[Senate Hearing 110-898]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-898
 
  MUSIC AND RADIO IN THE 21ST CENTURY: ASSURING FAIR RATES AND RULES 
                            ACROSS PLATFORMS

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 29, 2008

                               __________

                          Serial No. J-110-112

                               __________

         Printed for the use of the Committee on the Judiciary



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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts     ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware       ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin                 CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California         JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin       JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York         LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois          JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland         SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
            Bruce A. Cohen, Chief Counsel and Staff Director
           Stephanie A. Middleton, Republican Staff Director
              Nicholas A. Rossi, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Brownback, Hon. Sam, a U.S. Senator from the State of Kansas.....     4
Feingold, Hon. Russell D., a U.S. Senator from the State of 
  Wisconsin......................................................    71
Feinstein, Hon. Dianne, a U.S. Senator from the State of 
  California.....................................................     1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................    89
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     3

                               WITNESSES

Corker, Hon. Bob, a U.S. Senator from the State of Tennessee.....     6
Harleston, Jeffrey, Executive Vice President and General Manager, 
  Geffen Records, Santa Monica, California.......................    15
Kennedy, Joe, President and Chief Executive Officer, Pandora 
  Media, Inc., Oakland, California...............................    13
Nathanson, Matt, Songwriter, Performer, and Recording Artist, San 
  Francisco, California..........................................    19
Ondrasik, John, Singer/Songwriter, Five for Fighting, Los 
  Angeles, California............................................    17
Simson, John, Executive Director, SoundExchange, Washington, D.C.    11
Wyden, Hon. Ron, a U.S. Senator from the State of Oregon.........     8

                         QUESTIONS AND ANSWERS

Responses of Jeffrey Harleston to questions submitted by Senator 
  Brownback......................................................    31
Responses of Joe Kennedy to questions submitted by Senator 
  Brownback......................................................    34
Responses of Matt Nathanson to questions submitted by Senator 
  Brownback......................................................    38
Responses of John Ondrasik to questions submitted by Senator 
  Brownback......................................................    40
Responses of John Simson to questions submitted by Senator 
  Brownback......................................................    42

                       SUBMISSIONS FOR THE RECORD

Corker, Hon. Bob, a U.S. Senator from the State of Tennessee, 
  statement......................................................    46
Delaney, Albert, Vice President, Outboundmusic.com , Houston, 
  Texas, statement...............................................    48
Digital Media Association, Washington, D.C., supplemental 
  statement......................................................    49
Donnelly, Patrick L., Executive Vice President and General 
  Counsel, Sirius and XM Radio Inc.,.............................    59
Harleston, Jeffrey, Executive Vice President and General Manager, 
  Geffen Records, Santa Monica, California, statement............    73
Israelite, David M., President and Chief Executive Officer, 
  National Music Publisher Association, Washington, D.C., letter.    78
Kass, Federick J., Chief Administrative Officer, Intercollegiate 
  Broadcasting System, Inc., on behalf of High School and College 
  Broadcasters, New Windsor, New York, statement.................    79
Kennedy, Joe, President and Chief Executive Officer, Pandora 
  Media, Inc., Oakland, California, statement....................    81
Nathanson, Matt, Songwriter, Performer, and Recording Artist, San 
  Francisco, California, statement...............................    90
Ondrasik, John, Singer/Songwriter, Five for Fighting, Los 
  Angeles, California, statement.................................    93
Shapiro, Gary J., Consumer Electronics Association, The Home 
  Recording Rights Coalition, Washington, D.C., statement........    97
Simson, John, Executive Director, SoundExchange, Washington, 
  D.C., statement................................................   104
Starr, Val, Founder, GotRadio.Com, Antelope, California, 
  statement......................................................   108
Wyden, Hon. Ron, a U.S. Senator from the State of Oregon, 
  statement......................................................   110


  MUSIC AND RADIO IN THE 21ST CENTURY: ASSURING FAIR RATES AND RULES 
                            ACROSS PLATFORMS

                              ----------                              


                         TUESDAY, JULY 29, 2008

                              United States Senate,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:00 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Dianne 
Feinstein, presiding.
    Present: Senators Feinstein, Cardin, Whitehouse, Specter, 
and Brownback.

OPENING STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM 
                    THE STATE OF CALIFORNIA

    Senator Feinstein. This meeting of the Judiciary Committee 
will come to order. The purpose of this is to have a hearing, 
``Music and Radio in the 21st Century: Assuring Fair Rates and 
Rules across Platforms.'' We will ask the witnesses to confine 
their remarks to 5 minutes so that there is an opportunity for 
questions. Senator Specter has convinced me that this is the 
correct way to go that we have the most dialogue back and 
forth.
    I will begin with a statement, turn to Senator Specter, and 
then to our two distinguished Senate witnesses, and it is great 
to have you here on an issue like this.
    Last Congress, I introduced a bill, cosponsored by Senator 
Graham, to address some of the inequities that are currently 
created under copyright law. Senator Leahy worked with me, and 
the Committee held a hearing on the bill on April 26, 2006. 
However, we were unable to build sufficient momentum to pass 
the bill.
    This Congress, patent reform took up much of this 
Committee's time on intellectual property issues, but I am very 
pleased that we are now turning back to copyright and to the 
issues addressed by the PERFORM Act: rate parity, condition 
parity, and content protection.
    The one thing that patent and copyright law have in common 
is that they are both extremely complex. Copyright protection, 
as we all know, has its foundation in the Constitution. Yet 
over the centuries, how Congress acts to secure the exclusive 
right of inventions has become very technical. Not 
surprisingly, this parallels the evolution of how music is 
delivered to the public.
    Music was once available live at concerts or small 
gatherings. Then, with the dawn of recordings and transmission, 
radios were born. But a radio used to be as large as a piece of 
furniture. Now, music radio programs are provided in our cars, 
on MP3 players that are barely larger than a postage stamp. And 
we can access radio programming over the Internet and from 
satellites.
    There has been a revolution in the technologies that bring 
music to vast audiences, and there has been increased consumer 
demand for music. Unfortunately, this appetite has also created 
an entitlement mentality that ignores the property rights of 
the artist and the investment made to create the music in the 
first place.
    Now, we are all familiar with the impact of illegal 
downloading and stream ripping that have spread throughout the 
world. For example, a quick search on frequently used software 
download sites revealed dozens of stream-ripping applications, 
and that means sites that provide software to allow consumers 
to record and manipulate music programs without paying for 
them.
    In one case, the software available over the Internet can 
scan over 15,000 Internet radio stations, and the company 
states that users can set the application to automatically 
download up to 22,500 free songs daily from Internet radio 
stations. As the company's Web page puts it, and I quote, 
``Target and find music from your favorite artists or fill your 
hard drive to the brim with hits from your favorite genre.'' So 
the challenge facing us as lawmakers is how to encourage 
innovation, growth, competition, while at the same time 
protecting artists, musicians, and authors.
    The specific area I want to focus on is the compulsory 
license scheme created by Section 114 of the Copyright Act. 
Current law requires Internet, satellite, and cable radio 
companies to pay artists under different rate standards, and 
current law imposes different restrictions and conditions, 
depending on what platform is playing the music. This has led 
to confusion and inequity. The PERFORM Act was designed to 
bring clarity and fairness to the Government compulsory 
license.
    The PERFORM Act tries to address this by doing three simple 
things: one, create rate parity; two, evaluate condition 
parity; and, three, require content protection.
    First, rate parity. The bill would require webcasters, 
cable providers, and satellite radio to use the same rate 
standard to determine how much to pay musicians, and the rate 
standard would be set at ``fair market value.''
    Now, some have argued that a different rate standard should 
be set, and I look forward to hearing the witnesses' thoughts 
on what the rate standard should be across platforms.
    The second, condition parity. Last Congress, I hosted 
numerous negotiations to address the conditions imposed by 
Section 114 and, specifically, the laws definition of 
``interactivity.'' Unfortunately, we were unable to reach a 
solution. Therefore, rather than set what conditions should 
apply to each platform, the bill requires the Copyright Office 
to hold a meeting and report to Congress on what to do about 
interactivity. I am still hopeful we will find a way to replace 
this report with a negotiated solution.
    Third, content protection. The PERFORM Act requires cable, 
satellite, and Internet radio stations to protect against 
making illegal copies of music. All companies would be required 
to use reasonably available, technologically feasible, and 
economically reasonable means to prevent music theft. This 
flexibility will ensure that radio companies are not forced to 
use cost-prohibitive technology and to provide them with 
flexibility.
    I think this legislation is a good step forward in 
addressing a real problem that is occurring in the music 
industry. Changes or additions may be necessary as the bill 
moves forward. But I believe that to wait and do nothing does a 
disservice to everyone that is involved.
    We all know that music is an invaluable part of all our 
lives. New technologies and changing music platforms provide 
exciting new options for all consumers. As the industry 
continues to march forward into new frontiers, we have got to 
ensure that our laws can stand the test of time.
    So I look forward to working with the Ranking Member, with 
Senator Leahy, our chairman, and with my colleagues to pass 
this legislation and to hear the witnesses' thoughts on these 
issues.
    Now, the distinguished Ranking Member, the Senator from 
Pennsylvania, Senator Specter.

STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE 
                        OF PENNSYLVANIA

    Senator Specter. Thank you, Madam Chairwoman.
    I wanted to stop by this morning to make a few comments to 
assure the witnesses and my colleagues Senator Corker and 
Senator Wyden, who are testifying, that there is great concern 
in the Judiciary Committee for these issues. You cannot judge 
it by the absence of Senators on the dais here today, but there 
are a great many conflicting schedules which we all have. And, 
regrettably, I have other commitments, but Senator Brownback is 
going to step into my spot as Ranking Member for the purpose of 
this hearing.
    As I take a look at the briefing materials, it seems to me 
we have a crazy quilt patchwork on a very, very complex 
subject. There is no doubt that legislation has not kept up 
with the technology, and there are many parties in interest 
who, candidly, are not really being treated fairly, or at least 
there has not been a determination by the Congress, which is 
our responsibility, to make an appropriate decision as to where 
the compensation ought to be. There has not been a hearing on 
this subject since November 2007. You have two types of 
copyright protection applying to music: protection of the 
musical composition, sheet music and words owned by the 
songwriters and music publishers; and protection of sound 
recording, owned by the record label and performers.
    We have legislated in 1995 on the Digital Performance And 
Sound Recordings Act and in 1998 on the Digital Millennium 
Copyright Act. And, regrettably, but factually, the Judiciary 
Committee is not functioning too well at the present time. We 
are having a hard time getting a quorum to attend our executive 
sessions because of controversies over nominations. In fact, in 
my judgment, the whole Senate is not functioning very well. We 
have a situation where the partisanship has reached a level 
unprecedented, at least in my tenure in the Senate, where we 
have controversy, as illustrated by very bitter exchanges a 
couple of weeks ago between the leaders and very heated 
discussion yesterday evening when we are arguing about whether 
we are going to take up the oil speculators bill, and the 
controversy turns on whether the minority will be able to offer 
amendments on a process known as ``filling the tree.''
    I mention that to you because those are very realistic 
factors which are impeding the consideration of this kind of 
legislation. That happens to be the fact. And it is 
regrettable, and perhaps soon we will be able to turn aside the 
partisanship; and if, as, and when do, there will be very close 
consideration for the very important issues which are here 
today.
    Ryan Triplette, who is my key staffer on it, is 
extraordinarily knowledgeable. We just plowed through the 
patent issue and could not come to agreement. And we are 
hopeful that next year there will be a little better 
atmosphere, and we can tackle a great many issues, including 
this one, which I think is very, very important. And I will be 
studying the testimony closely and trying to find some way to 
come to a legislative conclusion on these very important 
issues.
    Thank you.
    Senator Feinstein. Thank you, Senator.
    Senator Brownback, would you like to make an opening 
comment?

STATEMENT OF HON. SAM BROWNBACK, A U.S. SENATOR FROM THE STATE 
                           OF KANSAS

    Senator Brownback. I would, Madam Chairman. Thank you very 
much. I want to thank my colleagues for being here--Senator 
Corker, Senator Wyden. Senator Wyden and I have been working a 
long time on an Internet radio broadcasting bill, and I am 
delighted that that is a part of the hearing today so that we 
can bring these topics out to the front.
    I appreciate the Chairman, Chairman Leahy, addressing this 
in a hearing, and I think this is important. I agree with my 
colleague Senator Specter on the complexity of the topic and 
its importance, and I am hopeful we can do something on it.
    In March of 2007, the Copyright Royalty Board delivered a 
potentially lethal blow to the future viability of Internet 
radio by setting very high royalty rates for digital 
transmissions of sound recordings on the Internet. Using the 
broken willing buyer/willing seller standard, the CRB set a 
$500-per-channel fee and set a fee to be paid per song per 
listener, resulting in a 300- to 1,200-percent rate increase in 
royalty payments--a 300- to 1,200-percent increase.
    For webcasters such as Pandora that allows users to create 
their own channels, the $500 fee was essentially a death 
sentence. This rate was simply unaffordable even for the 
largest and most profitable companies that engaged in 
webcasting. The willing buyer/willing seller standard does not 
even live up to its name. I have difficulty imagining a free 
and competitive market where a willing buyer would agree to pay 
a price that exceeds the buyer's total revenue many times over 
for any product or service.
    Despite how unreasonable it may sound, this is exactly what 
the CRB decision calls for. This decision highlights the need 
to revisit this section of the Copyright Act. It is clearly 
broken.
    You cannot defend this CRB ruling and claim the system is 
functioning properly. If the system worked and the willing 
buyer/willing seller resulted in unfair royalties reflecting 
marketplace realities, we would not be holding this hearing 
today. If the system worked, the webcasters and SoundExchange 
would not be involved in ongoing negotiations for more than a 
year after the ruling. And if the system worked, Congress would 
not have to intervene with legislation.
    Certainly a privately negotiated rate between the 
webcasters and SoundExchange is preferable, and I hope that the 
interested parties are able to arrive at a fair compromise. I 
was pleased to learn that the exceedingly high $500-per-channel 
fee has been waived, but there is still significant work to be 
done. Recognizing the need for reform in this area of copyright 
law, I joined my colleague Senator Wyden of Oregon to introduce 
the Internet Radio Equality Act 2 months after the CRB 
decision, and I have to tell you, Madam Chairman, Senator Wyden 
and I have received a huge amount of contact about this bill--
almost all in support of it. If enacted, our bill would vitiate 
the CRB decision and set royalty rates for Internet radio at 
7.5 percent through 2010, roughly the same rate paid by 
satellite radio. In 2010, the CRB would set a new rate; 
however, this time, instead of using the flawed willing buyer/
willing seller standard, the CRB would look to Section 801(b) 
of the Copyright Act.
    Section 801(b) directs the CRB to calculate rates based on 
the following objectives: maximizing the availability of 
creative works to the public; affording the copyright owner a 
fair return for his or her creative work and the copyright user 
a fair income under existing economic conditions; reflecting 
the relative roles of the copyright owner and the copyright 
user in the product made available to the public with respect 
to relative creative contribution, technological contribution, 
capital investment, cost, risk, and contribution to the opening 
of new markets for creative expression and media for their 
communication; and minimizing any disruptive impact on the 
structure of the industries involved and on generally 
prevailing industry practices.
    The objective set forth in Section 801(b) are the same ones 
the CRB looks to when determining rates for other digital 
transmission, such as satellite radio. In fact, the CRB 
recently set a new rate for satellite radio of 6 to 8 percent 
through 2012 using the 801(b) standard. Experience shows that 
801(b) functions well for all parties, unlike the willing 
buyer/willing seller standard and unlike the untested fair 
market value standard, which is currently supported by the 
content industry.
    I believe that the proposal Senator Wyden and I have put 
forward is the best possible solution to this problem. A rate 
of 7.5 percent will provide a fair rate to the recording 
industry without being overly burdensome for the webcasters. It 
accomplishes the goal that I share with Senator Feinstein in 
finally achieving parity between Internet and satellite radio. 
The Wyden-Brownback proposal uses the time-tested and workable 
801(b) standard.
    There should be little debate over the important role of 
Internet radio. I recognize that the record labels and others 
in the content industry may dislike not having full control 
over where, when, and how consumers enjoy music. However, we as 
policymakers must recognize the great public benefit Internet 
radio provides. Internet radio gives consumers more choices and 
creates competition, which ultimately leads to a better 
listening experience. Many small and independent webcasters 
cater to niche audiences that often feel unrepresented on the 
FM dial. Many webcasters offer musical selections not found on 
broadcast radio, which significantly benefits artists who would 
otherwise see no royalties, and at the same time allows lesser 
known artists the ability to be heard and build a fan base.
    There is a lot of talk in this body about media 
consolidation and the importance of diversity on the airwaves. 
I can tell you that it does not get much more diverse than 
Internet radio. I do not know why we would want to silence this 
important medium. We would be doing a great disservice to 
artists that depend on Internet radio if we allow the 
disastrous decision put forward by the CRB to stand and to put 
these groups out of business.
    I ask my colleagues to consider all of these issues, and I 
look forward to the testimony of my colleagues and the other 
witnesses, and I hope to work with my colleague Senator 
Feinstein and others to draft workable solutions on this 
problem.
    Thank you, Madam Chairman.
    Senator Feinstein. Thank you very much, Senator Brownback. 
I look forward to working with you.
    Now we will go to our first panel. We have two Senators 
before us. Senator Corker has asked to go first. Is that a 
problem for you, Senator Wyden?
    Senator Wyden. Not at all.
    Senator Feinstein. Okay. Senator Corker of Tennessee 
previously served as the Tennessee Commissioner of Finance and 
Administration. He was elected mayor of Chattanooga in 2001, 
joined the Senate in 2006, is a member of several committees, 
including the Committee on Banking, Housing, and Urban Affairs 
and the Committee on Small Business and Entrepreneurship.
    And if I may, I will just introduce Senator Wyden at the 
same time. He is the distinguished Senator from Oregon, first 
elected to Congress in 1980 to represent Oregon's 3rd District. 
He moved to the Senate in 1996, and he has served with 
distinction on several committees, including currently chairing 
the Energy and Natural Resources Subcommittee on Public Lands 
and Forests. I sit with him on the Intelligence Committee, and 
previously he served as the Director of the Oregon Legal 
Services for the Elderly from 1977 to 1979 and as a member of 
the Oregon State Board of Examiners of Nursing Home 
Administrators during the same period.
    Welcome, my colleagues. Senator Corker, we will begin with 
you.

