[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
MUSIC LICENSING PART ONE:
LEGISLATION IN THE 112TH CONGRESS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
INTELLECTUAL PROPERTY,
COMPETITION, AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
NOVEMBER 28, 2012
__________
Serial No. 112-158
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://judiciary.house.gov
_____
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COMMITTEE ON THE JUDICIARY
LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada
Richard Hertling, Staff Director and Chief Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------
Subcommittee on Intellectual Property, Competition, and the Internet
BOB GOODLATTE, Virginia, Chairman
BEN QUAYLE, Arizona, Vice-Chairman
F. JAMES SENSENBRENNER, Jr., MELVIN L. WATT, North Carolina
Wisconsin JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
STEVE CHABOT, Ohio JUDY CHU, California
DARRELL E. ISSA, California TED DEUTCH, Florida
MIKE PENCE, Indiana LINDA T. SANCHEZ, California
JIM JORDAN, Ohio JERROLD NADLER, New York
TED POE, Texas ZOE LOFGREN, California
JASON CHAFFETZ, Utah SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas MAXINE WATERS, California
TOM MARINO, Pennsylvania HENRY C. ``HANK'' JOHNSON, Jr.,
SANDY ADAMS, Florida Georgia
MARK AMODEI, Nevada
Blaine Merritt, Chief Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
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NOVEMBER 28, 2012
Page
OPENING STATEMENTS
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Subcommittee on
Intellectual Property, Competition, and the Internet........... 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Intellectual Property, Competition, and the Internet........ 38
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Member, Subcommittee on
Intellectual Property, Competition, and the Internet........... 40
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Chairman, Committee on the Judiciary....... 40
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Ranking Member, Committee on the
Judiciary, and Member, Subcommittee on Intellectual Property,
Competition, and the Internet.................................. 41
The Honorable Jason Chaffetz, a Representative in Congress from
the State of Utah, and Member, Subcommittee on Intellectual
Property, Competition, and the Internet........................ 42
The Honorable Howard L. Berman, a Representative in Congress from
the State of California, and Member, Subcommittee on
Intellectual Property, Competition, and the Internet........... 49
WITNESSES
Joseph J. Kennedy, Chairman and Chief Executive Officer, Pandora
Media, Inc.
Oral Testimony................................................. 52
Prepared Statement............................................. 54
Bruce Reese, President and Chief Executive Officer, Hubbard
Radio, LLC, on behalf of the National Association of
Broadcasters
Oral Testimony................................................. 60
Prepared Statement............................................. 62
David B. Pakman, Partner, Venrock
Oral Testimony................................................. 71
Prepared Statement............................................. 73
Jimmy Jam, Chair Emeritus, The Recording Academy, Record
Producer, Songwriter, Recording Artist
Oral Testimony................................................. 74
Prepared Statement............................................. 77
Jeffrey A. Eisenach, Managing Director and Principal, Navigant
Economics
Oral Testimony................................................. 79
Prepared Statement............................................. 82
Michael Huppe, President, SoundExchange, Inc.
Oral Testimony................................................. 124
Prepared Statement............................................. 126
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
The bill, H.R. 6480, the ``Internet Radio Fairness Act of 2012''. 4
Material submitted by the Honorable Jason Chaffetz, a
Representative in Congress from the State of Utah, and Member,
Subcommittee on Intellectual Property, Competition, and the
Internet....................................................... 44
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, Ranking
Member, Committee on the Judiciary, and Member, Subcommittee on
Intellectual Property, Competition, and the Internet........... 165
Prepared Statement of the Honorable Jared Polis, a Representative
in Congress from the State of Colorado......................... 170
Response to Questions for the Record from Joseph J. Kennedy,
Chairman and Chief Executive Officer, Pandora Media, Inc....... 172
Response to Questions for the Record from Bruce Reese, President
and Chief Executive Officer Hubbard Radio, LLC................. 181
Response to Questions for the Record from David B. Pakman,
Partner, Venrock............................................... 189
Response to Questions for the Record from Jimmy Jam, Chair
Emeritus, The Recording Academy, Record Producer, Songwriter,
Recording Artist............................................... 192
Response to Questions for the Record from Jeffrey A. Eisenach,
Managing Director and Principal Navigant Economics............. 194
Response to Questions for the Record from Michael Huppe,
President, SoundExchange, Inc.................................. 196
Prepared Statement of the Information Technology & Innovation
Foundation (ITIF).............................................. 202
Letter from the Songwriters Guild of America, Inc. (SGA), the
Music Creators North America alliance (MCNA), and the European
Composer and Songwriters Alliance (ECSA)....................... 213
Letter from the American Society of Composers, Authors and
Publishers (ASCAP); SESAC, Inc; Broadcast Music, Inc. (BMI);
and the Nashville Songwriters Associaton International (NSAI).. 217
Letter from The Recording Academy................................ 221
Letter from the Washington Bureau, National Association for the
Advancement of Colored People (NAACP).......................... 223
Letter from musicFIRST........................................... 225
Letter from the American Association of Independent Music (A2IM). 227
Letter from the American Federation of Labor and Congress of
Industrial Organizations....................................... 229
Letter from Americans for Tax Reform............................. 231
Letter from the Council for Citizens Against Government Waste.... 233
Letter from the Recording Industry Association of America (RIAA). 235
Letter from SAG-AFTRA............................................ 237
Letter from SoundExchange........................................ 239
Prepared Statement of the Taxpayers Protection Alliance.......... 241
Prepared Statement of Public Knowledge........................... 243
Letter from the Future of Music Coalition........................ 265
MUSIC LICENSING PART ONE:
LEGISLATION IN THE 112TH CONGRESS
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WEDNESDAY, NOVEMBER 28, 2012
House of Representatives,
Subcommittee on Intellectual Property,
Competition, and the Internet,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 11:30 a.m., in
room 2141, Rayburn House Office Building, the Honorable Bob
Goodlatte (Chairman of the Subcommittee) presiding.
Present: Representatives Goodlatte, Smith, Sensenbrenner,
Coble, Chabot, Issa, Jordan, Chaffetz, Griffin, Amodei, Watt,
Conyers, Berman, Chu, Deutch, Sanchez, Nadler, Lofgren, Jackson
Lee, and Johnson.
Staff Present: (Majority) David Whitney, Counsel; Olivia
Lee, Clerk; and (Minority) Stephanie Moore, Subcommittee Chief
Counsel.
Mr. Goodlatte. Good morning. This hearing of the
Subcommittee on Intellectual Property, Competition, and the
Internet on the Internet Radio Freedom Act will come to order.
The title of today's hearing is ``Music Licensing Part One:
Legislation in the 112th Congress.'' The focus of the
discussion today will be legislation introduced by Congressman
Jason Chaffetz, H.R. 6480, the ``Internet Radio Freedom Act.''
Today's hearing is the first in what I hope will be a series of
hearings examining the nuances of music licensing. The Merriam-
Webster Dictionary defines the word ``system'' in a number of
ways.
One of those is a harmonious arrangement or pattern. I'm
not sure that definition is the one most suitable to describe
the accumulation of laws and customs that govern the music
licensing apparatus in the United States today. The complexity
of our music licensing system is a result of a number of
sometimes independent but often interdependent factors. For
instance, there are distinctions that are based on one, the
type of work, whether the work is a musical competition or
sound recording; two, the type of right someone wishes to
license, whether they want to distribute, reproduce or publicly
perform the work; and even three, the type of technology they
plan to use, whether they want to publicly perform the work by
means of an analog radio or Internet radio broadcast. To be
sure, there is often a need for fine distinctions in a subject
area as complex and far reaching as copyright law.
And much of our work in this area is frequently devoted to
examining how best to calibrate the law to ensure it achieves
the right balance in a particular area. But from time to time,
we need to step back from the pieces and look at how they fit
into the whole. Music licensing is an area where it would
benefit us to take a broader look. To their credit, under the
leadership of Chairman Sensenbrenner, Conyers and Smith, this
Committee began the process of seeking to modernize and bring
some order to aspects of our music licensing system that have
been slow to adapt. Indeed, four laws that originated in the
Subcommittee that relate principally to or profoundly affect
aspects of our music licensing system were enacted during the
last decade. And the Committee and the Subcommittee devoted
considerable effort to attempt to both resolve the longstanding
debate over whether the United States should recognize a full
performance right in sound recordings and modernize provisions
in the Copyright Act that relate to the collective licensing of
musical works.
But there are many interconnected issues that have been
raised by stakeholders on all sides that the Subcommittee needs
to begin to carefully review and consider. These include the
following: First, Representative Chaffetz and webcasters have
raised the issues of rate standard parity in the sound
recording compulsory license, section 114, and reform the
adjudicatory and rate-setting processes.
Second, sound recording stakeholders have raised the issue
of applying the sound recording statutory license to
terrestrial radio stations. This Committee reported a bill on
that issue in 2009.
Third, music publishers and webcasters have raised the
issue of the rate standard in the musical work statutory
license, section 115, and suggested a need for parity of that
standard across licenses. They have also raised the issue of
reforming the musical works license, especially as it applies
to use by digital services directly.
Fourth, performing rights organizations that represent
songwriters and publishers, such as ASCAP, have asked the
Committee to examine broadly issues of music licensing,
including current decisions by the rate court in New York and
the continued utility of the consent decree.
Fifth, some broadcasters have suggested that performing
rights organizations that currently operate in the free market,
such as SESAC, should be bound by a consent decree or
legislation in a manner similar to that which binds their
competitors, ASCAP and BMI.
All of these issues need to be carefully examined as they
all affect both the incentive to create new works for consumers
to enjoy and innovation in the music and Internet industries.
However, today we focus our attention on the Internet Radio
Freedom Act. This legislation seeks to harmonize the rate-
setting standard among Internet radio broadcasters and
satellite and cable radio broadcasters by changing the rate-
setting standard from the willing buyer/willing seller standard
to a modified 801(b) standard, similar to what cable and
satellite radio broadcasters currently operate under. It is
worth noting that this legislation does not attempt to address
the question of whether terrestrial radio should pay
performance royalties.
In addition to harmonizing the rate standard, H.R. 6480
also contains numerous other provisions amending the procedures
governing the music licensing, including changing the method by
which copyright royalty judges are chosen. I am open to the
idea of harmonizing the rate-setting standard to create more
parity across music delivery platforms, but I many also
concerned about ensuring that those who create and perform
music are fairly compensated for their creative works. I hope
today we will have a productive conversation about the issues,
including; one, whether we should harmonize the rate standard
at all; two, if so, whether the 801(b) standard, the willing
buyer/willing seller standard, or something in between is the
right balance; and three, how adjusting the standard would
affect innovation in the Internet radio market and compensation
for artists in the long term.
The need to protect intellectual property and the
imperative to foster innovation are not mutually exclusive
goals. We can and will promote both interests going forward.
When we succeed, hopefully more of us will also agree that the
copyright law, in general, and the music licensing system in
particular, resemble that harmonious arrangement or pattern
defined in Merriam-Webster's Dictionary.
I look forward to hearing the testimony of all of our
expert witnesses today. And before we proceed to swear them in,
I want to acknowledge and thank several members of our
Committee for their service on this Subcommittee since they are
leaving the Congress. And I don't see any of them with me here
today, so maybe they've already left. But I still think it is
worth noting their contribution to this Subcommittee.
And I first want to mention Representative Howard Berman,
next Representative Dan Lungren, Representative Mike Pence,
Representative Ben Quayle and Representative Sandy Adams. And
in their absence, let's give them all a round of applause for
their service to this great Subcommittee.
[The bill, H.R. 6480, follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
__________
Mr. Goodlatte. And now it's my pleasure to recognize the
Ranking Member of the Subcommittee, the gentleman from North
Carolina, Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. And thank you for a very
outstanding opening statement. And I understand Mr. Berman is
in the back waiting to make a grand entrance, so we will chide
him later. I also want to thank the Chairman on his, what I
understand to be his imminent ascension to the chairmanship of
the full Judiciary Committee. And he's outlined a robust agenda
in this opening statement just in the music area. So I'll be
looking forward to working with him. And I want to thank him
for scheduling this first in a series of anticipated hearings
on music licensing.
Music is, of course, ubiquitous. It's everywhere. The
proliferation of reality talent shows like American Idol, X
Factor, The Voice, America's Got Talent, all evidence of our
affection and affinity for music. IPods and iPads and other
portable devices further illustrate our near, insatiable
appetite for music. It's impossible for me to imagine a day
where we don't encounter music. Despite our love of music and
our admiration for artists, including the singers, songwriters
and musicians whose creative talents provide us a wide
diversity of entertainment, the complex licensing scheme for
the delivery of music like stability and parity across
platforms.
Over the past 15 years, Congress has been called upon to
intervene following each rate-setting proceeding before the
copyright judges. We've created a compulsory license,
established new standards for new technologies and retooled the
structural framework for the setting of rates all in response
to complaints that industry participants could not reach
agreements or that the rates set by the authorizing body were
too high or too low. This is not a healthy process for artists,
delivery platforms or consumers and it's not a healthy process
for Congress.
Although today's hearing focuses on the Internet Radio
Fairness Act, that focus is itself probably very shortsighted.
Many of the supporters of H.R. 6480 highlight the longstanding
inequity associated with the disparate standards governing the
rate-setting process for the delivery of music by digital
transmission. Specifically, they argue that while preexisting
cable and satellite services pay lower rates determined under
the 501(b) standard, newer and increasingly popular Internet
music providers pay substantially higher rates determined under
the willing buyer/willing seller standard. But an even longer
standing inequity exists in the U.S. copyright law in that U.S.
copyright law fails to recognize a performance right for
vocalists and musicians when their work is played over
terrestrial AM and FM radio.
Today when you turn on your favorite AM or FM radio
station, the artists who perform that music, vocalists and
members of the band don't get paid a dime. But when you listen
to the same song on Internet, cable or satellite radio, the
artists are compensated for their work. The differences don't
stop there. The composer or songwriter is paid for the
performance of their work across all platforms while sound
recording artists are only paid when their work is delivered by
digital means. And both the songwriter and the recording
artists, when they are paid, are paid at different rates
depending upon the method of delivery.
