Broadcast Holdings called performance royalties a "tax" on listeners and urged the committee to keep the status quo. He contended that the promotional benefit performers and labels get from airplay is more valuable than cash.


Apparently few committee members appeared to buy the "tax" idea and seemed offended that the broadcast industry would make such a claim. "This is patently not accurate," said Rep Sheilah Jackson Lee (Dem-Texas.)


Luckily for record labels and performers, Berman is expected to present a bill this Fall, while a similar bill is expected in the Senate.


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I love music and want to see record labels and their artists thrive. Accordingly, my clients seek my advice on how they can run their companies efficiently and profitably. I've developed many ways for them to increase income while keeping costs under control, always tailored to their specific operating style and function. Let me help you as I've helped so many other labels "manage for success." Email me at <mailto:keith@holzmansolutions.com> so we can discuss how I might improve your business.


Should you be thinking of starting your own label, I recommend my book "The Complete Guide To Starting A Record Company" available as a downloadable eBook in PDF form, or as a printed, spiral-bound volume. Download the Introduction and read the complete Table of Contents at <http://www.recordcompanystartup.com/>.


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I emphatically agree that compensation for recorded performances should be paid to artists and their record companies. But what might happen if such legislation does not make it through Congress? What then? Will it be necessary for labels to boycott stations and no longer provide them with free promotion copies? Is that even legal? What would prevent stations from buying music and playing it on the air?


I asked my colleague, William Hochberg of High Mountain Law, if record labels could legally withhold their music. "It's doubtful," he replied. "ASCAP, BMI and SESAC issue blanket licenses, allowing broadcasters to play massive catalogs of songs, amounting to virtually the entire American repertoire. They are within their right to broadcast without limitation as long as they pay for the blanket license, and the courts will not currently recognize any additional obligation to pay a sound recording royalty for terrestrial radio."


At a 1975 NARM convention in Los Angeles, Stan Cornyn, then senior VP of Warner Bros. Records, gave a now-famous and off-quoted keynote speech titled "The Day Radio Died." In it he posited what would happen to the record industry if radio stations no longer broadcast any music. He said "As an industry, we have committed the unnatural act: we have become, year by year, so dependent on radio exposure of our records that -- without that play -- we're cooked….In the last ten years, and dramatically in the last five" (remember this was 1975) "the record business has sold only what it could get played."


Stan then went on to ask "Do we, as an industry, really want to confine our sales only to records that can get frequent airplay….To be almost totally dependent on another industry, which has very different goals than ours, to do our marketing for us."


Broadcasters, then and now, play the songs that they think will deliver to them the greatest quantity of "ears." And they only want those "ears" that are the most likely to buy their sponsors' products. These broadcasters are in business to make as much money as possible for their stockholders and they often do it on the backs of record labels and their artists.


What would labels do to market their "product" without this key, and often taken for granted, tool? If labels and artists decided to withhold their music from broadcast -- and if it's legal to do so -- we could get to the point where we may just find out.


In any event, it's imperative that all labels, particularly independents, develop all possible alternative approaches to market their music to the public, while encouraging their senators and representatives to pass effective performance royalty legislation.


Until next month,

Keith Holzman -- Solutions Unlimited

Helping Record Labels Manage for Success.


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Copyright 2007 by Keith Holzman, Solutions Unlimited. All rights reserved.