STATEMENT OF HON. BOB CORKER, A UNITED STATES SENATOR FROM THE 
                       STATE OF TENNESSEE

    Senator Corker. Thank you, Madam Chairman. I am delighted 
to be here with my friend Senator Wyden. We work together on 
numbers of issues. We may be a little different on this issue, 
but I am certainly thrilled to be here with him and be before 
this Committee.
    On my way to the Senate, I had a vigorous primary, and 
there was a big debate among my opponents about which one would 
be on the Judiciary Committee. And I quickly said I was 
assuring everyone I would never be on the Judiciary Committee, 
but I am so glad to be among this hallowed group of people and 
feel like I am on somewhat heavy ground here. So thank you for 
letting me be here. Senator Brownback, thank you also.
    I want to say that my comments basically really respond to 
Senator Brownback's comments. I know you all have a number of 
issues that you are working on here today, and I applaud you 
for that. I know how we pay for music and performers and 
songwriters is very, very complex. But I am speaking mostly to 
the comments that Senator Brownback put forth.
    Senator Feinstein and Senator Brownback, thank you for 
giving me the opportunity to testify today on the importance of 
valuing music. I applaud this Committee for its work in this 
area that is so very important to the State that I represent.
    In the past decade, the evolution of music delivery has 
been amazing to watch, and I know you alluded to that, Senator 
Feinstein. We have evolved from the favorite local AM/FM 
station to a large number of available stations on satellite, 
cable, and Internet radio platforms. The growth of radio on 
different platforms has been tremendous, and we can only 
imagine what offerings await us around the corner. But one 
basic fact we cannot ignore is that the fundamental element--
the reason we all tune in--is the music.
    We often take it for granted. We turn the knob, hit the 
button, click the mouse, and our favorite songs are there, as 
if conjured up at our whim. It is so easy to forget what goes 
into creating music. In fact, these works are the product of 
countless people and countless hours of hard work. Their songs 
are the record of their struggles, hopes, and dreams.
    There are very few places where the power of music is as 
strong and evident as it is in Tennessee. Our State has been 
blessed with numerous songwriters, musicians, and small and 
large business entities that work to bring us the music that we 
listen to on a daily basis. During my time in the Senate, I 
have had numerous briefings to learn how the music industry 
works. It is a complex and multi-faceted industry. I cannot 
overstate that fact. I know that we are looking at legislation 
here. It is a very, very complex industry. I have had numerous 
briefings and feel like I have a mind that understands business 
particularly well, and this is an industry that is very 
complex.
    It is also an industry that is in severe crisis. Due to the 
advances in technology, this industry faces numerous 
challenges, most dramatic of which has been the impact of 
piracy and the evolution of technology affecting the revenue 
streams of the various industry entities.
    When debating these issues, I believe it is very important 
to keep in mind that without the songwriters, performers, and 
various businesses that create the music, there would be no 
music for us to listen to over our radios.
    The Senate, in its wisdom, created the Copyright Royalty 
Board, and in March 2007 that Board made a decision and set 
royalty rates for entities that webcast music. The board's 
process for setting rates was an exhaustive one that involved 
18 months of hearings and meetings and at the end produced a 
result.
    I understand that certain groups are not pleased with this 
result; however, there is an appeals process in place, and that 
process is currently being played out and utilized by both 
sides. I urge this Committee to allow this process to take its 
course instead of forwarding legislation that would overturn a 
decision that has already been made by the Copyright Royalty 
Board.
    We have a tendency in this body many times to set up 
organizations that are professionally run and then, when a 
group does not like the decision, to intervene. And I hope that 
is not the case here.
    Furthermore, the House Judiciary Committee is currently 
facilitating negotiations between the two parties. That is 
ongoing right now. I applaud those efforts and remind my 
colleagues that this entire process is to provide fair 
compensation for the hard work and sacrifice of musical artists 
and those who invest in them.
    It is in everyone's interest to maintain a vibrant 
marketplace for music. However, while we are considering 
legislative action that would drastically affect this industry, 
we must remember the creators and performers who bring us this 
music. Without them, there would be no music for webcasters to 
play and build their businesses around.
    Thank you, Madam Chairman.
    [The prepared statement of Senator Corker appears as a 
submission for the record.]
    Senator Feinstein. Thank you very much, Senator Corker.
    Senator Wyden, welcome.

 STATEMENT OF HON. RON WYDEN, A UNITED STATES SENATOR FROM THE 
                        STATE OF OREGON

    Senator Wyden. Thank you very much, Madam Chair, and I am 
very pleased to see you particularly chairing this hearing 
because you have a track record of bringing people together. 
And that is what it is going to take on major issues. We 
certainly, as Senator Corker alluded to, have been trying that 
on health and other areas, and this is not a debate between, 
for example, recording labels and radio Internet advocates. It 
seems to me this is about what do you do for promising 
technologies, and maybe what I thought I would do, especially 
since Senator Brownback spoke so thoughtfully, is spare you my 
prepared remarks and just make a few comments, and I would ask 
that my prepared remarks go into the hearing record.
    Madam Chair, since coming to the Senate, I have spent a 
substantial amount of time particularly looking at how you 
promote fledgling technologies. For example, I am especially 
proud of being the lead sponsor of two important laws: the 
Interest Tax Freedom legislation that we passed and renewed 
here in the Senate, and also the law to prevent limitless 
lawsuits against free and open Internet access. So those are 
two laws that are on the books that I think are very much 
consistent with what Senator Brownback and I seek to do now 
with Internet radio. And we are going to work very closely with 
Senator Corker. He has made a number of points that I certainly 
share.
    I am the son of an artist. I am the son of a writer. So we 
have got to make sure that there is compensation for artists. 
But we have got to do it without putting a stranglehold on new 
technologies with old rules. And, in particular, if you look--
and this is one area where I will get into one specific. That 
is what we are doing in some of these Copyright Royalty Board 
decisions. The example that has concerned us is the Minimum Fee 
Section of the Copyright Royalty Board decision. The Copyright 
Royalty Board originally imposed a fee of $500 per channel on 
all commercial webcasters which they said was needed to cover 
administrative costs. And it seemed to us that there was no 
justification for this other than this is the way the old 
rules, the rules that existed before anybody dreamed of 
Internet radio, existed. And this regulation went out and was 
applied despite the fact that just one of the well-known 
webcasters at that particular moment would have had to spend 
over $500 million just for administrative fees. So you had a 
decision that was just divorced from reality, and, in fact, 
that was actually because it was so far-fetched what led to the 
negotiations that are now ongoing.
    So Senator Brownback and I, through S. 1353, seek to bring 
new technologies to this debate, and as Senator Brownback has 
noted, what this, in effect, does is it puts radio programming 
into vastly more hands. You can have programming that will 
affect unique needs, say you have a farmer in Corvallis, 
Oregon, or a musician in Topeka, Kansas. And anybody can, in 
effect, launch a NetRadio station, and it seems to me this will 
mean that the epicenter of American music is not just stuck in 
the commercial capitals of New York and Los Angeles. It can go 
back to a whole host of areas--small towns in Oregon, 
Tennessee, and Kansas.
    A second problem with the CRB rules that I would note, 
Madam Chair, specifically, is the costs for Internet radio 
broadcasters are much higher for the same content than for 
satellite or traditional radio. And I think, once again, that 
will impede the development of new technologies in an ill-
advised kind of fashion.
    I will close, because I know your time is short, by saying 
again that I feel very strongly, as Senator Corker has outlined 
this morning, that we have got to compensate artists for their 
work. I think my father, if he was listening to this hearing, 
as the author of many books, would relish the fact that his 
books can now be downloaded onto new technologies like Amazon's 
Kindle that my wife at the Strand Book Store pays a lot of 
attention to and read by anybody with a library card while they 
commute to and from work. My dad's audience would expand beyond 
his wildest dreams.
    So we have got to figure out a way to bring all of these 
innovations with larger audiences and vast numbers of creators 
together. And because of your reputation for thoughtfulness and 
fairness, working with Senator Corker and Senator Brownback and 
myself--and I see Senator Whitehouse has joined us as well--I 
am convinced we can get it done. Madam Chair, we did it with 
the Internet Tax Freedom legislation. We did it by making sure 
that we were not going to have limitless lawsuits against 
people who sought free and open Internet access. We can do it 
here again with yet another promising technology.
    I thank you very much for your time this morning.
    [The prepared statement of Senator Wyden appears as a 
submission for the record.]
    Senator Feinstein. Thank you, Senator. You are 
irresistible.
    [Laughter.]
    Senator Feinstein. We have been joined by Senator 
Whitehouse. Would you like to make a statement?
    Senator Whitehouse. No.
    Senator Feinstein. Then, if there are no questions of this 
panel, we will excuse both of you. We will thank you for your 
wise words, and we will proceed to panel No. 2.
    Senator Wyden. Thank you.
    Senator Corker. Thank you.
    Senator Feinstein. Thank you very much.
    Senator Feinstein. Panel No. 2 consists of John Ondrasik, a 
singer/songwriter; Jeffrey Harleston, head of operations, 
Geffen Records; John L. Simson, Executive Director, 
SoundExchange; Joe Kennedy, President and CEO, Pandora Media; 
and Matt Nathanson, songwriter and recording artist.
    I will begin the introductions while these gentlemen are 
taking their places, and we would ask that you confine your 
remarks to 5 minutes, summarize for us, give us your main 
points, and then we can have a good discussion.
    I will begin with John Simson. He has been involved in the 
music industry since 1971 as a songwriter, recording artist, 
manager, entertainment lawyer, and executive. He has practiced 
entertainment law since 1980 and is currently the Executive 
Director of SoundExchange. That is a performance rights 
organization formed to collect digital performance royalties 
for sound recording copyright owners and recording artists. Mr. 
Simson is a trustee of the Recording Academy, a board member of 
the 21st Century Consort, and lectures frequently on the music 
industry.
    Next is Mr. Kennedy.
    Joe Kennedy is current Chief Executive Officer and 
President of the Internet radio station Pandora. He joined the 
company in 2004 after spending 5 years at E-LOAN, where he was 
President and COO. From 1995 to 1999, he was Vice President of 
Sales, Service, and Marketing for Saturn Corporation.
    Mr. Jeffrey Harleston is head of operations for Geffen 
Records, the home of some of America's most popular recording 
artists. Prior to assuming his current position in 2003, Mr. 
Harleston was Senior Vice President of Business and Legal 
Affairs for MCA Records and, before that, Vice President of 
Business and Legal Affairs for MCA's parent company, the 
Universal Music Group.
    And now we have John Ondrasik, whom I have been privileged 
to meet. He is a Grammy-nominated singer/songwriter performing 
under the stage name Five for Fighting. He has performed for 
U.S. forces on USO tours in Hawaii, Guam, and Japan, and 
spearheaded the creation of ``For the Troops,'' a compilation 
album that is available for free to every active serviceperson 
in the United States armed forces. Mr. Ondrasik is also an 
active philanthropist and has recently launched a charity-
driven website to help raise money for such organizations as 
Save The Children, Autism Speaks, the New York Police and Fire 
Widows, and the Children's Benefit Fund. A very diverse 
personality.
    Matt Nathanson is a songwriter and recording artist from my 
home town, San Francisco, California. He currently records on 
Vanguard Records, has been on Universal Records, and has self-
financed several albums. Mr. Nathanson has toured with some of 
the country's most popular artists and has had his music 
featured in many films and television shows. He also credits 
Internet radio as a factor in his success through the use of 
iTunes and other digital services.
    So, as you can see, we have a diverse and talented lot 
here, and we will begin with Mr. Simson.

 STATEMENT OF JOHN SIMSON, EXECUTIVE DIRECTOR, SOUNDEXCHANGE, 
                        WASHINGTON, D.C.