The reasons for these disparities in treatment are largely
historical, but also rooted in legitimate concerns surrounding
the threat that high quality media poses to record sales and
other forms of revenue for artists. This concern, however, may
no longer justify the exemption enjoyed by broadcast radio, and
I think it is incumbent on us to address that disparity if we
are to bring any sense of rationality to this area of our
economy. That's about 90 percent of the problem. Yet H.R. 6480
fails to address it at all and, at best, nibbles around the
edges of the challenge.
I believe that we all realize that in some sense digital
transmission of music over the Internet has given birth to an
even wider degree of exposure and promotional value for musical
performers and genres that might otherwise receive little or no
airplay. In short, Internet radio has expanded choices for
consumers and provided alternate means for independent artists
to showcase their talents. But I believe that a fair licensing
regime must, first and foremost, adequately compensate the
artist who create and perform the musical content upon which
all delivery platforms are based.
We must get beyond the point where the shelf life of our
legislative solutions in this vital industry is only as long as
the next rate-setting proceeding. A comprehensive examination
of music licensing requires that we examine the existing
standards and rationales underlying our copyright system with
the goal of establishing a long-term competitive environment
with competitive rates for artists under a license which, after
all, is a compulsory license.
Mr. Chairman, there are several other components of the
Internet Radio Fairness Act, including the method of selecting
judges, expansion of discovery, modification of evidentiary
standards, antitrust provisions and the establishment of a
global database that I have not addressed here, but that also
cause me varying degrees of concern.
We have a distinguished panel of industry experts who no
doubt have very passionate views on all those issues in
addition to the rate standard. I look forward to their
testimony. Before I yield back, Mr. Chairman, I do want to
acknowledge a true champion of the rights of creative arts and
a pioneer on performance rights, Howard Berman.
Mr. Berman has jealously guarded intellectual property
rights throughout his distinguished career and has been a
valuable resource to me personally and to this Committee. I
want to express my gratitude for the work he has done on behalf
of the content community, as well as all other players in the
IP area and wish him well. I know that he will continue to
serve the public interest in some important next endeavor. And
with that, Mr. Chairman, I yield back and thank the Chairman.
[Applause.]
Mr. Goodlatte. The gentleman from North Carolina's timing
is better than mine.
Mr. Watt. I knew he was waiting on his grand entrance.
Mr. Goodlatte. We do thank the gentleman from California
for his long and very capable service on this Subcommittee and
the full Committee, and we will miss you, Howard.
Mr. Coble. Mr. Chairman.
Mr. Goodlatte. For what purpose does that the gentleman
from North Carolina wish to be recognized?
Mr. Coble. May I speak out of order for 1 minute?
Mr. Goodlatte. The gentleman is recognized without
objection.
Mr. Coble. I think I would be remiss if I did not echo what
has been said about the distinguished gentleman from
California. He served as my Ranking Member, I served as his
Ranking Member on this Subcommittee. And Howard, as has been
said earlier, you will indeed be sorely missed. Thank you, Mr.
Chairman. I appreciate that.
Mr. Goodlatte. I thank the gentleman. And now it's my
opportunity to recognize the Chairman of the full Committee,
who I want to also congratulate for the recommendation of the
House Republican Steering Committee that he Chairs, the
Science, Space and Technology Committee, in the new Congress,
and to thank him for his outstanding work as the Chairman of
the Judiciary Committee.
Mr. Smith. Thank you for that, Mr. Chairman. I am very
delighted that you will be succeeding me. And the Committee
will be in good hands, and look forward to continue to work
with you there. Also, it was appropriate that we applaud Howard
Berman a minute ago for his many contributions to this
Committee. And Howard, you should know that's actually the
second round of applause you have gotten today because the
Chairman, Bob Goodlatte, recognized you before you came into
the room. And so even the second round of applause was well
deserved as well.
Mr. Goodlatte. He doesn't represent the entertainment
industry for nothing. He understands how this works.
Mr. Smith. Again, thank you, Mr. Chairman, for calling this
hearing on issues affecting music licensing. This is a topic
that we have debated for many years and deserves this
Committee's attention in light of changes that have occurred in
the music industry. Twenty years ago when you wanted to listen
to a song, you either purchased it on a CD or you tuned your
radio to your favorite station and hoped that they would play
it. Today, you can simply type Pandora in your browser and
select an entire online radio station that plays your favorite
artists' sound recordings.
The relationship among artists, consumers, composers and
publishers is a delicate one. The Constitution affords Congress
the exclusive right to make copyright law that protects
creators while simultaneously ensuring that artists and
composers are compensated. This Committee has continually
addressed the issues that surround music licensing and royalty
structures. This includes the section 115 Reform Act, the
Performance Right Act, the enactment of three webcasting bills,
and the passage of the Copyright Royalty and Distribution
Reform Act.
Today we continue our ongoing examination of this
compensation scheme. This hearing will explore the state of the
law as it affects music creators, consumers and users of
musical works and sound recordings. Government dictated
compulsory licenses deprive creators of their ability to
negotiate for the use of their works. Rather than increasing
our reliance on these compulsory licenses, we should consider
moving in the direction of free market discussions and
negotiated resolutions.
The expansion and strengthening of stringent compulsory
licensing terms undermines the ability to develop healthy
markets. It leads to below market compensation for creators and
invites constant petitions for government to place its thumb on
the economic scale, commandeering the force of government to
choose winners and losers.
I do not believe the copyright law is perfect and should
remain unchanged. Any change, however, should reflect a
balanced approach with input from creators, presenters and
listeners of music. It is my hope that this hearing will begin
a process that will carry into the next Congress. And I look
forward to more opportunities to examine the laws and policies
that underlie our music licensing system and our compulsory
licensing regime. Balance, fairness and equality requires to
move with deliberation. Justice and prudence require that our
process be one that is inclusive of all legitimate interest and
perspectives if all results are to achieve lasting and
meaningful reforms. Thank you, Mr. Chairman. I yield back.
Mr. Goodlatte. I thank the Chairman. And it's now my
pleasure to recognize the Ranking Member of the full Committee,
the gentleman from Michigan, Mr. Conyers.
Mr. Conyers. Thank you, Mr. Chairman. And to all of those
who are being celebrated for leaving, for serving and for their
continued interest, of course, Mr. Berman. And I want to
include the former Chairman, Mr. Smith, who I worked with for
more years than I thought was appropriate. But we've had a
great time, and this Committee is very important to me. I'm
going to just edit my own remarks and put the rest in the
record, but might I be the first to suggest the misleading
title of this measure, the Internet Radio Fairness Act. A more
appropriate title might be the Paycheck Reduction Act, because
what we're doing here is lowering the royalties that Internet
webcasters would pay to artists by more than 85 percent.
This isn't the first time I've persuaded the Committee to
redraft the title. I remember the Frederick Douglass and Susan
B. Anthony Prenatal Nondiscriminatory Act also. We had to do a
little work on that as well.
Now, what's the basic issue that brings us here today?
Well, it's the fairness issue in terms of people being rewarded
for their skill and talent, musicians and singers across all
musical genres. I've tried to figure out a way to get Miles
Davis and John Coltrane into this discussion without success.
But this is their only compensation. They depend on royalties.
And their careers aren't always that long either. As a matter
of fact, some never have that big hit that separates them.
And so here we have the leading supporter of this bill, a
publicly traded company valued at $1.4 billion at the end of
last month, essentially urging that we consider a measure that
would cut royalties and deprive artists of the fair market
value of their work. Not surprisingly, this explains why
artists who don't often join in expressing public opposition to
political matters, some 125 have signed on in opposition to
H.R. 6480. As a matter of fact, today, and I'll ask unanimous
consent to put in the record the letter that also adds
opposition to the measure from the Center for Individual
Freedom, the Harbour League, the Hispanic Leadership Fund, the
Institute for Liberty, the Institute for Politic Policy
Innovation and the Tea Party Nation.
All of these quite diverse, as you can detect, are
expressing strong reservations about the measure that is being
examined here this afternoon. It can't be disputed that now we
understand Internet radio to be the future and that the
Internet has dramatically changed the way music is produced,
marketed and distributed. In particular, Internet radio has
become a major source of music for many listeners. Even Apple
and Clear Channel, and XM/Sirius have all moved into the
Internet radio space.
And I know that there are broadcasters, medium-sized and
small, that have some resistance to the idea of performance
rights. But I want to make a prediction today. This bill may
well be the catalyst to advancing and to formulating an AM-FM
performance right. That's what people are beginning to think
about, because outside of the experts here, most people assume
that people listening to a song or a performance on the radio,
that they were getting some kind of compensation all the time.
And now it's becoming clear that when former Chairman Conyers
starts working with Grover Norquist, the American Conservative
Union, the Citizens Against Government Waste and the Taxpayer's
Protective Alliance, there's something going on.
Now, on our side we have the American Federation of Labor,
AFL-CIO, we have the NAACP, the Screen Actors Guild, the
American Federation of Television and Radio Artists, the
American Association of Independent Music. And so I want all of
us to remember that it was in 1998 with Henry Hyde that we
introduced the Digital Millennium Copyright Act. It was signed
into law by President Clinton, and it granted Internet radio
services permission to take advantage of the compulsory
license, but established that a market oriented by a willing
buyer/willing seller rate would be put forth.
So that's what this is all about. It's been expanded. We've
had the Digital Performance Right in Sound Recordings Act of
1995, and we have moved along in a very fair way.
So I just wanted to conclude by thanking and congratulating
you, Chairman Goodlatte. We have a very important and
increasing role in the Judiciary Committee with reference to
intellectual property. And I think this is an excellent way to
start that examination. I thank you very much.
Mr. Goodlatte. I thank Chairman Conyers. And the Chair
would advise Members of the Committee and our panel and our
guests here today that because the Republican Conference will
convene at 2 p.m. For very important business, we do want to
announce that we must conclude this hearing by 2 p.m. So we
will proceed expeditiously. But we first want to recognize two
more Members, the gentleman from Utah to say a word about his
legislation for 1 minute, and then the gentleman from
California, Mr. Berman, for 1 minute. And then all other
Members' opening statements will be made a part of the record.
So the Chair now recognizes the gentleman from Utah, Mr.
Chaffetz, for 1 minute.
Mr. Chaffetz. Thank you, Chairman Goodlatte. I appreciate
your holding this hearing. And today, due to advances in
technology, innovation and risk-taking companies consumers are
able to listen to the radio on numerous different devices
delivered through a wide variety of digital services. Internet
radio should be a boon to the entire audio market, from
creators to distributors and, of course, to consumers, but
instead it's barely hanging on. MTV, Microsoft, Rolling Stone,
AOL, Yahoo, all tried to get in the space, all had to exit
because it doesn't work financially.
All forms of digital radio, whether satellite, cable or
Internet should compete against each other on a level playing
field. Unfortunately, that's not the case. The Internet Radio
Fairness Act legislation levels the playing field for Internet
radio services by putting them under the same market base
standard used to establish rates for other digital services,
including cable and satellite radio. Congress enacted the
royalty rate standard for Internet radio 14 years ago when
Internet radio was barely a concept and long before today's
prominent Internet radio companies even existed.
It's well past time to correct the mistakes with the new
understanding we have today of how the world works and stop
discriminating against Internet radio.
Mr. Chairman, I ask unanimous consent to insert in the
record three letters, one from the Internet Radio Fairness
Coalition, the Digital Media Association and an independent
artist, Patrick Laird, into the record.
Mr. Goodlatte. Without objection, so ordered.
[The information referred to follows:]
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__________
Mr. Goodlatte. And the Chair would observe that he doubts
that this will be Howard Berman's last words. But today the
gentleman from California gets the last word on these opening
statements and is recognized.
Mr. Berman. Well, thank you very much, Mr. Chairman. And I
thank all my colleagues for their very kind words. It's really
been a great honor to serve on this Committee for 30 years now.
I was reminded of when John Conyers was Chairman of the
Criminal Justice Subcommittee trying to reform the RICO laws.
That was awhile ago. But just--I don't have an opening
statement on the subject, I have some points I'll make later
on--but just generally, I think at the end of the day this
isn't about content versus technology. Musicians and artists
need to get adequately compensated to continue to create and
share their art and the services need to thrive in order to
ensure that the music continues to be heard.
And I think there's really more of a symbiotic relationship
here. We have to just find that sweet spot that maximizes the
ability of musicians and composers and songwriters to make the
music and the songs and the technologies to thrive and to play
that music for the benefit in the end of not just the people of
this country, but of the world. Thank you very much.
Mr. Goodlatte. I thank the gentleman. We have a very
distinguished panel of witnesses today. Their written
statements will be entered into the record in their entirety.
And I ask that the witnesses summarize their testimony in 5
minutes or less. To help you stay within that time, there is a
timing light on your table. When the light switches from green
to yellow, you will have 1 minute to conclude your testimony.
When the light turns red, it signals the witness' 5 minutes
have expired. And before I introduce the witnesses, as is the
custom of the Committee, I would ask that they rise and be
sworn in.
Do you and each of you swear that the testimony you are
about to give will be the truth, the whole truth and nothing
but the truth, so help you God? Thank you. And please be
seated.
We appreciate the personal efforts that each of you have
made to arrange your schedules to accommodate our request that
you appear and testify before the Subcommittee on this
important subject. Our first witness is Joseph J. Kennedy, the
Chief Executive Officer and President of Pandora. Pandora is
the Nation's leading Internet radio service. Since launching
its app and its mobile service in 2008, Pandora has been
recognized by both consumers and industry experts as the
premier application on the iPhone and other mobile devices. A
public company since 2011, Pandora has a market capitalization
in the neighborhood of $1.3 billion, has more than 150 million
registered users and serves more than 55 million individual
consumers each month.
Mr. Kennedy joined Pandora in 2004 immediately following
previous positions as a Senior Executive with E-Loan and Saturn
Corporation. He earned his MBA from Harvard Business School and
possesses a Bachelor of Science in Engineering and Computer
Science from Princeton University.
Our second witness is Bruce Reese who appears today on
behalf of the National Association of Broadcasters. Mr. Reese
is President and Chief Executive Officer of Hubbard Radio, LLC.
Hubbard operates 21 radio stations in five major media markets
in the U.S., all of which stream their broadcasts over the
Internet. Mr. Reese has spent nearly three decades in radio.
Prior to becoming CEO of Hubbard in 2011, he served as
president and CEO, Executive Vice President and General Counsel
at various times at Bonneville International Corporation.
Mr. Reese began his legal career with the U.S. Department
of Justice's antitrust division. He earned his Bachelor of Arts
degree and his J.D. from Brigham Young University.
Our third witness is David Pakman. Mr. Pakman is a partner
in Venrock, a venture capital firm he joined in 2008 that has
offices in Palo Alto, New York, Cambridge and Israel. An
Internet entrepreneur, Mr. Pakman previously served as the
Chief Executive Officer of eMusic, a leading digital retailer
of independent music that is second only to iTunes in the
number of downloads sold. Mr. Pakman is credited with being a
co-creator of Apple Computer's music group. Mr. Pakman earned
his degree in Computer Science Engineering from the University
of Pennsylvania's School of Engineering and Applied Sciences.
Our fourth witness is an accomplished record producer,
songwriter, recording artist and the chairman emeritus of the
National Academy of Recording Arts and Sciences, Mr. Jimmy Jam.
A five-time Grammy award winner, Jimmy and his business and
creative partner Terry Lewis have worked together for more than
30 years. They've written and/or produced more than 100 albums
and singles that have achieved gold, platinum, multi-platinum
or diamond status. Their collaboration has resulted in at least
26 number one R&B hits and 16 number one pop hits which gives
the pair more billboard number one hits than any duo in chart
history. Raised in Minneapolis, Jimmy and his family now live
in Hidden Hills, California.
Our fifth witness is Dr. Jeffrey Eisenach. Dr. Eisenach is
a professional economist who served in senior positions at the
Federal Trade Commission and the Office of Management and
Budget during the administration of President Reagan. A
visiting scholar at the American Enterprise Institute, Dr.
Eisenach focuses on policies that affect the information
technology sector, innovation and entrepreneurship. He is a
Managing Director and Principal at Navigant Economics and an
adjunct professor at the George Mason University School of Law
where he teaches regulated industries. Dr. Eisenach has been
published on a wide range of issues, including industrial
organization, communications policy and the Internet government
regulations, labor economics and public finance.
He has also taught at Harvard University's Kennedy School
of Government and at Virginia Tech. A member of the board of
advisors of the Pew Project on the Internet and American Life
for more than a decade and the former president of the Progress
and Freedom Foundation, Dr. Eisenach received his Ph.D. in
Economics from the University of Virginia and his Bachelor of
Arts in Economics from Claremont McKenna College.
Michael J. Huppe is our final witness. Since 2011 Mr. Huppe
has served as the President of SoundExchange, the nonprofit
organization that collects digital music royalties paid by
Internet radio, satellite radio and other digital media
services on behalf of recording artists and record labels.
Prior to being appointed to serve as President, Mr. Huppe
served as the organization's Executive Vice President and
General Counsel. Mr. Huppe earned his J.D. from Harvard Law
School and his Bachelor of Arts from the University of
Virginia. In addition to his duties at SoundExchange, Mr. Huppe
also serves as an adjunct professor at the Georgetown
University Law Center.
Welcome to you all. And we will begin with Mr. Kennedy. And
Mr. Kennedy I will tell you that I am one of those 150 million
Pandora users who enjoys your service, and welcome.
TESTIMONY OF JOSEPH J. KENNEDY, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER, PANDORA MEDIA, INC.
Mr. Kennedy. Thank you, sir. Chairman Goodlatte, Ranking
Member Watt, Members of the Subcommittee----
Mr. Goodlatte. Mr. Kennedy, you may want to push the button
on your microphone so we can all hear you.
Mr. Kennedy. Forgive me. Chairman Goodlatte, Ranking Member
Watt, Members of the Subcommittee, I am Joe Kennedy, the CEO of
Pandora, America's largest Internet radio service, which more
than 60 million Americans have listened to in just the last 30
days. America's embrace of Pandora reflects the potential of
Internet radio. We play all of the great music created and
enjoyed by Americans, not just the most popular genres and
hits, but bluegrass, big band, gospel, New Orleans jazz, et
cetera, over 400 genres and subgenres. It is the most inclusive
form of radio playing the music of over 100,000 different
artists every month.
I'm here to ask you to support the Internet Radio Fairness
Act sponsored by your Judiciary Committee colleagues,
Representative Chaffetz, Polis, Issa and Lofgren. This
important legislation will address two extraordinary inequities
in the Copyright Act. First, the unfair rate-setting standard
that applies only to Internet radio, not to cable radio or
satellite radio or to record companies when they obtain
licenses from musical works and songwriters; and second, an
unfair process that deviates in many important ways from how
our Federal Court system works, one that actually prevents
royalty judges from reviewing all relevant evidence when
determining Internet radio rates. The source of these
inequities is massed by complex legalese, but the consequence
is simple. In 2012 Pandora will account for only 7 percent of
U.S. radio listening, yet we will pay SoundExchange almost a
quarter of a billion dollars, more than 50 percent of revenue.
By contrast, satellite radio will pay 7\1/2\ percent and cable
radio 15 percent. Pandora pays more in absolute dollars than
any other company, including SiriusXM, a company with eight
times our revenue.
In fact, Pandora pays more sound recording performance
royalties than all of the radio industries in the UK, France,
Canada and Australia combined. And although Pandora's payments
are extraordinarily high they would have been even higher had
Congress not intervened to undo the Copyright Royalty Board's
disastrous 2007 decision, so high, in fact, that they would
have forced Pandora to shut down. In 14 months, the CRB will
begin another rate setting. To avoid yet another congressional
intervention, we urge your support of the Internet Radio
Fairness Act to ensure an outcome that is fair to all parties.
How is it possible that Internet radio rates can be so
unfair by any U.S. or global standard? The answer is twofold.
First, the so-called willing buyer/willing-seller rate standard
which applies only to Internet radio has not proven effective
in practice. It forces the judges to set a rate based solely on
marketplace benchmarks, yet there is no market for radio rates.
Not only is there no market for these rates, but since this is
also the Subcommittee on Competition, you may be interested to
hear that there is also evidence that the recording industry
has actively sought to prevent any such market from developing.
This is a highly concentrated industry with an HHI of over
2,500.
SoundExchange is today defending itself in Federal Court
against charges that it conspired to impede SiriusXM's effort
to develop a market for radio rates. In contrast, the rate-
setting standard for cable and satellite radio and for record
companies when they obtain licenses for musical works from
songwriters, utilizes a widely accepted fairness test that
directs the judges to assure fairness to all sides. The
recording industry simply cannot defend that the standard it
has embraced for over 30 years for use when it is the one
obtaining rights is not the right standard when the roles are
reversed and it is the licensor, not the licensee.
The second inequity violates a most basic American
principle of fairness. The CRB proceedings as structured under
current law actually permit the recording industry to cherry-
pick the agreements entered into evidence in order to keep
Internet radio rates artificially high. This is just one
example of how the CRB process is unfair and what the Internet
Radio Fairness Act will fix.
In summary, Internet radio is enjoyed by over 100 million
Americans, and we embrace that this new form of radio
compensates performing artists. Absent the repeated
congressional interventions detailed on the screen, today's
Internet radio would not exist. The law which produced such
disastrous results will be relied upon again in a rate-setting
process that begins in just 14 months. The time to fix that law
is now. It will benefit artists, innovators and the millions of
Americans who cherish Internet radio. Thank you.
Mr. Goodlatte. Thank you, Mr. Kennedy.
[The prepared statement of Mr. Kennedy follows:]
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__________
Mr. Goodlatte. Mr. Reese, we are pleased to have your
testimony.
TESTIMONY OF BRUCE T. REESE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, HUBBARD RADIO, LLC, ON BEHALF OF THE NATIONAL
ASSOCIATION OF BROADCASTERS
Mr. Reese. Thank you Chairman Goodlatte, Ranking Member
Watt, and Members of the Committee for hearing us today. My
name is Bruce Reese. I'm president of Hubbard Radio. We operate
20 radio stations in major markets around the country,
including WTOP here in Washington. I've been in the industry
for 30 years, and I'm testifying today on behalf of the
National Association of Broadcasters and its members.
Local broadcast radio is unique among music delivery
platforms because it is always on, it is always free and it is
accessible to listeners in every local community across the
country. There are now more than 14,000 local radio stations in
the United States. With a growing audience, over 240 million
people listen to radio every week, including those in
communities that are underserved by other communications
platforms. Local radio is responsible for hundreds of thousands
of American jobs and has been shown time and time again to be a
lifeline during times of emergency. What makes broadcast radio
so successful is the local flavor of our programming, which
forges a unique collection with listeners in a way that other
media do not. In a constant cycle of new technology, broadcast
AM and FM radio has remained part of the fabric of American
culture for more than 90 years.
The Internet presents an enormous opportunity for
broadcasters to expand both the reach and scope of locally-
based services, including access to archive station materials,
information about artists, and the ability to buy albums or
concert tickets. Unfortunately, today many radio stations still
do not stream their music over the web which does not help
broadcasters or artists. There is one primary reason for the
low adoption of Internet streaming by broadcasters:
unaffordable royalty rates. For music-based radio stations the
advertising revenue simply does not cover the streaming costs.
Further, no matter how popular your Internet service becomes,
the cost curve never bends in a favorable direction. At
Hubbard, we've chosen to pay these high rates to stream our
stations over the web because we believe our listeners expect
us to be there. But even in our best years, we do no better
than break even in our music webcasting business.
We're fortunate to operate in large markets and to have the
financial ability to make that long-term investment. This is
either a luxury that many of my industry peers do not have or a
risk they are unwilling to take. Whatever the reason the
majority of broadcast radio stations and the local services
they provide remain outside the reach of Internet listeners.
How did we get here? When initially set in 2007, and then built
upon in 2009, the rates set by the Copyright Royalty Board were
universally decried as being outrageously high. Four problems
at the CRB contribute most significantly to these high
royalties. First, the willing buyer/willing seller rate
standard provides the judges with no explicit guidance on how
to determine a fair market value. Second, the process by which
the parties present evidence of a fair market rate to the CRB
is insufficient. Third, the CRB appointment and rate-setting
processes do not afford adequate congressional oversight
allowing these rate decisions to proceed essentially unchecked.
And fourth, the CRB process itself is riddled with uncertainty.
It's telling that when NAB made our last offer to the
musicFIRST Coalition during the last Congress, our members' top
priority was to escape the total unpredictability of the CRB
proceedings.
We're here today to begin a dialogue with this Subcommittee
on how best to address these problems. NAB has members who are
very supportive of the bill introduced by Congressman Chaffetz
and Polis. Other members are still seeking better understanding
of how the bill would impact their businesses. So while NAB has
not yet endorsed any specific legislative approach, it is fair
to say that NAB supports congressional efforts to ensure fair
webcasting rates and needed CRB process reforms.
This important discussion over how best to encourage the
growth of Internet radio must not be bogged down by past fights
over the controversial performance rights bills. Recent deals
between individual broadcasters and record labels have included
fees for AM/FM airplay. This reinforces our belief that this is
an issue best addressed through private marketplace agreements.
NAB continues to oppose an industry wide government mandate.
Regardless of your position however on the performance fee
issue, Congress can and should act to resolve the important
webcasting rate making problems. The alternative inaction risks
stifling the growth of Internet radio to the detriment of
broadcasters, listeners and artists. Thank you, and I look
forward to answering your questions.
Mr. Coble [presiding]. Thank you, Mr. Reese.
[The prepared statement of Mr. Reese follows:]
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__________
Mr. Coble. Mr. Pakman you're recognized for 5 minutes.
TESTIMONY OF DAVID B. PAKMAN, PARTNER, VENROCK
Mr. Pakman. Thank you, Chairman Goodlatte, Ranking Member
Watt and Members of the Subcommittee. Thank you for inviting me
here today to testify regarding the state of Internet music
radio licensing. I'm a venture capitalist with the firm
Venrock. We invest in early stage Internet health care and
energy companies and work to build them into successful
standalone high growth businesses. We look to invest in
outstanding entrepreneurs intending to bring exciting new
products to very large and vibrant markets. Our firm has
invested more than $2.6 billion into more than 450 companies
over the past 40 years. These investments include Apple,
Athenahealth, Check Point Software, Intel and DoubleClick.
Although I was previously a multi-time entrepreneur in the
digital music business, we are not currently investors in any
digital music or Internet radio companies. As venture
capitalists we evaluate new companies largely based on three
criteria: The abilities of the team, the size and conditions of
the market the company aims to enter, and the quality of the
product. Although we've met many great entrepreneurs with great
product ideas, we have resisted investing in digital music
largely for one reason: The complications and conditions of the
state of music licensing. The digital music business is one of
the most perilous of all Internet businesses. We are skeptical
under the current licensing regime that profitable standalone
digital music companies can be built. In fact, hundreds of
millions of dollars of venture capital have been lost in failed
attempts to launch sustainable companies in this market. While
our industry is used to failure, the failure rate of digital
music companies is among the highest of any industry we have
evaluated. This is solely due to the overburdensome royalty
requirements imposed upon digital music licensees by record
companies under both voluntary and compulsory rate structures.
The compulsory royalty rates imposed upon Internet radio
companies render them noninvestible businesses from the
perspective of many VCs.
The Internet has delivered unprecedented innovation to the
music community and allowed more and more artists to be heard
unfiltered by the incumbent major record labels and terrestrial
radio stations. I believe more people listen to a more diverse
set of music today than ever before in our time. However, the
companies trying to deliver these innovative services are
unsustainable under the current rates and frequently shut down
once their investors grow tired of subsidizing these high rates
and illusive profits fail to arrive at any scale. Pandora is a
company that's done an amazing job of trying to make their
business work at the incredibly high rates under which it
currently operates.