    Mr. Simson. Madam Chair, Ranking Member Brownback, Senator 
Whitehouse, and members of the Committee, thank you for 
inviting me to testify before you today to speak about fair 
rates for music, a subject--as a former performer, artist 
manager, entertainment attorney, and now executive director of 
SoundExchange--with which I am very familiar.
    Shortly after Congress granted the right for artists and 
labels to be paid fair royalties from digital services, one of 
the great young saxophonists in American music, Art Porter, 
Jr., of Little Rock, Arkansas, died tragically while on tour in 
Thailand. Shortly thereafter, his wife also died of cancer, 
leaving behind their two sons, who were now being raised by 
their grandparents. We have been able to track them down, and 
soon they will get a check from SoundExchange for the legacy 
their dad left behind.
    Another great artist, Joe Jones, who had a song, ``You Talk 
Too Much,'' you might remember; it was a staple of the 
airwaves. Not a one-hit wonder, as some might think, a 
Juilliard graduate, another great artist whose widow was very 
grateful for the royalties we sent her. And then there was the 
day, shortly after Katrina, we found Ernie K-Doe's widow--he of 
``Mother-in-Law,'' another song you may remember--down in New 
Orleans. Her response when she found out about these royalties 
was, ``Child, you just put the Thanksgiving turkey on my 
table.''
    These are just some of the many artists and the stories 
that we hear, many heartfelt stories, from widows and widowers 
whose spouses created many valuable recordings; many artists 
living on Social Security; young artists just starting out, we 
hear from them, the one-hit wonders, the orchestra members. The 
creators of music are getting paid because Congress created a 
digital performance right. And it is the basic principle of 
intellectual property that performers should get paid for what 
they create.
    In fact, just last week, when the Enforcement of 
Intellectual Property Act of 2008 was introduced--and we thank 
you, Madam Chair, for cosponsoring--Senator Leahy noted that, 
``The protection of intellectual property is vital to our 
economy.'' And it is also vital to the livelihood of the 
recording artists whom we represent.
    Every day, you know, the landscape is transforming so 
dramatically in the music industry. We see a new reminder that 
music is undergoing a major transformation. In the new 
landscape of the 21st century, people are accessing music 
through listening, not through purchasing. But as we go through 
this transformation, one basic principle has to remain: the 
people who create the music must be paid, and must be paid 
fairly.
    Over the past 17 months, SoundExchange has addressed 
genuine business concerns of webcasters because we see them as 
partners. The $500-per-channel fee minimum was mentioned. You 
know, the only reason that the judges did that without a limit 
was because the other side entered no testimony about how many 
channels they had.
    We want webcasters to succeed because we want them to 
continue paying royalties to our 31,000 artists and over 3,500 
labels. But we want fairness as well.
    In every instance we try to look at the big picture, 
including the vibrant business activity that is being generated 
in webcasting with its over 50 million listeners. Just last 
August, Bridge Ratings projected that Internet radio 
advertising revenue will hit $20 billion by 2020. There are 
lots of examples I could show you about the vibrancy of 
Internet radio and how it is growing. Just last week, the new 
iPhone, the hottest application--congratulations to my witness 
here, Joe Kennedy--belonged to Pandora Radio. I am sure that 
news alone is enough to send chills down the spines of 
satellite radio and AM/FM radio operators.
    So why, with all this activity, do we hear the constant 
refrains of doom and gloom--which we have heard for over 10 
years now--when, in fact, webcasting is the place to be? 
Everyone wants to be there. The simple answer is webcasters 
want to pay less so they can make more. The problem is they 
want to pay less than what was judged fair by an impartial 
panel of judges.
    For some reason, there are those who think that music is 
something that they should have for free or below market value. 
They do not think about the endless practice sessions, the 
second jobs, the lessons, the road trips, sleeping on friends' 
couches while on tour, or like me going to law school, 
eventually, or about the thousands of people who work in the 
recording industry promoting, investing, marketing, developing, 
and producing all those recordings. Frankly, the attitude that 
music should be free or devalued is inherently wrong.
    Just a few weeks ago, several of your colleagues in the 
House from both parties suggested to the recording industry and 
the National Association of Broadcasters that we get together 
and negotiate a rate for AM/FM radio broadcasts, which 
shamefully, right now, pays zero. The next day at a radio 
conference, we had the opportunity to make that suggestion to 
the head of the NAB. His response? ``I would rather cut my 
throat than negotiate.'' His words.
    Unlike the NAB, webcasters believe in paying and are 
paying, but they are going to great lengths, including lobbying 
Congress, in trying to devalue our music for their own 
financial gain.
    Webcasters are currently advancing an argument they call 
``parity'' but that we more accurately call a ``subsidy.'' To 
us parity means every radio-like service should pay including 
AM/FM radio. But it does not mean that artists and owners must 
subsidize every Internet business model--good, bad, or 
exploitive--which is what they are asking for. The fact is 
webcasters were given a huge concession by this Congress in the 
statutory license. It lets them use any sound recording without 
permission in exchange for a fair royalty. Little paperwork, no 
tracking down of artists, no need to negotiate with thousands 
of independent and major labels. We do all that work for them. 
All they have to do is play the music and pay a fair rate.
    To establish a fair rate, and recognizing the complexity, 
Congress set up the CRB process, and it is working. Businesses 
are growing. The Internet is the place to be. The President of 
CBS Digital recently said, ``[it] is an incredible business--we 
gotta own this!'' The fact is the system is not broken and it 
does not need fixing. If anything, Congress should be commended 
for the very fair process it established.
    Madam Chairwoman--
    Senator Feinstein. Would you conclude, please? Thank you.
    Mr. Simson. Yes. Madam Chairwoman, thank you very much. 
Music is like magnets and glue. People are attracted by and 
stick around for the music. Music is what makes these services 
have value. All we are asking is for our fair share.
    Thank you.
    [The prepared statement of Mr. Simson appears as a 
submission for the record.]
    Senator Feinstein. Thank you very much, Mr. Simson.
    Mr. Kennedy.

    STATEMENT OF JOE KENNEDY, PRESIDENT AND CHIEF EXECUTIVE 
       OFFICER, PANDORA MEDIA, INC., OAKLAND, CALIFORNIA

    Mr. Kennedy. Madam Chairwoman, Senator Brownback, Senator 
Whitehouse, on behalf of Pandora and the Digital Media 
Association and the Internet radio industry, I thank you for 
inviting me to speak today. I will discuss how Internet radio 
innovation offers unique benefits to listeners and artists, and 
I will ask your help as we confront a royalty crisis that 
threatens our company and our industry.
    Ten years ago, you had the foresight to establish a 
statutory framework for a new form of radio: radio delivered 
over the Internet. This form of radio, unencumbered by the 
traditional spectrum limitations of traditional broadcast 
radio, would finally enable the full range of America's 
wonderful diversity of music and artists to be heard.
    By delivering on this promise, Pandora has become this 
country's most popular Internet radio service. Pandora plays 
the music of over 60,000 different artists, most of whom have 
never been heard on traditional radio. Our repertoire spans the 
full range of musical diversity created and enjoyed in America: 
rock, country, jazz, gospel, blues, Christian, Latin, 
classical, and more. Americans have embraced this opportunity 
to enjoy this diversity, and it is our privilege to serve 15 
million Americans who have registered as users since we 
launched just 3 years ago.
    Artists and labels have benefited as well. Nielsen research 
shows that Pandora listeners are three to five times more 
likely to have purchased music in the last 90 days than those 
who do not use our service.
    Our world is converging, and accessing Internet radio is 
looking more and more like using broadcast and satellite radio. 
We are attempting to listen to a Pandora station transmitting 
live over an Apple iPhone. The AT&T service in here may not be 
good enough to get the signal.
    Senator Feinstein. What does that tell you?
    Senator Brownback. That is not your fault. That is AT&T.
    [Laughter.]
    Mr. Kennedy. Ah, you can hear it there. As John said, it 
has become actually the second most popular application on the 
iPhone.
    The iPhone will also play the hundreds of radio stations 
operated by CBS Radio as well as all of the radio stations 
offered by XM satellite radio.
    But just as the potential of Internet radio is beginning to 
flourish, it faces early extinction because of the royalty 
rates set last year by the Copyright Royalty Board. According 
to an analysis published by JPMorgan, the royalty rates exceed 
the total revenue of the average Internet radio service, 
leaving nothing to cover the many other costs of the business.
    At Pandora, we have had great success monetizing the usage 
of our service and plan to reach $25 million in revenue this 
year. However, the CRB royalties would cost us over $18 million 
this year, more than 70 percent of our revenue--a crushing 
amount. If XM or Sirius were to have revenue of $25 million, 
their sound recording royalties would equal only $1.6 million, 
or 6.5 percent of their revenue.
    We also pay royalties to songwriters through our licenses 
with ASCAP, BMI, and SESAC. However, these royalties are 
consistent with what broadcast and other forms of radio pay--
between 3 and 4 percent of revenue--further highlighting the 
absurdity of the CRB rates.
    How are these disparities possible? Broadcast radio has a 
statutory exemption and pays nothing, and cable and satellite 
radio royalties are set using a statutory standard very 
different from that used for Internet radio.
    Since the CRB decision, hundreds of thousands of 
listeners--and, notably, more than 6,000 artists--have asked 
Congress to support the Internet Radio Equality Act, and we all 
thank Senator Brownback for being our lead cosponsor. This 
legislation would sent Internet royalty rates at 7.5 percent of 
revenue, more than what satellite pays and obviously higher 
than broadcast radio's zero.
    We also appreciate Senator Feinstein's support of radio 
royalty parity. However, the Senator's bill applies only 
prospectively, and without a solution to the present crisis, 
Pandora will die. One hundred and twenty employees in an 
enterprise zone in Oakland will lose their jobs, and an 
invaluable promotional channel for tens of thousands of artists 
who rely on Internet radio for exposure will disappear.
    Additionally, the PERFORM Act's fair market value royalty 
standard would subject Internet radio to yet another untested 
standard, just as Congress did when the willing buyer/willing 
seller standard was set in 1998.
    Pandora and DiMA urge that the balanced royalty standard 
found at Section 801(b) of the Copyright Act, which has worked 
well since 1976, simply be extended to Internet radio. Everyone 
in Internet radio wants artists to be paid fairly, but we also 
want Internet radio to survive. Neither will happen unless the 
CRB decision is remedied, and it will not be a lasting remedy 
unless the time-tested 801(b) royalty standard is extended to 
Internet radio.
    Thank you very much.
    [The prepared statement of Mr. Kennedy appears as a 
submission for the record.]
    Senator Feinstein. Thank you very much.
    Mr. Harleston.