But their quarterly earnings reports make abundantly clear
why they are virtually alone in this category. Regretfully I
cannot point to a single stand-alone business that operates
profitably in Internet radio. In fact, in all of digital music,
only very large companies who subsidize their digital music
efforts with profits from elsewhere in their business currently
survive as distributors or retailers of music.
There was a time when record companies were part of
conglomerate media companies which also distributed the music
they controlled. These joint owners and users of music
appreciated the need for healthy economics on both sides of a
license. Once the Internet emerged, new distributors or users
of music grew outside of major label ownership. Perhaps in
response to their failure to prosper as Internet distributors
of music, the major labels took at short-term approach and
refused to license their music on terms that would allow the
music users to enjoy healthy businesses.
To this day, more than 15 years since I first entered the
digital music business, I remain baffled by this practice. In
my opinion, it is in the long-term best interests of music
rights holders to encourage a healthy, profitable digital music
business that attracts investment capital, encourages
innovation, and indeed celebrates the successes of the
licensees of its music. A healthy future for the recorded music
business demands an ecosystem of hundreds or even thousands of
successful music licensees, prospering by delivering innovative
music services to the global Internet. Yet the actions of the
RIAA seem counter to this very goal. They have appeared on the
opposite side of every issue facing digital music innovators,
opposed to sensible licensing rates meant to achieve a healthy
market. Regretfully, and, perhaps most upsetting to all of us,
the artists are the ones who suffer most. They depend on the
actions of their labels to encourage a healthy market to grow,
and have little influence on the decisions of the RIAA.
I am a believer in the value of open and unfettered markets
and generally prefer market-based solutions. Unfortunately the
music industry is controlled by a mere three major labels, two
of them controlling about two-thirds of all record sales. That
amount of concentrated monopoly power has prevented a free
market from operating and letting a healthy group of music
licensees thrive.
That said, I do believe there has been great value in
compulsory licensing regimes such as the one governing Internet
radio. This structure has allowed Internet radio companies to
license the catalogs of all record labels and tens of thousands
of independent artists, not just the dominant majors.
The problem is simply that the rates available to Internet
radio companies under this compulsory license are too high.
They frighten off investment capital, prevent great
entrepreneurs from innovating, and they kill off exciting
attempts to bring their music services to consumers.
I would like nothing more than to invest in the many
entrepreneurs we have met with great ideas about the future of
music, but without a sensible rate structure in place, our
focus on this market won't be able to return.
Thank you.
Mr. Coble. Thank you, Mr. Pakman.
[The prepared statement of Mr. Pakman follows:]
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__________
Mr. Coble. Mr. Jam.
TESTIMONY OF JIMMY JAM, CHAIR EMERITUS, THE RECORDING ACADEMY,
RECORD PRODUCER, SONGWRITER, RECORDING ARTIST
Mr. Jam. Thank you, Chairman Goodlatte, Ranking Member Watt
and Members of the Subcommittee. My name is Jimmy Jam. I am a
record producer, recording artist, songwriter and small
business owner. I am also the chair emeritus of the Board of
The Recording Academy, known for producing the Grammy Awards.
The Recording Academy is the trade association that represents
the individual performers, songwriters and studio professionals
who create the music enjoyed around the country and around
world. I am also a member of the American Federation of
Musicians, SAG-AFTRA, and ASCAP. I am honored and grateful for
the opportunity to present the music creators' viewpoint at
this important hearing.
Now, as a record producer I have had the privilege of
working with some of the finest recording artists, including
Usher, Mariah Carey, the Isley Brothers, Willie Nelson, Yolanda
Adams and many others. And while their names are well known, if
you came to my studio on any given day, you would see dozens of
people who you have never heard of employed as session
musicians, background singers, songwriters, engineers and other
professionals who all derive their income from creating music.
The majority of Recording Academy members are middle-class
artists; music is not just their lives, but their livelihood.
As a small business owner, I know firsthand that bringing
music to the American public takes time, investment, talent,
and the passion of many remarkable individuals, but while music
is our passion, it is also our job, and, like any job, we hope
to be paid fairly for our work. So let us compare two of the
ways creators get paid in the digital era.
If a consumer downloads a song from Amazon, they pay the
rights holders and creators about 70 cents. If a consumer
streams that same song on Pandora radio, Pandora pays
SoundExchange about one-tenth of 1 penny; or, put another way,
the listener would have to hear that song on Pandora every
single day for nearly 2 years to equal the payments earned from
the one download on Amazon.
So when Pandora tells you it is paying too much, think
about that tenth of a penny, and then remember that small
amount is shared by the copyright owners, featured artists,
session musicians, singers and producers. That is why the
Recording Academy opposes H.R. 6480, the Internet Radio
Fairness Act, which would lower these already small payments by
as much as 85 percent. And while Pandora is trying to lower the
earnings of artists through legislation, it is also seeking to
lower its payments to songwriters in rate court. We oppose both
efforts.
The Internet Radio Fairness Act is ironically named. First,
it is hardly fair to ask the very people who enable Pandora's
business to work for below-market payments. But even worse it
fails to mention the most unfair aspect of the music royalty
debate.
Now, if I told you, the congressional leaders responsible
for IP policy, that one business in America is allowed to take
and use another's intellectual property without permission or
compensation, I think you would say, that is crazy. Well, one
such business does exist: the radio broadcast industry.
Through unbelievable exemption in the law, terrestrial
radio is allowed to take and profit from any sound recording
without paying a single penny to those that create the track.
Now, this is the only industry in America that is allowed to do
this, and the United States is the only developed country in
the world that provides such an exemption for its broadcasters.
We believe that before there can be any discussion of rates or
rate standards, Congress should close the corporate radio
loophole.
Chairman Goodlatte, the Internet Radio Fairness Act is
anything but fair, but by all means it is time to have a real
conversation about fairness. For example, is it fair for
Pandora, which already enjoys the benefit of a compulsory
license, to also enjoy a government-imposed, below-market rate?
Is it fair for songwriters who provide the very DNA of the
music industry to have to fight Pandora in court just to keep
their already small payments? And finally, is it fair for
terrestrial broadcasters to pay nothing for using the sound
recordings because they, not we, have decided that it is good
for us?
The answer to all these questions is clearly no. Members of
the Subcommittee, if you agree that music creators should be
paid fairly for their work, then I ask that you oppose H.R.
6480, and that we all work together to support fair-market
royalties paid by all who use music as the foundation of their
business.
Thank you.
Mr. Coble. Thank you, Mr. Jam.
[The prepared statement of Mr. Jam follows:]
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__________
Mr. Coble. Dr. Eisenach.
TESTIMONY OF JEFFREY A. EISENACH, MANAGING DIRECTOR AND
PRINCIPAL, NAVIGANT ECONOMICS
Mr. Eisenach. Mr. Chairman and Mr. Ranking Member, Members
of the Subcommittee, thank you for the opportunity to testify
before you today. I thank Mr. Goodlatte for his kind
introduction and note that while the research upon which my
testimony is based was partially supported by the musicFIRST
Coalition, I am appearing solely on my own behalf, and the
views I will express are exclusively my own.
I have submitted written testimony, and I would like to
briefly summarize it.
Beginning with the Digital Performance Right in Sound
Recordings Act of 1995, and continuing with the Digital
Millennium Copyright Act in 1998, Congress has adopted an
increasingly market-oriented approach to sound performance
recording rights.
Under DMCA, license terms and royalty rates for nearly all
parties are either negotiated directly between the parties or,
in the case of rights subject to a compulsory license, are set
so as to, quote, ``represent the rates and terms that would
have been negotiated in the marketplace between a willing buyer
and a willing seller.'' Twice in recent years this Subcommittee
has passed legislation that would have extended this market-
based approach to over-the-air broadcasting.
My central point today is that Congress is on the right
track and should not turn back by passing legislation designed
to subsidize a particular class of copyright users. I am
referring, of course, to the proposed Internet Radio Fairness
Act, or IRFA, and especially to the proposal to replace the
market-oriented willing buyer/willing seller standard with the
uneconomic four-part standard under section 801(b) of the
Copyright Act of 1976. Doing so would distort the marketplace
and harm consumers for four primary reasons.
First, market-based rates maximize consumer welfare by
ensuring that society's resources are directed to their
highest-valued uses. In a market-based economy like ours,
prices serve as the key signaling mechanism telling economic
actors how capital and labor should be directed to produce
products and services valued most highly by consumers at the
lowest possible cost. Replacing the market-based willing buyer/
willing seller standard with the downward-biased 801(b)
standard would result in the misallocation of economic
resources and ultimately make consumers worse off.
Second, there is no valid economic or public policy basis
for forcing content providers to subsidize webcasters by
charging them the below-market rates that would almost surely
result from IRFA. The market for online music is intensely
vibrant and growing rapidly. Online advertising revenues are
growing 30 percent per year. New firms are entering the market,
existing firms are garnering billion-dollar valuations, and the
mobile marketplace, as Pandora notes prominently in its most
recent financial reports, is getting ready to take off and
explode.
Pandora makes much of the fact that content acquisition
accounts for half or more of its revenues, but in reality its
content costs as a proportion of revenues are comparable to
other similar firms. Moreover, the ratio of Pandora's content
costs to its revenues is within Pandora's control. As The New
York Times put it recently, throughout the music industry there
is a wide belief that Pandora could solve its financial
problems by simply selling more ads.
Third, the fourth prong of section 801(b), the
nondisruption standard, would grant copyright users a de facto
right to perpetual profitability based on their current
business models. In fact, copyright users are arguing in the
current SDARS II proceeding that the nondisruption standard
guarantees them a profit not only on their past investments,
but on future investments as well.
In the dynamic world of online content delivery, the
creation of what amounts to a right of eternal life for market
incumbents is a recipe for technological and marketplace
stagnation.
Fourth and finally, passage of IRFA would risk politicizing
the rate-setting process for sound recording performance
rights. The changes it would make to the appointment process
and qualifications of the copyright royalty judges would reduce
the objectivity and independence of the CRB.
More broadly, as you all know, all firms would prefer to
pay lower prices for their inputs. Car manufacturers would like
to pay less for steel, filling stations less for gasoline,
aluminum plants less for electricity. In general, markets
ensure that the prices paid for such inputs are, to paraphrase
Goldilocks, neither too high nor too low, but just right.
The politicization of pricing decisions, on the other hand,
favors those with the greatest capacities for political
influence. In this case Congress should not allow the fact that
webcasters have the demonstrated capacity to generate a large
volume of emails from their listeners to lead to a result that
would in the end harm those very same consumers by retarding
innovation and destroying incentives for content creation.
Mr. Chairman and Members of the Subcommittee, that
completes my testimony. I look forward to your questions.
Mr. Coble. Thank you, Doctor.
[The prepared statement of Mr. Eisenach follows:]
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__________
Mr. Coble. Mr. Huppe.
TESTIMONY OF MICHAEL HUPPE, PRESIDENT, SOUNDEXCHANGE, INC.
Mr. Huppe. Mr. Chairman, Ranking Member, Members of the
Subcommittee. Thank you for giving me the opportunity to set
out the reasons why the music community stands united in its
opposition to the so-called Internet Radio Fairness Act. The
entire music industry, and many groups beyond this industry,
all reject this attempt to subsidize companies at the expense
of artists. Worse yet, a bill that claims to seek fairness and
parity blatantly ignores the fact that traditional over-the-air
radio, representing a huge aspect of the radio market, pays
nothing to artists when it is their music that makes radio
possible.
Contrary to what you may have heard, Mr. Chairman, digital
radio is flourishing under the current royalty structure. As
this slide demonstrates, the number of such services has grown
from 850 in 2007 to more than 2,000 services today.
SoundExchange wants to foster that type of growth; it is,
after all, good for everybody. But we must always remember that
the statutory license which enables this growth is a tremendous
commercial benefit, a gift really, to these online services. It
allows them to use every sound recording ever released to build
their own business. The very least Congress can do is ensure
that artists are paid fairly for this forced transfer of
rights.
Now, Mr. Chairman, there has been a lot of talk about what
these payments really mean, so let us try to put it in everyday
perspective. As you heard Jimmy Jam say, Pandora currently pays
about one-tenth of a penny to stream a single song. So when the
average Pandora listener listens for 20 hours per month
throughout the entire year, Pandora pays to SoundExchange less
than $4, less than $4, in royalties for 250 hours of music.
Mr. Chairman, that is less than some people in this room
spent on their coffee this morning for an entire year's worth
of listening. And remember, that $4 is divided among hundreds
of featured artists, background musicians, record labels and
others who created the music that drives the industry. And this
legislation before you today seeks to lower those payments even
further. That is why over 130 artists listed in this ad
recently signed a letter in support of fair payment and against
this bill.
So how are most artists paid now? Current law sets a fair-
market standard for compensating artists. Specifically it
considers what a willing buyer would negotiate with a willing
seller in the marketplace; in other words, what is the fair
market value? That rule applies to more than 2,000 digital
services.
As this slide demonstrates, only 3 digital services out of
the 2,000 do not operate under this fair-market standard. Why
only three, you ask? Because they happened to be in business
back when the standard was established in 1998. In other words,
Mr. Chairman, they are getting this break merely because they
have been around a while. This bill is really about trying to
lower those 2,000 modern services down to a subsidized rate,
rather than raise the three outliers up to the modern fair-
market standard.
As you have heard, terrestrial radio must also pay for the
music that drives its success. To paraphrase Mr. Watt, we
shouldn't nibble around at the edges and avoid the biggest
problem out there. We cannot have a meaningful discussion about
fairness if we allow the $14 billion radio industry to continue
to pay nothing to artists. We are thankful that this Committee
has recognized that inequity by favorably reporting out the
Performance Rights Act of 2009. And we also want to commend Mr.
Nadler's draft interim first act, which seeks an interim
solution to this decades-long injustice.
Lastly, Mr. Chairman, the bill has a litany of unfair and
unwise provisions that are too long to list here, but reveal it
for the one-sided, unfettered wish list that it is. So we agree
that the current situation is unfair, but it is unfair to
artists and labels. It is unfair that traditional radio gets to
use sound recordings for free. It is unfair that SiriusXM, a
multibillion-dollar company, pays less than the market rate.
And it is unfair that thriving Internet radio companies like
Pandora want Congress to make artists subsidize their business.
In closing, Mr. Chairman, it is no secret that the music
community, like any healthy family, has any complicated
relationships over complicated issues. It is not often that you
see agreement on a given topic from artists, musicians,
managers, producers, songwriters, publishers and labels, so it
is noteworthy when we all come together as one voice opposing
something like this bill. But it is not just us, Mr. Chairman.
We stand shoulder to shoulder with groups as diverse as the
AFL-CIO and the Americans for Tax Reform, the NAACP and the
American Conservative Union, SAG-AFTRA and AFM, and Citizens
Against Government Waste. That type of outcry is a clear
indication to Congress that this bill is bad policy and would
make bad law. Mr. Chairman, we want Pandora and other digital
services to succeed, but the law must ensure that artists are
treated fairly in the process.
I appreciate the opportunity to testify today. We look
forward to working with Congress to develop a comprehensive
approach that treats creators of music fairly and all music
platforms equally.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Huppe follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
__________
Mr. Coble. The gentleman's time has expired.
I want to thank all of the panelists for your time and your
presence here today.
In 1998, there was some question as to how the DMCA was
going to affect Internet radio. A series of stakeholders
meetings were convened, and the net result of those meetings,
you will recall, was willing seller/willing buyer.
Now, Internet radio has enormous potential for music
lovers, the music industry and high-tech industry, but in my
opinion it does not replace the rights of creators and
performers. All three, it seems to me, should flourish.
Mr. Kennedy, let me put a two-part question to you. Is
Pandora profitable and successful without changes in the law,
A; and B, how does Pandora generate revenue, and does that
include capital generated from the stock market?
Mr. Kennedy. Forgive me. I hesitate to frame this as a
Pandora-specific issue. As you heard from Mr. Hubbard, the
rates that exist today in Internet radio prevent every
broadcaster from entering the market or, for those that are
there, from making any profit in the market. So we don't really
view this as a Pandora issue.
The amount of money we pay, almost a quarter billion
dollars a year, is more than the performance rights paid by the
entire radio industries of the U.K.--which includes AM/FM
payments--France, Germany, every country on the planet.
So I don't think this issue is really about the
profitability of Pandora. And to the extent the profitability
of Pandora is relevant, then 801(b) is really the appropriate
standard, because it is the standard that directs the judges to
take into consideration the financial conditions of the
companies involved. Willing buyer/willing seller makes no
reference to that. And so if you believe that it is a relevant
consideration in rate setting, then we certainly would say
801(b) is appropriate, and let the judges completely examine
the financial performance of Pandora and every other licensee
under section 114 in making their determination of appropriate
rates.
We generate revenue by a mix of advertising and
subscription, really the way radio has generated revenue for
many years. As Mr. Reese talked about, ad-supported radio is
the foundation of the radio experience in America, has been
that way for roughly 100 years. SiriusXM is a subscription
model. We offer both of those business models to consumers.
Part of the benefit of the Internet is the ability to give
consumers that choice.
Mr. Coble. I thank you, sir.
Mr. Jimmy Jam or Dr. Eisenach, many established artists, I
am told, have signed a letter to Congress opposing this
legislation. How about up-and-coming artists; does it affect
them as well?
Mr. Jam. Sir, I would say that it probably affects them
even more so.
Mr. Coble. Mr. Jam.
Mr. Jam. The green light is on. Maybe come a little closer?
How is that?
Mr. Coble. That is better.
Mr. Jam. That is why I am a producer and not a singer. I
know how to set it up, but----
Mr. Coble. I bet you do both pretty well, Mr. Jam.
Mr. Jam [continuing]. I leave it to the talented people to
do it.
The ad actually includes a lot of people who I think would
be thought of as up-and-coming artists certainly, but, yeah, it
affects everybody across the board. And I think that, you know,
part of the reason that I am passionate about it, and I have
been fortunate to have a lot of success in the industry, but to
me it is important that it continues on.
And it is really simple to me. When we talk about the music
business, the word ``music'' comes first. There has to be
music. We have to support the music before anything else,
before the business gets done. And I just feel that the idea of
lowering rates that are already in place and were already
acknowledged by Pandora as they could function under those
rates, it seems a little bit interesting to me that 3 years
later we are here in front of you arguing that for some reason
they can't make the business model work.
Mr. Coble. I want to try to beat the illumination of that
red light. Thank you, Mr. Jam.
Mr. Reese, if you would distinguish--strike that.
Regarding terrestrial radio, how would you distinguish
terrestrial from satellite, cable radio and Internet radio?
Mr. Reese. I think two principle distinctions, Mr.
Chairman. First is that AM/FM radio is local and free, and that
is a distinguishing characteristic from the others, which are
at least subscription driven and in many cases subscription and
advertiser supported. And we have been there for 90 years. We
have been providing relationships with communities. We played
with an important promotional role, a multibillion-dollar
promotional role, in promoting the music industry.
It was said by one of the witnesses that music makes radio
possible. Radio makes music possible. There has been a terrific
relationship there for nearly 100 years now, and we believe the
free local nature of our business is very important in
continuing to make music possible.
Mr. Coble. I thank you, sir.
I see my red light has appeared, so I will yield back the
time I don't have.
Mr. Watt. Mr. Chairman, I am going to defer to the other
Members and go last in case we run out of time, so I will go to
Mr. Conyers.
Mr. Coble. The distinguished gentleman from Michigan is
recognized.
Mr. Conyers. Thank you, Mr. Chairman, and I thank all the
witnesses.
I am still trying to determine why artists and performers,
whose music is played 24 hours a day on terrestrial radio,
don't get a dime. And I notice that, with all due respect, the
first three witnesses said little or nothing about it, and, to
me, this is the--I mean, we are not only leaving things at a
situation that is unacceptable, but we are making it worse;
don't you think, Mr. Huppe?
Mr. Huppe. Thank you, Congressman. I absolutely believe we
are making it worse. As I mentioned earlier, to attempt to
solve the problem piecemeal and avoid the biggest elephant in
the room, which is the $14 billion over-the-air industry, is
really a huge mistake.
You know, it was stated just a minute ago that without
radio there would be no music, and I believe it was asserted
that without--without music there would be no radio. Mr. Reese
asserted without radio there would be no music. I respectfully
beg to differ. Music is what drives radio. Music is one of our
greatest cultural assets. The American music industry, American
artists, American unions, American record companies are the
most popular musical asset around the world. It is American
music that is played overseas. It is American music that is
played in Europe. And the fact that we stand alone in not
rewarding the artists who feed that music to the radio station
so they can make their profit from advertising is unacceptable.
And I would note----
Mr. Conyers. So our country is the only country that
doesn't compensate.
Mr. Huppe. It is the only industrialized country that does
not do it.
Mr. Conyers. And pay royalties to those who are performing.
Mr. Huppe. It harms performers twice, because not only do
they not share in any of that $14 billion profit made every
year by the radio industry off their hard work, but because we
do not have that right in this country, there are hundreds of
millions of dollars overseas collected on behalf of American
artists that don't ever work their way to American artists
because we lack the reciprocity. So they are harmed not once,
Mr. Conyers, but twice.
Mr. Conyers. Dr. Eisenach, could you put in some order the
importance of the four principles that you articulated in
connection with this subject matter? What is at the bottom of
all of this, if we were putting it simply?
Mr. Eisenach. Two concepts. First, the notion of applying a
nondisruption standard to the Internet, I hope everyone would
recognize how nonsensical and perverse that is. The Internet is
the world's greatest example of the process of creative
destruction. The Internet works because people come to the
table with new ideas; they invest their sweat and their energy
and their money. Sometimes they succeed; sometimes they fail.
They don't have a right to succeed. And section 801(b)(4)--
(b)(1)(D) would, in effect, seek to give them that right. So it
is a recipe for technological and marketplace stagnation.
Secondly, and this responds to something Mr. Kennedy said,
the advantage of the willing buyer/willing seller standard is
precisely that it does not guarantee the profitability of
individual companies, precisely that, right? This is the stuff
of public utility regulations. We have rate commissions which
are designed to preserve the profitability of our electricity
companies. But that is not the kind of innovative marketplace
that we are dealing with here. We don't want to guarantee these
companies the right to eternal life.
Mr. Conyers. Thank you very much.
I wasn't going to ask the former head of The Recording
Academy any questions, but, you know, Jimmy Jam, you come off
as a very able witness. You are in the industry. Don't you
think that just a sense of fairness would require that
somewhere along the line--we tried it once; I think we passed
the bill of mine at least once here already--in terms of giving
performers some share of all of the enjoyment they are giving
to hundreds of millions of people, and everybody is doing it in
almost every country on the planet but us.
Mr. Jam. Right. Yeah. This is an area where it doesn't
really make a whole lot of sense that artists do not get paid
royalties on AM/FM radio. I am sorry, I don't remember which
gentleman it was of the experts on this side that basically
alluded to the fact that there were some private deals that had
taken place. We like the idea that that has happened because
basically it is an acknowledgment that it is the fair thing to
do. And those companies that have chosen to go into a private
agreement, that is wonderful.
The thing that I would say, though, is that we need an
industrywide solution to that problem. And really only Congress
can make that happen and make it so that--this is actually a
letter that was written by Scott Borchetta, who is the CEO and
President of Big Machine Records. So this is one the private
deals that was done. But in his letter, even though that they
have struck the private deal, which we think is a good thing
moving forward, he does call that the idea that the government
needs to get involved at this point to make it an industrywide
solution, even he, as part of this private deal, feels that
that needs to happen.
So we would obviously like to see that happen on that side,
and we want to just create the right that the rest of the
developed world has. We are the only Nation that doesn't have
that for the artists.
Mr. Conyers. I am so glad that all of you are here, and I
thank the Chairman and return any unused time.
Mr. Sensenbrenner. [Presiding.] The time of the gentleman
has expired. The new Acting Chair will recognize himself for 5
minutes.
Mr. Kennedy, as you know, I have been pretty sympathetic to
the concerns that webcasters have brought up. And during the 6
years when I was the Chairman of the full Committee, the
Committee reported out and was enacted into law two changes in
royalties. And after my retirement as Chairman of the full
Committee, the Webcaster Settlement Act was passed.
Digital Millennium Copyright Act established a compulsory
license, which I think was necessary to allow this industry to
get off the ground, but it also said that the license fee
should be based on a willing buyer/willing seller principle,
which I basically interpret as saying that it should be based
on market principles. That was in 1998.
In 2002, there was political pressure to reduce the royalty
payment, and Congress, during my chairmanship, passed the Small
Webcaster Settlement Act. Then 2 years later we passed the
Copyright Royalty and Distribution Reform Act, and the trade
association that led the lobbying campaign for the webcasters
issued a press release boasting that they were thrilled that
Congress had a passed the legislation, and that the redesigned
royalty arbitration process will be more efficient and the
rates would be more fair to participants as a result of the
revision in the law.
Then during Mr. Conyers' chairmanship, there was another
bill passed, which was called the Webcaster Settlement Act of
2008, and Pandora praised the deal as, quote, ``the agreement
we have been waiting for,'' unquote, and, ``Pandora is finally
on safe grounds with a long-term agreement for survivable
royalty rates.''
Now here we are back again, and this is the 1, 2, 3, 4,
fifth attempt of the Congress and specifically this Committee
to deal with this issue. Mr. Kennedy, when is a deal a deal,
and you have to accept a bad deal as well as cash in from a
good one?
Mr. Kennedy. Mr. Sensenbrenner, several comments in that
regard. The webcasters who were there in 1998 when this law was
first passed were two fledgling webcasters who are now no
longer in business. The webcasters who are present in the 2002
and 2004 time frames that you reference are no longer in
business. We have not been part of any of those legislative
changes. The webcaster settlement agreement that we reached
with SoundExchange extends through 2015, and we fully sign up
to live within the provisions of that webcaster settlement
agreement.
The issue before us is that that settlement agreement
expires in 2015, and we enter a new rate setting for the period
2016 through 2020 with the system in place that, as you allude
to, has failed to develop outcomes that are considered by all
parties--fair by all parties in any of its applications. We
seek now to address that fundamental flaw in the legislation
precisely to get Congress out of the business of having to
intervene into these proceedings.
Mr. Huppe would have the exact numbers, but the
overwhelming majority of the payments to SoundExchange today
from Internet radio do not come by rates that were set by the
CRB. They come as a consequence of settlement agreements
entered into only after congressional intervention.
That is not the way the system should work. The system
should be able to generate rates that all of the parties
consider fair, and we seek to achieve what Mr. Berman alluded
to in the context of a symbiotic system, an approach that can
truly generate outcomes that are considered fair by all
parties.
Mr. Sensenbrenner. Well, Mr. Kennedy, my time is about
ready to expire, but let me say that the Members of this
Committee have, you know, spent probably more time dealing with
this issue than with any other single issue in the last decade
or decade and a half, and we have got lots of other stuff on
our plate that we have got to deal with, as everybody in the
room knows. So what would happen if we just said, well, your
time is up, we can't spend any more time on this, let 2015
come, and let the current agreement expire?
Mr. Kennedy. I think the issue for you to consider is that
under the rates that are established by the CRB, again rates
under which very few, if any, services operate, to give you a
perspective, if those rates were applied to all of radio in
this country, based on a study by a very well-respected music
business professor at Washington and Lee University, this
study, unfunded by any participant, completely independent,
estimated that the total payments due from the radio industry
under the current rate structure set by the CRB would be $4
billion a year. That is illustrative of what the willing buyer/
willing seller and current CRB process establishes as the
appropriate rate.
I am not aware of anyone who studied this issue who
believes that the appropriate answer is to charge AM/FM radio
$4 billion a year, that that would truly represent a fair
market rate that broadcast radio would be a willing buyer at
those rates. Yet those are the rates last set by the Copyright
Royalty Board. They are completely out of line by any standard
in the U.S., in the world, and in order to establish a system
that generates fair outcomes to all parties, this system
fundamentally needs change.