 STATEMENT OF JEFFREY HARLESTON, EXECUTIVE VICE PRESIDENT AND 
   GENERAL MANAGER, GEFFEN RECORDS, SANTA MONICA, CALIFORNIA

    Mr. Harleston. Madam Chair, Ranking Member Brownback, 
Senator Whitehouse, members of the Committee, thank you so much 
for having us here today. My name is Jeffrey Harleston, and I 
am head of operations for Geffen Records, located in Los 
Angeles, California. Geffen is home to legendary artists such 
as B.B. King, Nirvana, and The Who--as well as contemporary 
superstars like Mary J. Blige and Nelly Furtado. In addition to 
this roster of amazing artists, I have the good fortune to work 
with an exceptional array of managers, producers, marketers, 
and executives who tirelessly dedicate their talent and 
experience to delivering great music in the 21st century.
    Although our industry is facing some major challenges 
today, we have plenty to be excited about. An increasingly 
active part of what we do as a major record label is the 
licensing of our music, often to those that are perfecting the 
last great idea--and to those that are working on the next 
great idea. Today's music marketplace is nothing like it was 10 
or 5 years ago. While the sales of CDs have fallen off 
considerably, we have witnessed a substantial shift in the ways 
consumers use music. They want music to be portable. They want 
it instantly. They want it on Facebook and MySpace pages, on 
cell phones, iPhones, BlackBerrys, and iPods. But this growing 
digital marketplace can only survive if we ensure that everyone 
plays by the same rules, that creators are compensated fairly, 
and that the value of music is protected.
    That is why I am pleased to support the PERFORM Act 
introduced by Senators Feinstein and Graham. The PERFORM Act 
establishes ``platform parity'' among music radio services. 
Right now, the law, as others have noted, is a patchwork of 
rules written at different times for different emerging radio 
technologies. Now that these technologies have matured into 
sophisticated businesses that compete with each other to offer 
consumers multiple services, it is time to update the law to 
ensure that the playing field upon which they compete is level 
and fair. The PERFORM Act accomplishes this by applying the 
same compensation and protection standards to all radio 
services that benefit from a Government license.
    Under the Government license, radio services pay a 
Government-set rate for the music they perform. They do not 
have to ask the creator for permission to use their music. They 
do not have to negotiate with hundreds of different record 
labels. They just pay the set royalty, follow the regulations, 
and they are good to go.
    Today, the rules used to determine what the compensation 
should be for each radio platform are very different. It is 
inappropriate--and detrimental in the long run--to provide any 
platform with a competitive economic advantage over another. To 
achieve platform parity, the compensation paid by all platforms 
should be determined according to the same standard, and we 
feel that standard is the fair market value.
    Applying the same standard across different radio platforms 
does not mean everyone should pay the same price or even have 
the same pricing structure. For example, in my work at Geffen, 
we license the use of our recordings to hundreds of companies 
ranging from Amazon.com to MTV, to MySpace, mobile companies 
like Verizon, television programs like ``Grey's Anatomy'' and 
``CSI,'' to retail outlets like Wal-Mart, to video games, to 
toys, to even toothbrushes and greeting cards. What is 
important is that the negotiation of the license in each of 
these instance takes into account market considerations, takes 
into account the uses of the music by the product or the 
service that is licensing. Yet, the same standard is used to 
determine the fair cost in each of these instances, and that is 
the fair market value.
    Similarly, the standard applied by the Government to all 
radio platforms should also estimate and reflect what the 
market price would be for the use of that music. The Government 
took away the fair market negotiation when they enacted radio 
licenses and gave these platforms phenomenal efficiency and 
ease of use. The very least the Government can do is ensure 
that if they are going to set the price for our property, it 
ought to be based on a set of rules that leads to a result that 
is consistent with what the marketplace would yield.
    The other parity issue addressed in the PERFORM Act is the 
rule that all radio platforms should make sure they are safe 
and secure, and that all uses of the music they deliver are 
compensated. Satellite radio services like XM and Sirius 
already prevent, through encrypted delivery, the taking by 
others of the music they broadcast. They also have reached 
agreements with record companies to make sure all uses of the 
music they deliver are compensated, and we commend them for 
their partnership. While current law prevents Internet radio 
stations from making multiple uses of music without paying for 
those uses, many Internet radio stations are not secured to 
prevent the uncompensated taking of our music by others.
    A real-world example is a software program called ``Radio 
Tracker,'' one of the hundreds of applications known as 
``stream-ripping'' software. Radio Tracker is published by a 
German company that charges $30 to download their software 
program. Once installed, the program simply asks you to enter 
any artists or songs you wish to copy on a ``wish list.''
    Without the user ever listening, the software searches over 
2,500 Internet radio stations, sometimes as much as 5,000, at 
the same time looking for the these songs or these artists. 
When it finds them, it copies every one individually, collects 
them in a permanent library that can be moved easily to an 
iPod, along with song lyrics. It even allows for ringtones to 
be downloaded or a CD burned. Basically, you get a digitally 
perfect copy of any song you want. The German stream-ripping 
company gets $30--none of which is used to compensate the 
artist, the producer, the songwriter, or the label. The user 
never has to buy another song. It is as simple as that.
    I would like to thank the Committee for its focus on this 
important issue, and especially Senator Feinstein for your 
leadership in crafting the PERFORM Act. Your legislation goes a 
long way toward establishing a level playing field where all 
parties and platforms operate under the same rules, providing 
consumers with the music and experiences they desire, while 
ensuring that the creators, the artists, and the producers are 
appropriately rewarded for their valuable work.
    Thank you.
    [The prepared statement of Mr. Harleston appears as a 
submission for the record.]
    Senator Feinstein. Thank you very much, Mr. Harleston.
    Mr. Ondrasik.

    STATEMENT OF JOHN ONDRASIK, SINGER/SONGWRITER, FIVE FOR 
               FIGHTING, LOS ANGELES, CALIFORNIA

    Mr. Ondrasik. Thank you. Thank you, Senator Feinstein. 
Thank you for inviting me today. Senator Brownback, thank you, 
Senator Whitehouse, thanks for being here. It is nice to be 
with my friend Matt here. I have known him for a while, and it 
is good to have some songwriters on your panel.
    My name is John Ondrasik. I am a singer/songwriter. I 
record under the band name ``Five for Fighting,'' which is a 
hockey term. Of course, back at home, I am simply known as 
``Dad.'' And my message today is one my two wonderful children 
have heard from me and have understood from the very beginning: 
Play fair.
    I am not in D.C. very often. I have participated in Grammys 
on the Hill and in events to support our troops. My songs and 
activities often reflect issues and causes I believe in, and my 
experiences have shown me the power of words and music. I 
recently was touched when I heard that Senator Hatch wrote a 
song for his friend Senator Kennedy. That gesture made me proud 
as an American and reminded me how music, at times, can express 
our basic humanity and feelings better than any other medium. I 
look forward to hearing that song. I wish Senator Hatch was 
here.
    I am here today not on my own behalf, but on behalf of 
thousands of my fellow songwriters and performers. As with 
them, as with us, creating brings us great joy. But, 
unfortunately, joy alone does not put food on the table and 
allow us to take care of our families. The fact is, as creators 
of our music, we are actually small businesses. And while we 
take pride in our ability to move and entertain people, like 
any businessperson--like every American--we expect, need, and 
deserve fair compensation for our work. I am here today to ask 
that you ensure the platforms that deliver the music we make 
are secure and effective and that all uses of music over those 
platforms are fairly compensated. In essence, I am asking for 
platform parity, and I would like to thank you, Senator 
Feinstein and also a friend of mine, Senator Lindsey Graham, 
for introducing the PERFORM Act, which recognizes these 
principles.
    As we all know, songwriters and performers get paid for 
different uses of their work. Whether it is the sale of a 
concert ticket, a spin on a radio station, a sale on iTunes, 
each has its own value. Buying a concert ticket does not 
automatically get you a free album. And I think respecting 
these different uses and the revenue streams they provide is 
crucial to the survival of songwriters and performers. Not all 
performers write their own songs.
    That is why it is necessary for those who broadcast music 
to prevent the transformation of the radio listening services 
into services that offer permanent copies of music without 
paying the appropriate license for that use. By essentially 
turning radio into iTunes without the proper compensation, part 
of the essential revenue stream for creators disappears. And no 
matter how pleasing it is that others appreciate your work, I 
am sure you would agree that if part of your income was put in 
jeopardy, you would be concerned about that.
    Let me be clear: I am excited about opportunities provided 
in the digital marketplace. It is amazing what is going on. As 
a fan, I love Pandora. It is very cool. It is very hip. It has 
opened up new opportunities for us and for those who deliver 
music as well. But to benefit from those opportunities, we must 
all recognize and protect the value of that music. We must 
provide a landscape that does not discourage the next 
generation of creators from pursuing their contribution to our 
culture. That is the key.
    At the end of the day, if there is no protection for what 
we create, it effectively has no monetary value. That not only 
hurts us, but it hurts our culture, our economy, and every 
business striving to share in the benefits of the new 
marketplace. As Mr. Harleston said, we are pleased that 
satellite radio has recognized this, and they encrypt the 
delivery of their music that protects us, and they work with 
us.
    I think it is necessary for all music to recognize, like 
satellite has, the corresponding obligations and 
responsibilities they have--both to creators and to each 
other--to protect and value the music they deliver. That music 
is what drives their business and what will drive it in the 
future and to compensate the artist for all uses.
    What should that compensation be? I believe in the 
principle established in the PERFORM Act that creators deserve 
fair market value for their work. Surely it is not too much to 
ask that when you create something in our great country, you 
get fair market value for it. Why should music be different 
from anything else? Why shouldn't Government consider what a 
buyer is willing to pay for what I am offering? That is exactly 
what fair market value is, and that is the standard that should 
be used across the board for all competing platforms.
    I think we all want to see a thriving music marketplace. We 
all do. It is important. By creating a level playing field for 
all platforms, including establishing equal standards for the 
protection and market-based compensation of music, the PERFORM 
Act provides for this and allows all of us--creators, 
businesses, music lovers--to benefit from these opportunities.
    Let me say that personally this has been an extraordinary 
experience for me. I am honored to speak before you. If the 
opportunity arises again, perhaps I could bring my kid. I told 
them all about it. My daughter Olivia, who is 7 years old, she 
just wrote her first song called ``Secret Diary.'' And if she 
was here, she would sing it for you. Trust me, she would. I 
hope we all have the opportunity to hear new music and the 
works of many more creators for years to come--maybe Olivia. 
Ensuring that singers and songwriters are treated fairly across 
all music platforms is exactly the way to accomplish this. It 
really just makes sense, and I think we all can work together 
to make that happen. And as my kids would tell you, it allows 
us all to play fair.
    Thank you.
    [The prepared statement of Mr. Ondrasik appears as a 
submission for the record.]
    Senator Feinstein. Thank you very much.
    Mr. Nathanson.