The attempts to develop new and different rate standards,
new and different processes, while undoubtedly well meaning
over the last 15 years, have generated a rate standard and a
rate system that, as you allude to, simply have not delivered
results that have been considered fair by all parties and, as
you say, have taken far too much time of Congress. It is time
to fix that fundamental system.
Mr. Sensenbrenner. Well, my time has long since expired.
The gentleman from California Mr. Berman.
Mr. Berman. Well, thank you, Mr. Chairman.
It is quite clear that a rate that all parties agree on is
easier said than done. There are obviously a few people at that
table who think willing buyer/willing seller is not a fair
market rate. My guess is there are a few people at that table
who think the 801(b) standard is not a rate that reflects a
fair market value. And part of the problem here, as Mr.
Sensenbrenner has said, there is great value in the compulsory
license in terms of getting music out there, but it is sort of
hard to figure out what a fair market rate is in a compulsory
license. No one wants to appeal that.
What is the glaring incongruity in this legislation is to
call it the Internet Fairness Act when the issue should be sort
of the Music Fairness Act for the people who create the music
and the people who deliver the music.
And it is disingenuous, I have to say, Mr. Reese, for you
to talk about finding the rate that will incentivize more
webcasting by radio stations without acknowledging any
obligation to be subject to a performance right for over-the-
air broadcasting. You want to talk about parity without
discussing the ultimate inequity, the fact that over-the-air
broadcasters do not pay for the music they play.
If radio stations want to be all talk radio, they shouldn't
have to pay a penny of music performance rights, but when they
live and thrive and sell lots of advertising--Mr. Kennedy
talked about $4 billion, why that would be unfair to charge to
webcasting. Is zero fair to charge to broadcasters?
There is a potential bargain here, even though it is a fair
market rate bargain, but it is in the context of dealing with
all the inequities in the platforms, and without that you are
not going to find this fair rate for all parties. So I think
the broadcasters have to come to terms with maybe some of your
guys don't want to go into webcasting, and they like it free,
but at the end of the day, if webcasting is a major part of the
future, I think we are at a point in time where you are going
to have to come to terms with free doesn't work anymore in
terms of incentivizing creators and fairness. And so in a Music
Fairness Act, it is a huge albatross around this legislation's
neck to ignore that issue.
I understand the Pandora problem. They are not an over-the-
air terrestrial broadcaster, and they are part of a coalition
to try and change a standard. But I am predicting that, and I
won't be here to determine it, but I am predicting that
standard will not change in the desire to find that fair market
rate.
By the way, as Mr. Kennedy acknowledged, no one is paying
the willing buyer, or hardly anyone is paying the willing
buyer/willing seller rate, it has only been discounted by
agreements. I was very involved in the most recent agreement
back in 2008 and early 2009.
But the absence of a performance right for terrestrial
broadcasting is what is going to make this a very interesting
academic exercise that isn't going to produce a piece of
legislation, and we have to come to terms with that on all
sides, and including most specifically the broadcasters. You
may able to stop that from happening, but you are not going to
be able to get what you think is the rectification of an
injustice on the digital side without coming to terms with
that.
And with that I yield back.
Mr. Chaffetz. [presiding.] I thank the gentleman.
I now recognize the gentleman from California Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman.
I am going to follow up on my distinguished colleague and
friend. And when I say that, Howard, you got kind of a standing
ovation before you came out because of your good work on this
Committee, and you are going to be missed until you pop up
somewhere else, and then we are going to be glad to have you
back in whatever roll you choose to have. So I want to
personally take a few moments to thank you for the work you
have done with me on both this Committee and others.
Mr. Berman. If the gentleman would yield, I do not want to
be on the copyright royalty tribunal.
Mr. Issa. You know, Howard, one the beauties of not being
in elected office is that your obligation is only what you want
in the future.
Mr. Reese, I am going to follow up on what Mr. Berman
started on. Do you think that if you webcast from a
terrestrial-based location, you promoted the artist the way you
do on a regular terrestrial radio station, your price should be
the same as it is on terrestrial radio station? It is not a
trick question; we all know the price is free.
Mr. Reese. Well, the price over there in terms of a cash
price has been free. In terms of the promotional value that has
been provided----
Mr. Issa. Well, then the question is if Pandora, sitting
next to you, or yourself in a Web broadcast, if do the same
promotion, should the price be the same? Because I tell you,
Mr. Kennedy is perfectly happy, I suspect, to add an equal
amount of promotion to Pandora on behalf of the artist if it
gets him a price of free.
Mr. Reese. Well, Mr. Kennedy recently, or just moments ago,
volunteered for our industry to pay $4 billion in as well. So I
agree with you, he would be happy for us----
Mr. Issa. No, actually he wants your price. I have no
doubt, and I am not going to ask him to state it, because it is
just too obvious----
Mr. Reese. No. I----
Mr. Issa. Just hear me out for a second. I have been
working with Mr. Conyers and Mr. Berman and others for years on
this trying to figure out how do we get to something that Mr.
Jam and others can have their business model work, and, of
course, all those people who want to create, and yet be fair to
the competition between the two of you. And I think it is
wonderful that you are seated next to each other, because one
of you has not made a profit because, in fact, you are paying a
tremendous amount of royalties on the music and trying to have
a business model--as good a model as it is in gross revenues--
have a business model that has some net revenues.
But they are paying the equivalent of your $4 billion, if
you will. You are paying zero. And every time we talk about
paying anything, you know, National Association of Broadcasters
push back and say, we are all going out of business, we can't
afford it.
So am I to presume that I have to discount Mr. Kennedy to
some new numbers so he can break even, but even at free you are
going to go out of business. So my question to you is isn't
harmonization, an amount greater than free, that allows
specifically Congress to unwind its past participation that
created multiple standards where like competitors pay vastly
different amounts of royalties--and I say so because I am a
cosponsor of the bill not because I think it is the final bill,
but because there had to be a discussion and starting point,
and it was a new approach to it. So I would love to hear your
answer, sir.
Mr. Reese. We are here because we think it is important
that we discuss these issues. Several of the Members have
alluded to the desirability of a free market business. Mr.
Sensenbrenner suggested this Committee is sick and tired of
dealing with this issue, and that we ought to address this.
We have seen free market solutions begin to happen here,
and we believe that is the right way to approach this, rather
than having a mandate of some variety come in here. We will,
for economic reasons, continue to do our best as an industry to
maintain our viability as a business to be able to continue to
serve our communities, to be there in times of emergency, but
we don't believe that a mandate is the way to address that. We
believe that a free market approach is the way to work, and it
is beginning to work. We would encourage this Committee to
allow that process to continue to thrive.
Mr. Issa. Mr. Jam, you obviously are in a different
position. You receive nothing in some cases, some money in
others, and no particular difference in what you are delivering
to those industries; isn't that true?
Mr. Jam. No, I mean, the music is the music. I get paid as
an artist on one side, and on the terrestrial radio side I
don't.
But Mr. Reese brought something up that is kind of
interesting. If you allow me just 20 seconds here, I can read,
because he is talking about let the private industries come to
an agreement.
This is just a piece of a letter that I alluded to earlier
from Scott Borchetta, who is the president and CEO of Big
Machine Records, who had come to a private deal with Clear
Channel and, I believe, a couple of other of the terrestrial
broadcasters. He states, while the debates on this subject are
many, the absolute need for legislation cannot be emphasized
enough. Only then will American artists properly participate in
performance monies earned around the world. The United States
of America stands inauspiciously in line with North Korea,
Iran, Afghanistan and China----
Mr. Issa. I thought Cuba was in there.
Mr. Jam. They might be. He doesn't mention them there, but
they could be--in not paying artists for terrestrial sound
recording performances. And he goes on to say, respectfully,
this is despicable and unacceptable.
Mr. Issa. Mr. Chairman, I want to thank you for your
participation in creating this hearing and your willingness to
continue with this issue.
Mr. Nadler. Can't hear you.
Mr. Issa. Maybe somebody finally decided I should cut my
mic.
But thank you again, Mr. Chairman. I yield back.
Mr. Goodlatte. [presiding.] I thank the gentleman for his
comments and his questions.
And the Chair recognizes the gentlewoman from California,
Ms. Chu, for 5 minutes.
Ms. Chu. Thank you, Mr. Chair.
I would like to address questions to Mr. Eisenach on the
composition of the Copyright Royalty Board. There is a change
that is proposed by this bill, and, in fact, this bill would
eliminate the requirement that one of the copyright royalty
judges have significant knowledge of economics, and that one of
the other judges be an expert in copyright law. Given that
economics and copyright are certainly central to deliberations
of this Board, what are your thoughts on this change?
Mr. Eisenach. Well, first of all, I find the provision
eliminating the requirement for someone with economic knowledge
to be especially personally offensive and hope the Committee
would take that under consideration.
But, you know, the rate-setting process, the notion of
establishing independent commissions to set prices in
circumstances where either as a matter of first instance in the
case of public utilities or as a matter of a backstop in the
instance of the compulsory licenses here, the independence of
those bodies and the ability of those bodies to operate as
expert bodies and apolitical bodies is at the core of the whole
notion of how we approach these issues. We seek to set politics
aside and to have an expert group dispassionately look at the
evidence and arrive at the best possible conclusion.
Now, I have reviewed the major proceedings that have taken
place under the Digital Millennium Copyright Act, and I believe
that is what has taken place. And that is different from saying
that they have hit the right price on the mark to the penny
each time. That is not going to happen in this kind of rate-
setting proceeding. But have they established a rate which
reasonably approximates the market-based rate? I believe they
have.
And the changes that are proposed, the ones that you
mention and others, in IRFA are changes--for example, I think
requiring that the Copyright Royalty Board judges be confirmed,
but also that the Board not be able to function without a full
capacity really guarantees that each time there is a vacancy on
the Board, all of these issues, which are contentious economic
issues properly decided outside the realm of politics, but
properly decided in an expert realm, all of these issues will
be forced to be represented in a political framework.
So that is what I think we are trying to get away from when
we establish an entity like the Copyright Royalty Board, and
the changes that IRFA would make, you know, would throw us back
into the fire that we were trying to escape from in the first
place.
Ms. Chu. In fact, I would like to follow up on that issue,
the political appointments of the Copyright Royalty Judges. Mr.
Huppe, I could direct this toward you, which is this curious
change that the Senate confirm the Copyright Royalty Judges,
and given the politics and stagnation that is mired around any
nomination appointment to the Senate, is this advisable? There
are many political appointees that have yet to be confirmed
right now, and wouldn't adding the CRB judges to this list of
positions requiring confirmation lead to a lot of
inefficiencies in the system? Both of you.
Mr. Eisenach. Well----
Mr. Huppe. Congresswoman, absolutely that is true. The
Copyright Royalty Judges perform a very important function, and
it has been set up in a certain way by Congress, and the system
is working. To echo the words of Mr. Eisenach, the judges have
developed a very particular expertise, and there are very
complicated cases that they review.
There has been the impression left, I think, by some of our
witnesses that these are willy-nilly rates that are set by
these judges. Nothing could be further from the truth. These
are very complex hearings with many witnesses, many days of
trial testimony, unbelievable amounts of discovery, complex
economic theory, looking at markets, looking at actual deals
that have happened in the marketplace. These decisions are
based on real deals out in the real marketplace involving free
sellers and free buyers. They are the absolute thing that the
judges should look to.
So they have developed this expertise, and politicizing the
process by making them subject to Presidential appointment
would be a problem firstly because it politicizes the process,
and it is exactly this type of process that we do not want to
politicize. And it would also lead the system to encounter
serious problems. There is almost always something going on
before the judges. With all the different classes of service
both in 114 and other sections of the Copyright Act, there is
an ongoing and very high-volume business that judges have to
deal with. To have that interrupted with gaps and political
disagreements over who should sit and who should not would work
great harm to the system.
Ms. Chu. And, Dr. Eisenach, I don't know if he wanted to
continue his thought.
Mr. Eisenach. I just repeat what Mr. Huppe said and say
that if you go back over the course of about 100-plus years of,
both through State Public Utility Commissions and through
independent regulatory commissions at the Federal level, this
notion of taking, what are essentially direct economic fights,
what is before you today is two constituencies, each of which
wants to get paid more, or multiple constituencies all of whom
want to get paid more. Now, the question is are we going to do
that on the basis of who can get the most postcards mailed to
their Members of Congress, or are we going to do it on the
basis of some kind of objective standard, and what is that
standard going to be?
And I think you want an objective process to decide those
things, first of all. And second of all, I think what you want
is an objective standard that aims to hit at something
approximating the market-based rate, which is willing buyer/
willing seller.
Ms. Chu. Thank you. I yield back.
Mr. Goodlatte. The gentleman from Utah Mr. Chaffetz is
recognized for 5 minutes.
Mr. Chaffetz. Thank you.
Mr. Huppe, at the very beginning of your presentation, you
put up a chart that showed the royalties paid. What percentage
is Pandora paying of those dollars going in?
Mr. Huppe. I am not actually permitted to disclose those
numbers. I will tell you this----
Mr. Chaffetz. No. I want to know what percentage.
Mr. Huppe. What percentage of the overall revenues?
Mr. Chaffetz. Yes. Yeah.
Mr. Huppe. Pandora, they pay a substantial portion of our
revenues.
Mr. Chaffetz. I want to know a percentage. You are here
testifying before Congress. Don't tell me you don't have
permission from your mom. Tell me what the number is.
Mr. Huppe. Well, with all due respect, Mr. Chaffetz, my mom
is not here today.
Mr. Chaffetz. And I am, and I want to know what
percentage----
Mr. Huppe. Of the current, based on numbers that I have
most recently seen, Pandora, of Internet revenues or overall
revenues to SoundExchange?
Mr. Chaffetz. What?
Mr. Huppe. Are you asking overall revenues or Internet
revenues, Mr. Chaffetz?
Mr. Chaffetz. Based on that chart that you put up there.
You used a chart earlier.
Mr. Huppe. I used a chart that showed the growth of
services.
Mr. Chaffetz. Let us get both numbers.