    STATEMENT OF MATT NATHANSON, SONGWRITER, PERFORMER, AND 
          RECORDING ARTIST, SAN FRANCISCO, CALIFORNIA

    Mr. Nathanson. Hi. Thanks a lot for letting me speak.
    I have spent the last 17 years creating a career for myself 
in the music business. I released my first record in March 
1993. Promotion for that record was pretty much me going to 
Kinko's and printing up really crude flyers and handing them 
out in college and posting sort of neon green flyers for shows 
at local coffee shops.
    I released my most recent record in August of 2007. 
Promotion for that consisted of, among other things, months of 
blog posts detailing the making of the record, e-mail blasts to 
my mailing list, viral video clips posted on YouTube of in the 
studio, an album pre-sale on iTunes, online listening parties, 
and promotion through Internet radio.
    The Internet has changed the way I run my business. It has 
changed the way my music is heard. It has changed the discovery 
process for the music listener. And it has leveled the playing 
field for the artists. All of this change is good, including 
the birth of iTunes, YouTube, Pandora, MySpace, Rhapsody.
    When I started, there were only really two ways of making a 
living playing music:
    The first was to sign a deal with a label, get a recoupable 
advance, and hope that when my record was released the label 
would push my songs to bc radio and to MTV. And then those 
outlets in turn could choose to push or not push my songs to 
the public at large.
    The second option was to hit the road, sleep on floors, and 
build fans one show at a time.
    Today, if a person makes a record, he or she does not have 
to struggle and fight as much to find their audience. Self-
promotion is not just postcards and flyers and sleeping on 
floors. With the Internet, there is no audition process for a 
label contract. There is no retail shelf space to compete for 
or buy. And artist can post a song to their blog or their 
MySpace page, and from there it spreads. They can sell songs on 
iTunes or MySpace or sell their CDs on CD Baby. And with 
MySpace combined with Internet radio and blogging, the artist 
can finally build a following and sell out shows in parts of 
the country they have never even been to. When they finally go, 
there are people there.
    Internet radio is such a crucial part of this new business. 
I cannot tell you how many times people have come up to me at 
shows and said, ``The first time I heard you was on Pandora,'' 
or ``The first time I heard you was on Rhapsody, and now I have 
got your CD, now I am at your show, now I am a fan.''
    These websites have been essential to my career growth and, 
in turn, the overall growth of my small business. Look, 
royalties are great, right? Like I appreciate the royalty 
checks I get from SoundExchange and ASCAP. I am not one to--you 
know, I am into--money is fine.
    [Laughter.]
    Mr. Nathanson. But in contrast to some who try to maximize 
every revenue opportunity, it is more important to me, and I 
think to most artists at my level, to strike the right balance 
between promotional opportunities and revenue opportunities. 
Royalties should be fair, but not so high so Internet radio has 
to struggle to stay alive and to grow.
    It is really an incredibly exciting time for music. What 
once felt really limited and elite now has sort of broken wide 
open, right? The scales that once were tipped in favor of a few 
record labels and a few broadcasters are now more equal and 
fair, right? This is the first time that the music business has 
broken open and created a level playing field for artists. This 
is a new music business, not the old guard. And Internet radio 
is part of the new opportunity.
    It is essential that laws foster this new music business, 
the business that works equally well for small artists. Please 
do not let royalties kill Internet radio, and do not pass new 
laws that favor industry incumbents and harm new competitors 
that are so beneficial to the creators like John and I.
    Internet radio is good for the ecosystem of the music 
system. It is a fact. If it disappears, it will not necessarily 
hurt Geffen Records, and it will not even hurt someone who is 
established, like a household name like John and his band, Five 
for Fighting. It is going to hurt me, and it is going to hurt 
everybody like me, the middle class of the music-creating--and 
it is going to hurt the listener. It is like it is all about 
distribution, it is all about getting it to the people. And 
then people like me, working musicians who fly under the radar 
and make a good living creating and performing music, it is 
going to hurt us the most.
    So thanks for letting me speak.
    [The prepared statement of Mr. Nathanson appears as a 
submission for the record.]
    Senator Feinstein. Thank you very much. I think this is 
very interesting testimony.
    I guess if I have a bias, it is for the artist and to see 
that what the artist does is fairly compensated, because that 
is what the richness is of the technology. The technology is 
only as good as what you put on it, and, therefore, fair pay 
for what you create is extraordinarily important, or else I am 
afraid you drift really toward mediocrity, because people do 
not really have the incentive. They cannot earn a living.
    So let me ask you this question: Is there anyone that 
thinks there should not be parity between the platforms, and 
why?
    Mr. Simson.
    Mr. Simson. Madam Chair, I believe in parity. I think the 
rate standard should be the same for all of the platforms. And, 
obviously, I believe that AM/FM Radio should pay. They do not 
pay right now, and I think that is an egregious--
    Senator Feinstein. See, this is the hard part because they 
are big, they are powerful, they object, as you just said, in a 
colorful way. And people say, ``Oh, leave it alone for now.'' 
And I do not know how we ever really get to a system of rate 
parity by leaving the 800-pound gorilla out of the room.
    Mr. Simson. I would certainly agree. I do think, though, 
that we should be--and I think it was mentioned by Mr. 
Ondrasik, that rate parity does not mean that everybody pays 
the same rate. I think the judges very carefully, over an 18-
month period carefully examined webcasting as a business, the 
same way they examined satellite radio as a business. And so 
you may not end up with the same exact percentage. In fact, if 
you look carefully at the satellite decision, satellite radio 
has a lot of different offerings. There is sports, there is 
talk. Half their channels are not music channels. So the judges 
there actually halved what we should have gotten and said it 
was 13 percent after halving it. So 26 percent is really the 
value of music to satellite radio if they were strictly a music 
service.
    So these numbers that are being thrown around I think are 
being thrown around a little bit loosely. We have other 
services where we get 15 percent. iTunes pays 70 percent for 
their content.
    So I think we should let the judges do their jobs, examine 
these businesses very closely, but under the same rate 
standard.
    Senator Feinstein. Okay. One other quick question. Mr. 
Harleston, if I may, Internet radio providers have argued that 
the rate standard should be 801(b) for satellite, cable, and 
Internet, instead of the fair market value that is in my bill. 
That is the difference, I think, between us in our bills. What 
do you think of using the 801(b) factors to set the rate 
standard to determine what these radio stations should pay for 
music? In other words, we need to compromise to move this 
thing, it seems to me. Would that be a fair compromise?
    Mr. Harleston. Well, let me try and answer it this way: I 
think that the compromise is getting--I will try and articulate 
it the easiest way I can. The way I do my business and the way 
that--you know, Mr. Nathanson talked about his business, and we 
are actually far closer than I ever realized, having heard him 
speak. The way I do my business, as any content owner would, is 
I evaluate the content that I have and the opportunity that is 
in front of me. And I think, you know, kind of the difficulty 
that we have is we have a system that is trying to fit kind of 
a square peg in a round hole. And the round peg is there are 
many things that are very positive that I as a content holder 
may want to avail myself of in the world with my music. There 
are opportunities when I may decide, I may have the choice to 
take my music and, you know, allow it to be broadcast or 
distributed however I might choose to do that at whatever 
compensation scheme I feel I am most comfortable with.
    For example--you know, and Mr. Ondrasik said this very 
well--we all think that Internet radio is fantastic, and we all 
think it is--the new technologies are keeping music in this 
music industry vital. In the 15 years that I have worked in the 
industry, you know, I have seen it undergo really terrible 
upheaval, terrible change, and we have had an opportunity with 
new technologies to really get the consumer back, get the 
listener back, get the music fan back by exposing it. And the 
one thing Internet radio does is broaden the scope of what is 
out there. But I would like to have the choice to decide how I 
want to license my music and the fair market value--that is why 
I keep coming back to that--the fair market value of what it is 
worth.
    There may be an artist that needs exposure because they are 
these so-called, using Mr. Nathanson's term, middle class of 
the music industry that I may feel is more adept to being 
exposed through other channels that I may--for example, iTunes 
has a program, ``Download of the Week.'' Well, major record 
labels give their music for 1 week to iTunes to download for 
free, and typically you are choosing artists that you are 
trying to expose. But an artist that is a superstar artist that 
does not need the exposure, you might have a different 
opportunity. I probably would not choose to do a Download of 
the Week with iTunes because it is a revenue-generating 
opportunity for me. I am a businessman.
    So it is a long, roundabout way of answering your question, 
but that is why, you know, I feel--I understand your need for 
compromise--
    Senator Feinstein. So the answer is no. Is that right?
    Mr. Harleston. Excuse me?
    Senator Feinstein. The answer is no?
    [Laughter.]
    Mr. Harleston. The answer is no.
    Senator Feinstein. I just wanted to know. My time is up.
    Senator Brownback.
    Senator Brownback. I was going to say the answer is maybe.
    [Laughter.]
    Senator Brownback. That was what I heard, but I guess that 
is in the listener's mind, which all of this is. Thank you all 
for being here. This is very interesting. I think it is 
fascinating, particularly, Mr. Nathanson, your experience to 
diffuse the industry and to allow people to break into it, new 
incumbents to come into it. I think that is just a fascinating 
story.
    Mr. Kennedy, do we know at all how many Internet radio 
stations there are now? Do we have any idea?
    Mr. Kennedy. I actually could not tell you how many 
services there are. There are certainly thousands, if not tens 
of thousands. Again, the beauty of Internet radio is there is 
no kind of FCC spectrum limitations, and so it really has, you 
know, as Matt talked about, kind of democratized access. And I 
think that is why so much music is being exposed to the benefit 
of listeners and to the benefits of creators.
    Senator Brownback. If the CRB rates are put into place that 
are currently negotiated, how many of those Internet radio 
stations will be able to survive?
    Mr. Kennedy. I do not know of any Internet radio service 
that is just an Internet radio business that could survive 
these rates.
    Senator Brownback. Can Pandora survive?
    Mr. Kennedy. Pandora will not survive. How can--
    Senator Brownback. And you are one of the two biggest--you 
are one of the two biggest?
    Mr. Kennedy. We are actually the largest now in the 
country. I think at these rates--
    Senator Brownback. And you could not survive with these 
rates?
    Mr. Kennedy. It is impossible. There is no way, $18 million 
on $25 million, it is simply crushing. We could not pay 
people--
    Senator Brownback. So the industry is gone if these are put 
in place.
    Mr. Kennedy. I think there might be, you know, the great 
big broadcast conglomerates like Clear Channel and CBS, you 
know, that is all that will be left of Internet radio.
    Senator Brownback. Because they could move and use this as 
a loss leader or something.
    Mr. Kennedy. Exactly. So they pay nothing on 98 percent of 
the radio they play, and so they can choose to pay the higher 
rates on the 2 percent that they stream online. I mean, if I 
paid nothing on 98 percent, I could pay the CRB rates on the 2 
percent. But I think the great loss, though, would be for 
American listeners and American artists, because in that 
scenario, all the diversity is lost and all of a sudden 
Internet radio becomes just like broadcast radio has been for 
the last 20 years.
    Senator Brownback. Now, what is wrong with the fair market 
rate, then, in your estimation? We heard Mr. Harleston talk 
about he does not like the 7.5-percent rate that satellite 
radio pays. What is wrong with fair market then?
    Mr. Kennedy. The 801(b) standard, as I understand it, has 
been used since 1976 for every other form of copyright 
arbitration, and it has been used successfully with 
songwriters, with music publishers, with a wide variety of 
services in radio; it has been used for cable and satellite. It 
is tested, it is proven successful.
    We are in the mess we are in today because 10 years ago a 
new standard that had never been tested, willing buyer-willing 
seller was injected into the statute. I think the worst thing 
we can do at this point is inject yet another untested standard 
into the statute. We have this standard, 801(b), that has been 
used successfully for 25 years for exactly this form of royalty 
arbitration. Why wouldn't we go with what has been proven 
successful?
    Senator Brownback. So it is really kind of what Mr. 
Harleston is saying. He would like to be able to float rates 
differently. I mean, if he wants to break in with somebody, he 
would like to do it for zero; if he has got it established, he 
wants more. And you are saying that is just--that gives you no 
predictability in your marketplace for being able to maintain 
or operate an Internet radio. Is that correct?
    Mr. Kennedy. Right. We play the music of 60,000 different 
artists. We play over half a million songs every week. We 
cannot have a rate negotiation around each song every week, 
depending on what someone wants to do. If that were the case, 
the system, again, would fail. No one would ever be able to 
offer that diversity or artist and music if they had to go 
through one-to-one licensing--
    Senator Brownback. Mr. Nathanson, because my time will be 
up quickly, how many new artists are breaking in now through 
Internet radio? Do we have any idea now versus, say, 20 years 
or 10 years ago before Internet radio?
    Mr. Nathanson. I do not really know those kind of numbers. 
All I know is that, again, sort of the platform--the landscape 
has changed to such a point that there is no longer kind of the 
bottleneck where you have to get signed to a label and then 
they push you. It comes up through all the different--it is 
sort of a combination of all these tiny--
    Senator Brownback. Routes.
    Mr. Nathanson. Yes, it is all--instead of one big focused 
center, everything is sort of--artists are rising up through 
all the difference channels. That is what is so exciting about 
it. You know what I mean? It is a wild, open sort of new 
frontier.
    Senator Brownback. So if the Internet goes back to just a 
few channels, like Clear Channel or others, using it for a loss 
leader, what happens then?
    Mr. Nathanson. We have seen what that has done to the 
record industry now, so, I mean, it has not done them a 
service. I mean, it is sort of like we are at a really great 
place, and it would be a huge step back to go back to this kind 
of concept of a couple of companies owning the outlets.
    Senator Brownback. Thank you.
    Thank you, Madam Chairman.
    Senator Feinstein. Thank you, Senator.
    Senator Whitehouse.
    Senator Whitehouse. I got the impression while Mr. Kennedy 
was speaking that Mr. Ondrasik had some interest in offering a 
response, so let me offer you that opportunity on my time.
    Mr. Ondrasik. Thank you, sir, very much. I appreciate that. 
I would just like to express kind of the artist's side of the 
actual numbers. We really have not talked about the actual 
numbers, and the way I understand it, currently right now 
artists are being paid--or the royalty rate is $1.40 for a 
thousand songs. So in playing 1,000 songs, which, if you factor 
the programming, that is almost 15 songs an hour, that is 3 
days of programming, constant streaming 24/7, $1.40.
    I am also told the average check the SoundExchange gives 
out is $360 per year. I checked mine last night. Last year, my 
SoundExchange royalties was $9,000. And if I was not a 
songwriter, that would have been my income. And if that was my 
income, I would not be making music.
    One more global point I think a lot of artists are 
concerned about. We are worried that certain platforms--and I 
am not necessarily talking about Pandora. We need Pandora to 
survive. We do. And I think we should work together to make 
that happen. But we are concerned about platforms that use our 
music to gain eyeballs. Once they reach a certain critical 
mass, they flip their companies for hundreds of millions of 
dollars that music artists never see a penny of. And that is 
what we worry about. That is not fair.
    If the model cannot sustain $1.40 for 3 days of 
programming, why should artists be punished for that? I am all 
for giving away free music. I do it all the time. The CD for 
the troops was free. But we should not be forced to give our 
music away for free. And if the model does not sustain that, 
well, the model will work itself out.
    I think that needs to be said. Artists like Matt need this 
outlet, no doubt about it. There are many outlets for him--
MySpace, his own Web pages. I worked 18 years in this business 
without making a penny. He is close to my heart. It is guys 
like him and the future songwriters that I am here for. If it 
was about me, you could have my music. I do not need any more 
money. But I worry about companies that take advantage of our 
content to rake in hundreds of millions of dollars at our 
expense.
    Thank you, Mr. Whitehouse.
    Senator Whitehouse. I am new to this institution and new to 
this issue, so I am here more to listen and learn. I am sure 
this is an issue we are going to be dealing with, and I would 
like to be as informed as possible.
    It strikes me as almost a lay observer that we have a 
technology that has galloped way ahead of the agreements and 
understandings that had proliferated through this industry to 
share its bounty, and now there is a tension between where the 
technology has taken us and the old means of doing business.
    My question is: Are there ways in which you foresee this 
technology facilitating a further--kind of turning it back 
around so that we are in a better position to see that the 
artists and the writers and the musicians are funded as well as 
they could be?
    And, for instance, is it clear now that we can track every 
use on the Internet of copyrighted artists' material? Or is 
still the Wild West to the point that except in limited 
circumstances--Pandora presumably being one of them--we are not 
even clear on what is being put out there?
    Mr. Simson. Senator, if I may answer that, SoundExchange is 
certainly part of the new technology. We have a board that is 
50 percent copyright owners and 50 percent performers. We get 
reports of use from Pandora, from XM, and Sirius that tell 
exactly what they are playing on a monthly basis. So we know 
what they are performing.
    There are a number of services, though, who are not 
complying, who do not send us those reports, and as you say, it 
is the Wild West. We are guessing at what they are playing 
because they are not compliant with the law. If they are 
compliant with the law, we will know. We have built technology 
to basically take in all that information, crunch it down, and 
then send out checks to the performers and record companies.
    If I could also just add one thing on John's comment. You 
know, Matt's comments are wonderful. You know, I was an 
independent artist. I managed a lot of independent artists over 
the years. But the artists that I referenced in my earlier 
testimony, frankly, the heirs of those artists, they cannot go 
out and tour anymore. You know, it is not going to help the 
widows and spouses, many of whom--you know, they have created 
such a valuable legacy of this country, whether it is jazz, 
Hawaiian, other niche services that are being performed. They 
need the royalties. They do not have a choice.
    So I think we really need to make sure they are paid 
fairly, and as John pointed out, you know, it is 2 cents for an 
hour's worth of music that goes to the performer and the record 
company.
    Senator Feinstein. Mr. Nathanson, why don't you make your 
comment, and I wanted to ask Mr. Simson a question.
    Mr. Nathanson. Sure, just one comment. I totally get where 
you are coming from, and I know that you are, you know, sort of 
supporting me.
    [Laughter.]
    Mr. Nathanson. My concern is that you use the word 
``fair.'' You throw the word ``fair'' around in an industry--
and I am not really--this is not really my expertise, but the 
reason that Ernie K-Doe's widow is in the situation that she is 
is because the record industry sort of put her in that 
situation. And so it is difficult for me to sit here and hear 
you want to sort of right the wrongs of the industry you are in 
by wronging--it is by sort of crushing the technology that is 
actually creating the new business model now. It is like--I 
feel like you are--I understand where you are coming from, and 
I sort of appreciate it. But the idea is that we are sort of 
entering into a new phase of the way that music is distributed 
and heard, and we need to work together to make it happen. And 
the laws that have been in place are not working together. They 
are working from this fearful place of sort of crushing 
technology that, like Mr. Whitehouse said, has galloped ahead. 
And it is like you just cannot do that.
    Senator Feinstein. You know, it is interesting, because 
Senator Whitehouse leaned over and said to me, ``This is really 
an example of the generational changes within the industry.'' 
And it is really true. The question is: How do we come out of 
this with fairness? And it is not fair out there right now.
    Mr. Simson, there are two bills: Senator Brownback has the 
801(b) standard; I have the fair market value standard. I asked 
Mr. Harleston the question. Let me ask you the same question.
    Which in your view would work if we have to compromise to 
move this along?
    Mr. Simson. Madam Chair, thank you for asking. I believe 
that when you create a statutory license and you effectively 
take away our option to not license, none of the performers can 
say, ``Oh, the rate is not high enough. I do not want to be 
part of this.'' They cannot opt out. You have taken away that 
option by creating a statutory license. In that kind of 
situation, they should receive what the fair market would 
provide them if they did have the right to license.
    I think the other key here is I have no interest in seeing 
Internet radio go away. If they stop paying royalties to 
SoundExchange, I may be looking for a new job.
    Senator Feinstein. Well, let me stop you on that one, 
because what Mr. Kennedy said--and I was looking at the rate 
information here. In 2006, it was 0.008 cents per player per 
listener; in 2007, it was 0.009 cents; 2008 and the current 
rate is 0.0014. And 2010 is the last year of the rate under 
this decision, and it would be 0.0019. I guess I cannot 
translate those numbers into what Mr. Kennedy said, which was 
$18 million out of $25 million. How does that happen?
    Mr. Simson. If you take a look at the rates, we had a rate 
in place from 1998 to 2005 of 0.0762 cents. The judges, when 
they set the new rate for 2006, increased the rate by just 5 
percent. The 2007 rate of 0.0011 of a penny was essentially 
getting us to where the cost of living would have gotten us had 