Mr. Huppe. Roughly a third. Somewhere between a third and a
half of our revenue is from Pandora.
Mr. Chaffetz. Overall. What about from just the Internet
portion?
Mr. Huppe. Just the Internet? They are in the neighborhood
of 60 to 70 percent.
Mr. Chaffetz. Thank you.
Do you feel the 801(b) standard is working when you
determine what record labels base songwriters; is that the
right standard, is that working?
Mr. Huppe. You are referring to the 115 standard,
Congressman?
Mr. Chaffetz. Yes. On how record labels pay songwriters,
does the 801(b) standard work?
Mr. Huppe. I think the best standard that everyone should
follow--and it is my understanding that the record labels, if
it is part of a broader solution involving comprehensive reform
like has been discussed here multiple times today, I believe
the record labels are willing to play by the same rules as
everybody else.
Mr. Chaffetz. Well, we will have to further explore that.
Mr. Jam, as you know, currently the amount SoundExchange
receives for any given recording played by an Internet radio
station, generally 50 percent goes to the copyright holder,
which is usually the record label; 45 percent goes to the
artist; and 5 percent is set aside for background and session
musicians. Do you think that the majority of that should go to
the copyright holder, essentially the record label, or should
the artist get more?
Mr. Jam. Well, let me hit my button here. Sorry about that.
I guess I feel that, first of all, 50 percent for the
compulsory rate is fair because it----
Mr. Chaffetz. So you are not suggesting that artists should
get the majority of the revenue.
Mr. Jam. I don't think I am suggesting anything yet because
I had only started talking. I believe that the 50 percent is
the correct--as the rate the court has set, that is the correct
way to go.
Mr. Chaffetz. I am sorry, I only have got 5 minutes. I have
to keep going. If you like the way the rates are set, I accept
that, and let me move on.
Mr. Kennedy, it is obvious from the part of the argument
you just need to pay more. You are not paying enough. I would
like to you address that.
Maybe I should actually start with Mr. Pakman here. Why
aren't more companies going into this? One of the things that
is disturbing is MTV, Rolling Stone, Microsoft, Yahoo, AOL,
they all tried to get into this business and couldn't make it
work. And the argument is, well, these guys need to pay more;
they just need to pay more. Why don't they just go out and
charge? I mean, obviously there is a marketplace, according to
the argument on this side of table. The argument is that they
are just not charging enough. Their ad sales team isn't good
enough. How do you view that?
Mr. Pakman. Congressman, we don't have a market here. We
have very few willing sellers, huge amount of concentrated
power, and we have almost no buyers. We have only one large
stand-alone company in Internet radio, and we have plenty of
other players who are in digital music, but they subsidize
digital music with profits from elsewhere in their business. In
a sense they use music as loss leaders.
We want an ecosystem where we have hundreds or thousands of
participants, licensees offering music services, Internet radio
and others.
Mr. Chaffetz. I'm sorry, my yellow light is already on. I
got to keep going. Mr. Kennedy, can you address that please.
Mr. Kennedy. I think the evidence is that Pandora monetizes
Internet radio better than any other entity based on all of the
public information that I've seen. This is not a Pandora-
specific issue. The issue is that at 7 percent of all radio
listening in the U.S., we're paying a quarter of a billion
dollars. That if the CRB rates were applied to all music radio
listening in this country, the rates due would be over $4
billion.
Mr. Chaffetz. Sorry to interrupt you right there, but based
on what happened in your last experience, what percentage of
your revenue would have had to be paid out in royalties?
Mr. Kennedy. If the CRB ruling in 2007 were let to stand,
we would have to pay more than 100 percent of our revenue in
royalties and would have run out of business.
Mr. Chaffetz. Mr. Chairman, as I yield back, I believe that
the 801(b) standard, what this bill is suggesting that we would
move toward, would be the more fair opportunity for those to
have this discussion and take into account all of the factors
that are out there, not just cherry-picking, some selected
deals in order to convince some judges out there, I really do
believe it can actually get to that standard.
So this is the beginning of this, Mr. Chairman. I
appreciate the discussion here, but I hope that this will
continue to bear fruit because Internet radio should be
thriving far and above and beyond just Pandora.
Mr. Huppe. Mr. Chairman, may I respond to that?
Mr. Goodlatte. Yes. The gentleman's time is expired but
we'll allow you to respond.
Mr. Huppe. Thank you, Mr. Chairman. There's been much said
about Pandora and the percentage of revenue that they pay. And
what I think it's important for everyone to understand is that
percentage of revenue can be a very misleading quote. The only
person that has control over Mr. Kennedy's revenue in this room
is Mr. Kennedy. Pandora has focused over the past several years
and they've made a conscious business decision, and we don't
fault them for it, but it's a business decision that was made
to focus on growing their user base, growing their audience,
growing their brand, growing the hype. They've done a very good
job of it and we congratulate them.
They had an IPO last year. But the fact that they have done
things other than focus on revenue is a very important part of
this discussion. A few years ago, they would charge heavy users
who went----
Mr. Chaffetz. Can you point to anybody else that is
successful? Point to one. Just name one.
Mr. Huppe. It depends what you mean by success, Mr.
Chaffetz.
Mr. Chaffetz. Revenue, money, dollars, stock.
Mr. Huppe. There are many companies who do not----
Mr. Chaffetz. Name one.
Mr. Huppe. There are many companies who do not start off in
a revenue positive situation.
Mr. Chaffetz. I know, because there's none. Name one.
Mr. Huppe. We are----
Mr. Chaffetz. It's been out there for awhile. The Internet
is thriving. I think it's going to be around for awhile. Name
one that is successful under this model.
Mr. Huppe. If you look to success as a measure of
investment, $1.5 billion market cap of Pandora, commercial----
Mr. Chaffetz. Outside of Pandora, name one other company
that's successful.
Mr. Nadler. Mr. Chairman.
Mr. Goodlatte. The time of the gentleman has expired. For
what purpose does the gentleman from New York take recognition?
Mr. Nadler. I just ask that Mr. Huppe was answering a
question and then Mr. Chaffetz came in with some other
question. I would like to hear the end of the answer he was
giving. It was very fascinating as far as he got.
Mr. Goodlatte. We're going to let him very briefly answer
that, and then we are going to move on to the gentleman from
Florida who has been waiting patiently to ask his questions.
Mr. Huppe. Thank you, Mr. Chairman. As an example of
Pandora's focus on users over revenue, a few years ago for
heavy users who went over 40 hours a month they would charge
$0.99 if a heavy user went over 40 hours a month. There came a
point where they stopped doing that.
Mr. Chaffetz. Mr. Chairman, he's not answering the
question.
Mr. Goodlatte. I know, but we all exceeded the amount of
time, so we're going to discontinue and we'll allow the
gentleman from Florida to follow up on that if he wishes to.
But the Chair recognizes Mr. Deutch for 5 minutes.
Mr. Deutch. Thank you, Mr. Chairman. I choose not to follow
up on that. Here's what I would like to do. Mr. Kennedy, you
and I have spoken before about your service. I've suggested to
you that there may be no one in Congress who spends as much
time enjoying your service as I do. I'm a huge fan. What I've
learned in preparation of this hearing that was the most
troubling to me though, quite frankly, is that for all of the
discussion about percentage of revenue, the number, and I would
like to give you the chance to talk about this, but the number
that there seems to be general agreement on, that listeners
like me wind up contributing to the artists is $4 per listener,
$4 per listener goes to the artist. And that according to some
of the estimates that we've seen, the recording industry has
some and there are some others out there, that number under
this legislation would be reduced to less than $0.70.
So I guess I'm troubled by that. And I would actually get
back to Mr. Chaffetz's line of questions here, and the exchange
that was taking place. I understand that there's this
discussion about revenue, but the fact is that there is some
control that you have over revenue. And why is it that instead
of--why is it that this entire discussion is about a percentage
of your current revenue compared to others' percentage of
current revenue instead of a discussion of how you monetize,
and the fact that the results of the way you monetize while
successful generate $4 per listener for all the time I listen
to be reduced under this bill to less than $0.70.
Mr. Kennedy. Mr. Deutch, part of what has, I think,
complicated this debate is to talk about the royalties paid by
fractional pieces; how much per song, how much per user. The
fact of the matter is that we'll pay SoundExchange this year
almost a quarter of a billion dollars.
Mr. Deutch. We don't dispute that you're paying a lot of
money. I'm just looking at how that actually translates to what
artists are paid. And as a per listener, on a per listener
basis.
Mr. Kennedy. And I think for perspective we pay that
quarter billion dollars for approximately 7 percent of radio
usage in this country. A study by a well-respected music
business professor at Washington Lee University said what if we
took the CRB rates and applied them to every song played on the
radio across the U.S. The results in payments due under the CRB
willing buyer/willing seller are estimated by this professor to
be over $4 billion. And for perspective it's important to know
the entire revenue of the recording industry in this country is
that same zone.
Mr. Deutch. I understand that. I'm just asking whether
there are other ways to monetize what you do. Well, let me just
turn to Mr. Reese who has figured this out with the benefit of
not having to pay the performers at all. But Mr. Reese, you
said that--you spoke earlier in your testimony about the fact
that there would be a--I want to make sure that I get this
right. I mean, you talked about broadcast radio being always
free and available all the time, and you worried about--you
warned against this performance tax that may be coming. And I
just wanted to clear one thing up there. On your stations that
are talk radio stations, you pay the hosts, right? And on the
stations that are talk radio stations that don't have local
hosts but have syndicated hosts who aren't in the studio but
your producers there are producing the show, they still, those
hosts still get paid as well.
So I guess what I'm trying to figure out is, as Mr. Kennedy
and Pandora grapples with how to make it work on that side,
here--why is it that you would characterize as a performance
tax a payment that you make regularly in very large amounts of
money to talk show hosts all throughout the country?
Mr. Reese. We are more than a music service. We are not
Pandora, we are not any other webcaster with AM/FM radio. We
are local, we are produced. We're more than just someone who
pushes a button randomly and music comes out. Music comes out,
with all due respect to the brilliant algorithms that Mr.
Kennedy's people have developed. There's a lot more involved in
this. There has been a lot of support here for a negotiated
resolution of this problem. We need a solution where everybody
thrives. On the webcast side only, which is what this
legislation addresses, there's a system in which one side
doesn't have a way to make a profit. We haven't demonstrated it
yet, and a number of people have tried. We haven't been able to
sustain a profitable business on the webcasting piece. And this
piece of it needs a different solution. Ideally, a negotiated
solution.
Mr. Deutch. I understand. I hope this is the start, as Mr.
Conyers said, I hope this is the start of our discussion. But
the one question I'm just trying to figure out is, and Mr.
Chairman, this will be my last question, if you could just
explain to me, and I'm not trying to be flip, I want to
understand, the difference between your station that pays an
awful lot of money for Rush Limbaugh's broadcast to Rush
Limbaugh, and the station that plays Rihanna many, many times
an hour, but doesn't pay her anything, can you just explain
that to me?
Mr. Reese. We are paying the disk jockey who is introducing
Rihanna and is helping her label sell lots and lots of music
over the year. So again, it's not just the musician who's
involved here. I understand your question. It is an issue that
has been addressed and continues to be addressed. It's a very
complicated issue. It lends itself best to private negotiation.
And we're beginning to see that. We believe that's a better
solution than a mandated solution on a one-size-fits-all basis.
Mr. Goodlatte. Thank you, Mr. Reese. The time of the
gentleman has expired. And the Chair recognizes the gentleman
from New York for 5 minutes, Mr. Nadler.
Mr. Nadler. Thank you, Mr. Chairman. Let me say first of
all, just following up on the gentleman from Florida, I don't
think it's a complicated question, I think it's a very simple
question. People ought to be paid for their service. As far as
I can tell performing artists and over-the-air-radio are the
only people in the United States or the world for that--well,
slave labor in some other parts of the world, but only people
in the United States who are not paid for their labor, period.
And to me, that's very simple. I believe basically in the free
market, though some people may not think I do, but I do. I also
believe in government intervention when strictly necessary, but
when strictly necessary. And that brings the question of when
it's strictly necessary. I don't understand why--I do think
that the bill we're talking about here should not be enacted
except perhaps as part of a larger global solution to the
problems we're talking about because any of the specifics just
increase the distortion of something that we keep distorting
all the time.
With that in the background, let me ask a couple of
specific questions. Mr. Kennedy, two questions. First of all,
you've referenced several times a well-respected professor. Can
you tell us who that is?
Mr. Kennedy. Forgive me for not pronouncing his last prior.
His name is David Touves, T-O-U-V-E-S.
Mr. Nadler. And where is he?
Mr. Kennedy. A longstanding business professor at
Washington and Lee University.
Mr. Nadler. Washington and Lee. Thank you. Secondly, as Mr.
Huppe points out in his testimony, the founder of Pandora, who
I think is your predecessor, said only 3 years ago in July of
2009 after the private negotiations on rates concluded that
``Pandora is finally on safe ground with a long-term agreement
for survivability royalty rate--for survivable royalty rates.
This ensures that Pandora will continue streaming music for
many years to come.'' Now you're saying the rates are too high.
Are we going to have to change the law every time the CRB
decides a rate under the law that is not to your liking or to
the Internet community radio's liking? Three years ago you said
this would be fine for a long time, and now you're back and
saying we got to change the law.
Mr. Kennedy. Yes. And I would encourage you to read that
entire----
Mr. Nadler. Yes what? Yes, we have to change the law every
time you don't like the ruling from the CRB?
Mr. Kennedy. We truly want to get Congress out of this
business. And I think all of us who run businesses would like
to spend our time running businesses. But there's unfinished
business here. And I would encourage you to read that full blog
post by Tim Westergren following the settlement in 2009.
Mr. Nadler. But my real question is, without going into
another long discussion here, 3 years ago, the head of Pandora
said after the rate setting, we're finally on clear ground,
it's going to take us for a long time, this ensures Pandora
will continue streaming music for many years to come. The
implication was Congress can relax, forget about it, it solved
the problem for a long time. Now it's 3 years.