the rate just been adjusted for cost of living over the course 
of the license.
    This year's rate of 0.0014 of a penny is a rate that Yahoo! 
agreed to pay in a private deal in 2001, and that was actually 
set by the first arbitration panel. So 7 years later, we have a 
rate that was agreed to by one of the larger Internet players. 
But, you know, we have tried to address these issues. We have 
made very, I think, dramatic attempts to settle with our 
webcaster partners. We have offered to extend the license out 
to 2015 to give them a much slower ramp-up to get to these out-
year rates.
    Senator Feinstein. Stop now. Mr. Kennedy, what is wrong 
with that?
    Mr. Kennedy. I think it is important to understand--the 
numbers sound so small on this per performance, per listener 
basis.
    Senator Feinstein. That is right. They do.
    Mr. Kennedy. Which has never been used before in music 
royalties. But radio is a very big system, and if all of 
radio--broadcast radio, cable, satellite, Internet--had to pay 
the rates you mentioned for just this year, the total royalties 
would be $3.1 billion. If they had to pay the royalties you 
referenced for 2010, the royalties would be over $4 billion.
    The total revenue of the entire recorded music industry in 
this country is $7 billion, and so the royalties that we are 
talking about--
    Senator Feinstein. Okay, stop. Stop for a minute. How does 
that happen?
    Mr. Kennedy. It is because--
    Senator Feinstein. I mean, they must know that. It cannot 
be an intent of these rate setters to drive somebody out of 
business--that cannot be the intent. So why would they do that 
unless they thought it was the fair rate and that the market 
was able to absorb it?
    Mr. Kennedy. I think that is a great question. I think we 
have all been scratching our heads. How could they come up with 
a minimum fee? How could they come up with the rates? And I am 
not a lawyer, but I think my analysis would be that this 
willing buyer/willing seller standard, which on the surface you 
say, well, that sounds kind of reasonable, when actually 
applied by the judges took them to very distant places looking 
for benchmarks that have nothing to do with radio. And in a 
detailed academic exercise about many adjustments to try and 
make a very distant benchmark apply to radio, the judges got 
lost.
    Senator Feinstein. Okay. Stop.
    Mr. Simson, do you agree with that?
    Mr. Simson. No, I do not. And, again, I think if we look 
at--you know, Mr. Kennedy mentioned revenue, that they were 
going to generate $25 million this year; they have 15 million 
users. My fuzzy math says that is about $1.70 a user per year.
    Just to give you some idea, satellite radio generates $115 
per user per year. Over-the-air radio, where you do not pay 
anything but you have to listen to ads--you ``pay by 
attention'' is the parlance--generates about $80 per listener 
per year. So $1.70 is a very low number, and I think Mr. 
Ondrasik made the point, you know, should artists be 
subsidizing a business that is generating $1.70 per year?
    Senator Feinstein. Mr. Harleston, do you want to get into 
this?
    Mr. Harleston. I just would like to comment. I think Mr. 
Simson made a statement in his opening statement that there was 
a study by Bridges or somebody that had projected ad revenues 
for Internet radio somewhere in the neighborhood of $20 billion 
by the year 2020. Is that correct?
    So, I mean, it is hard to analyze other people's businesses 
because I am not in their business. I do not know what the 
factors are that are driving the revenue. But the last time 
that we had a technology that galloped ahead, as everyone is 
talking about, and it was thought about as a technology that 
was necessary for the industry--for the good of music, 
necessary for the good of the people, it was called 
``Napster.'' And it was a technology that everybody looked at 
us and said it is generational, you do not understand, it is--
    Senator Feinstein. I was part of those hearings, so I 
remember it very well.
    Mr. Harleston. You remember it. It was a business model 
that was based on, you know, appropriating content for free, 
whether you had a license or not. And it was a business that 
ultimately, you know, with the help of people here and the 
private market, we were able to put into a situation where it 
has not gone away. The delivery of music electronically is more 
vital now than it has ever been before. And it has given birth 
to new artists and to new music and opened the door for a lot 
of consumers to have music that they could not have before. But 
what it did do is make sure that the artists and the producers 
and the songwriters and everybody involved in creating the 
music was compensated, not just Shawn Fanning and his group of 
friends.
    Mr. Kennedy. Madam Chair, if I may?
    Senator Feinstein. Yes, please.
    Mr. Kennedy. I have to say I am offended that Internet 
radio would be compared with Napster, the very root of piracy. 
We are legal, licensed service. We have paid--
    Senator Feinstein. I do not think he was comparing--
    Mr. Kennedy [continuing]. More than $10 million in 
royalties to SoundExchange. To compare us to piracy I think is 
offensive to all of the people who have been trying to build 
legitimate businesses that compensate artists. We have no 
interest in getting music for free. We want to pay artists. We 
have nothing to do with Napster, and we are not interested in 
devaluing music.
    Mr. Harleston. I was not intending to equate you with 
piracy but to equate the arguments that people are making on 
this panel with respect to technology and the viewpoint that 
people are trying to stifle technology. In fact, we love your 
technology. I cannot speak for your business model. I do not 
know what your business model is. I do not know how much ad 
revenues play into it. You know, I know that you have--I know 
Pandora, some of it is ad supported, some of it is subscription 
supported. You know, I am not--I am not facile enough with your 
business to be able to answer the Senator's questions with 
respect to how you are getting your revenues and the numbers 
are looking so skewed, as you say they are.
    The point I was trying to make was in looking at these 
technologies, there is often business models that are presented 
that are, you know--that are--I do not want to drag you into 
this. But there are other business models that have been 
presented that, you know, are technologically based that 
actually have been less than on the up and up.
    Senator Feinstein. Gentlemen, if I might, we have been 
joined by Senator Cardin, and I would like to give him an 
opportunity to ask some questions.
    Senator Cardin. Well, Senator Feinstein, first thank you 
very much for conducting this hearing. I am really here to 
learn. I am fascinated by the exchange that is taking place.
    I do believe we need to have a fair compensation for 
royalties that reflects the work of the artist, but we need to 
be neutral as to the source, and that is the challenge, because 
it is hard to predict technology changes and consumer desires. 
And I think the discussion that is taking place is very helpful 
to all of us. So I think we are trying to get it right.
    We do want to protect the work of the artists, but we do 
want technology to advance and consumers to be able to get the 
widest possible exposure to the artists' works. And it is 
difficult when you look at the different technologies and how 
the compensation is done. It is not an exact science, and we 
very much appreciate the witnesses that are here because the 
record that is being done today in this Committee I think is 
going to be helpful to us trying to establish the right regime 
here in Congress.
    Madam Chair, I really thank you for your leadership. I know 
that you have been working for a long time to try to make sure 
the artists are protected, but also to make sure that we have a 
fair system, and I thank you and look forward to working with 
you.
    Senator Feinstein. Thank you. Thank you very much, Senator.
    If you get into this 801(b) versus fair market value, it is 
very hard for me to sort it out. And it seems to me that what 
you have to do is provide a mechanism whereby fair-minded 
professionals make judgments. And that, of course, would be the 
Copyright Royalty Board. That is what they are supposed to do.
    So I gather we have two people here, at least, that want 
the fair market value--is that correct?--as set by the 
Copyright Royalty Board. Is that correct?
    Mr. Harleston. That is correct.
    Senator Feinstein. Mr. Simson.
    Mr. Simson. That is correct.
    Senator Feinstein. Mr. Kennedy, you do not. Now, what is it 
that you want?
    Mr. Kennedy. We do not have any problem with the Copyright 
Royalty Board process.
    Senator Feinstein. Okay.
    Mr. Kennedy. I think our particular case was the first one 
ever tried by these three judges in this new process. I think 
they may not have been on the top of their game in the first 
proceeding that they oversaw, but the basic process is not one 
we have any argument with.
    But, again, we do not understand why we would not be 
subjected to the same standard that is used for broadcast, 
satellite, and used for music publishing, for songwriting for 
25 years and it is proven to generate satisfactory resolutions 
for all parties. And why we would go into a completely new, 
untested concept for royalties having been through 10 years of 
another untested concept, that is just really hard for us.
    Senator Feinstein. Okay. Let me get a response to that. Who 
wants to respond to that?
    Mr. Simson.
    Mr. Simson. Yes, Madam Chair. I think one of the issues 
with the 801(b) factors is that they have not been updated, and 
they are out of date. I think that, you know, in our proceeding 
there was a lot of evidence about the substitutional effect 
that might be created by these technologies that are giving 
consumers unlimited access to tracks all of the time, where the 
need to purchase is no longer there as we shift from, as I 
mentioned, the consumption is now the listen.
    So I think we would need to certainly--I am certainly in 
favor of the fair market standard. I think it is what we need. 
But if you are going to look at 801(b), I think it clearly 
needs updating and modernization and taking into the 
calculation of what these new technologies are doing to other 
business opportunities.
    Senator Feinstein. Okay. I think we have come to the end of 
this. But for the two artists that are here, my interest in 
this--and I have been party to these hearings now for more than 
a decade--is to see that we have a fair system; that people who 
create the software are fairly reimbursed, because that is the 
beauty of music. You want music to get better and better and be 
more and more innovative and interesting, and people have to 
get a fair rate of return.
    How to do that and not kill record companies--but to have a 
system that is fair across the board, it appears to me that the 
only way to do it is to have parity across the platforms. And 
if you really look at it, I do not know the strictures of 
801(b), but I do know the concept of fair market value. And the 
rate has to be set, and it has got to be set by professionals 
after they look at all of the evidence. That is how we come 
upon fair market value, not to drive anybody out of business, 
Mr. Kennedy, but to see that the playing field is level across 
the spectrum. To me that is the desired thing. The artist gets 
a fair rate of pay. The exposure is fair. The systems work in a 
way with competition but fairness. And that is what we have 
tried to do in this bill.
    So what I would really appreciate is that you all take a 
look at the fine print, and if you have suggestions, get it to 
us, either to Senator Graham, myself, Senator Leahy, because I 
think we do need to move a bill, and I think there is interest 
in moving a bill at this time.
    So let me just thank all of you very, very much. It has 
been a very interesting hearing. The record will remain open 
for 1 week for comments.
    The hearing is adjourned.
    [Whereupon, at 11:40 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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