Mr. Kennedy. In the very same posting, first of all, that
agreement expires in 2015. We are fully prepared and are living
with that----
Mr. Nadler. So in other words when you--excuse me. So when
your predecessor 3 years ago said Pandora continues streaming
music for many years to come, he was talking about for 6 years?
Mr. Kennedy. Yes.
Mr. Nadler. Okay.
Mr. Kennedy. In one sense he was talking about the prospect
of going out of business. It's also very important, in a
subsequent paragraph, Tim said, the system remains
fundamentally unfair.
Mr. Nadler. Okay. Fair enough. Secondly, let me ask Mr.
Huppe. At $4 a year to a recording artist, which seems a
ridiculous figure, but if it's only $4 a year why are royalty
payments 50 percent of their revenues?
Mr. Huppe. And yes, actually, Congressman, it's $4 to
everybody. Only half of that goes to the artist side. The other
half goes to copyright owners. Two dollars goes to the artist
side.
Mr. Nadler. So even more so, why is it----
Mr. Huppe. And the reason that it is such a big percentage
of the revenue is, as I mentioned, Pandora has made a very
conscious business decision. They could do lots of things to
monetize more than they do.
Mr. Nadler. Okay. So the answer is they should be looking
more at the revenue side?
Mr. Huppe. The revenue side would definitely change that
ratio, yes.
Mr. Nadler. Thank you. I don't want to rush, but I have
more questions. Finally to Mr. Eisenach.
Professor Eisenach, the Internet community says it would
like Congress to change the rate standard it faces from willing
buyer/willing seller to the factors found in section 801(b). In
fact, the Chaffetz bill would use the factors in 801(b) but
then they add additional factors to the current 801(b) law.
First of all, what is our evidence of the kind of rate the CRB
has set in the past using the 801(b) standard?
Mr. Eisenach. Well, in SDARS I proceeding, for example, the
Copyright Royalty Board established that its best estimates of
the appropriate rate, and they were setting it on the basis of
percentage of revenues, was 13 percent. And then they came
back, they considered the 801(b), the fourth standard in
particular, the disruption standard, and decided that, in fact,
the correct standard was 7 percent, so they cut it about in
half.
Mr. Nadler. I have two quick questions. Well, I'll make it
one last one. If the CRB interprets 801(b) as compelling a
below market rate, what will likely happen to the royalties
received by artists under H.R. 6480 which uses a version of
this standard?
Mr. Eisenach. As referred today, half of the royalties paid
under the compulsory license go to the artist, so I think
that's a good estimate. They would lose half of what their--
half of whatever the impact was.
Now, on the question of what would that be, if you just--a
lot of things happen when you change prices. Let me just say
it's very important, you're hearing two numbers here. You're
hearing cost as a percentage of revenues. That's not a number
that economists look at when they think about how competitive
is a market or what are people paying, right? The only thing
you've heard today that approximates a price is $4 per year.
That's a price. The price per play which that is based on,
that's a price. Now, when you start changing prices, which is
what would happen, you would end up with a lower price, a lot
of things can move around. But if you simply take the status
quo, other things equal, and do the math, rates would go down
by--revenues would go down by 85 percent.
Mr. Kennedy. Can I answer just briefly?
Mr. Goodlatte. Actually, we are running very low on time
and neither the Ranking Member or the Chairman have asked any
questions yet, so the gentleman's time has expired.
Mr. Nadler. Thank you. I yield back.
Mr. Goodlatte. And the Chair recognizes the gentleman from
North Carolina, Mr. Watt, for his questions.
Mr. Watt. Thank you, Mr. Chairman. And it's been an
interesting hearing, a lot of different concepts discussed. The
one I'm kind of fascinated with is the one that Mr. Reese seems
to support, which is this free market solution. And I want to
kind of go at that, what that really means. Under free market
solution, I take it we would do away with a compulsory license,
and you would have to go and negotiate with every artist for
the playing of their music. And if you played their music, you
would be subjected to litigation for playing it.
And so I'm trying to figure out what this free market
system is that you are talking about. If you wanted to play Mr.
Jam's music, you had no compulsory license, you got to go find
Mr. Jam because you'd like his music to play on your station
like you go and find your talk artist. Maybe you like Beyonce
for awhile so you will contract with her for a whole year. You
got to pay her. If you like her and you don't go and track her
down and negotiate with her whatever the rates are, she sues
you when you play her music and you're in litigation forever.
That's the free market we're talking about? Or that is
assuming we just passed a law that recognizes a performance
right. We don't do anything else. We don't do anything other
than say performers have a right to be paid for their music
just like everybody else has the right to be paid for whatever
they produce. Is that the free market that you're talking
about, Mr. Reese?
Mr. Reese. Well, there are a lot of nuances to your
question.
Mr. Watt. A lot of nuances to my question, but that's the
free market, I take it. Let me just ask the bottom line
question. Would you accept that free market concept in that
way? Would that be a successful deal for all of the stations?
Mr. Reese. What seems to be beginning to work, Mr. Watt, is
in the current context of a compulsory license record labels
and----
Mr. Watt. So you've done away with the free market because
you've created a compulsory license?
Mr. Reese. You've also created a right that doesn't exist
as well.
Mr. Watt. Okay. We don't do anything. We don't even
recognize a performer's right. So when you use somebody's
music, you get sued. Is that a world that you think would be
successful for the broadcast industry?
Mr. Reese. What seems to be working, beginning to work here
is in the context, in the current world in which we exist,
record labels and broadcasters seem to be beginning to find a
solution here that works for both sides.
Mr. Watt. I understand that, I do recognize that.
Mr. Reese. We are not supportive of a creation of a new
right, we're also not supportive of undoing much of what we've
got so far.
Mr. Watt. That was really the question I was asking. Mr.
Pakman, you've been, since you've testified, left out of most
of the questions and answers. How would you go about monetizing
the rights that Mr. Kennedy has, other than paying for them
through the musicians taking a hit?
Mr. Pakman. I think Pandora is doing a fine job of
exploiting the two business models available to it.
Mr. Watt. My question is are there some revenue sources
that Pandora could access to monetize their business to make it
more viable? That's the question I'm asking. If everything else
was great are there some other revenue sources they could
access?
Mr. Pakman. I believe the only two available to it are to
ask its users to pay and to ask brands to pay, and that they
ask both of them to pay. So I believe they're pursuing the two
business models available to them.
Mr. Watt. Mr. Eisenach, you seem to disagree with that.
Mr. Eisenach. And very briefly, two points. First of all,
there's a lot of entry going on in this marketplace. Pandora
just raised 50--excuse me, Spotify just raised $50 million for
Goldman Sachs who are no dummies and would not be doing that if
they didn't think there were profits to be made. And veterans
of Skype have just entered this market. Apple is considering
entering this market. They all think they're going to make
money.
Mr. Watt. I understand that. I'm trying to find out how you
monetize this other than on the backs of musicians.
Mr. Eisenach. Pandora is the fifth largest wireless on-line
ad network in the world behind companies like Google and
Facebook, just behind them, and fast and growing, faster than
any of them. That's another source of revenue, which is all of
the information that they are accumulating about their
listeners and the ability to sell advertising not only--to sell
that information to other users.
Mr. Watt. Okay. All right. Well, I'm out of time. I'm just
theorizing here. I mean, this is something I proposed the last
time we had this discussion about performance rights. Let's
just do a performance right. If you don't like the rate, let
the market take care of it. I believe in the free market.
Lawyers believe in litigation. I mean, you know. There's some
benefits that we're providing here to all parties, and it just
seems to me that everybody needs to get a grip here and sit
down and try to work this out rather than trying to nibble
around the edges of it. I don't think we can solve this problem
by dealing with 7 to 10 percent of the industry. We got to be
dealing with the entire package here, otherwise I personally
don't have much interest in it.
Mr. Kennedy. Mr. Chairman, may I have a minute to respond?
Mr. Goodlatte. Actually, we are very low on time, so I'm
going to recognize the gentleman from Georgia, Mr. Johnson, for
5 minutes.
Mr. Johnson. Thank you. Mr. Eisenach, in your written
testimony, you argue that market-based rates result in an
efficient system that maximizes consumer welfare, and yet there
is testimony that the market is anticompetitive due to a small
number of competitors that have disproportionate influence over
music licensing. If you would give us a short explanation of
that and also, or an example of that, and also tell us whether
or not the marketplace is freely functioning or is it too
complex, calculated or closely controlled?
Mr. Eisenach. Well, first of all, I would note that the
Federal Trade Commission just as recently as September approved
a major merger between two of the largest, two of the four
largest record labels, and did so saying that there was no
market power issues to be concerned about in approving that
merger. So the current Federal Trade Commission, I think, if
they thought there were market power issues on that side they
would have said so. On the other side of the market, Pandora
brags, or states, ``brags'' isn't fair, we should be proud of
the fact that it has 69 percent of the market for online radio.
So who is the dominant firm if we're going to simply look at
market shares? It is not obvious which is which. Now in all
markets like this, you have firms with large market shares.
That's how they work, and the way they're likely to work in the
future. The battles between these firms over sharing the value
that's created among them are always heated battles, and that's
what you're seeing here. The question is should that battle
take place in a hearing room or should they take place in a
negotiation room someplace probably in Silicon Valley.
Mr. Johnson. Let me ask this question of you, sir, since we
are on the subject of competitiveness. The bill contains
certain activities by copyright owners. It targets those
activities as per se violations, but would permit webcasters to
engage in the same types of communications. Can you elaborate
on that for us?
Mr. Eisenach. Just very briefly. When you establish a
system like the one we have of compulsory licenses, you have
bargaining agents by the nature of the institutional
arrangements involved. And so the paper that I submitted I go
through a long list of things that are in IRFA, the proposed
legislation, which attempt to tilt the playing field. And it's,
I think, a very kind of bold face attempt to simply gain the
upper hand.
Mr. Johnson. Let me ask Mr. Huppe also on that issue.
Mr. Huppe. Thank you, Congressman. It's important to be
able--what SoundExchange does, for instance. When we administer
this license, this is the job we've been selected to do. And
part of what we have to do when we administer that license is
educate our side of the table and let people know what's going
on with the statute. It's very important to remember that when
the CRB sets a rate it is binding on all record companies. It
forces them to surrender their property at the rate the CRB
sets. And I would note there's no such similar obligation on
the other side. It doesn't bind the webcasters to do anything.
It binds the record companies.
So it's not only the right thing to do. We believe it's our
duty to work with them, talk to them, educate them about what's
going on and when we go to the CRB, represent them on their
behalf. And some of the language in the bill, which is one-
sided directed our way, is troubling in its restrictions.
Mr. Johnson. Thank you. Let me ask Mr. Reese. Mr. Reese, in
1998, we responded to the rise of satellite and digital
technologies by amending the Copyright Act to create a
performance right, but exempted terrestrial broadcasters from
paying royalties for this right. The rationale for this
exemption was that broadcasters and sound recording owners
enjoy a mutually beneficial relationship where broadcasters
promotion and increased exposure of music benefit sound
recording owners through increased sales, tours and other
sources of income. Has that relationship between the
broadcasters and the sound recording owners changed?
Mr. Reese. I don't believe that mutually beneficial
relationship that was talked about in 1998 has changed. And
that is indicated by the efforts the recording industry goes to
with the radio industry to continue to encourage us to play
their music, even though they're not getting paid for that
performance directly.
Mr. Johnson. Do you believe that it's fair to both artists
and owners of sound recordings, and it's fair to all providers
of music or publishers of those sound recordings, do you think
it's fair for there to be some discrimination between any of
those platforms or artists?
So in other words, what I'm saying is I believe that we
should treat artists fairly across the spectrum regardless of
what medium or what platform we're on, and we should also treat
all particular phases of a platform equally as well. Do you
believe that that is true?
Mr. Goodlatte. I hate to interrupt the gentleman from
Georgia to say that's a great question. The answer is going to
have to be in writing. And because the time has expired all of
my questions will be submitted to the members of the panel in
writing as well. Both the Republican Conference and Democratic
Conference have business that started at 2 p.m. And I regret
that we have to cut the hearing short, but I thank you all for
your contribution. This has been a very good start to
discussing a very important issue.
Without objection, all Members will have 5 legislative days
to submit to the Chair additional written questions for the
witnesses which we will forward and ask the witnesses to
respond as promptly as they can, so their answers may be made a
part of the record. Without objection, all Members will have 5
legislative days to submit any additional materials for
inclusion in the record. And with that I want to again thank
our witnesses for their contribution today, and the hearing is
adjourned.
[Whereupon, at 2:09 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Ranking Member, Committee on
the Judiciary, and Member, Subcommittee on Intellectual Property,
Competition, and the Internet
Today we examine various music licensing issues and will explore
ways to improve the current music licensing system.
It is my understanding that this process will continue into the
next Congress, which I strongly support.
The Internet has dramatically changed the way music is produced,
marketed, and distributed. In particular, Internet radio has become a
major source of music for many listeners.
In addition, technological developments have changed the ways by
which artists are discovered. In past years, new artists and their
songs were typically introduced via the radio.
Today, artists are discovered through a vast array of platforms,
including blogs, YouTube videos, webcasts, satellite radio broadcasts,
and even the artists' own websites.
In today's world, music is accessible to the public in whatever
format is desired, at any time, and on demand.
As we discuss the various issues presented by these technological
developments, it is essential that we also consider the potential
impact that our decisions will have on songwriters and whether their
entitlement to proper compensation is adversely affected by these
decisions.
Among the issues we should address during today's hearing and the
hearings we anticipate holding in the next Congress are the following.
To begin with, I am concerned that H.R. 6480, the ``Internet Radio
Fairness Act,'' may not actually improve the current system and that it
could result in artists receiving less compensation.
The bill seeks to facilitate a process by which all digital music
services would be judged by the same rate-setting standard.
The bill does this by changing the existing ``willing buyer,
willing seller'' standard that Internet webcasters currently use to the
801(b) standard used for determining rates for satellite and cable
television music channels.
As a result, H.R. 6480 would lower the royalty rate for Internet
webcasters as well as lower the royalties that Internet webcasters
would pay to artists by more than 85 percent.
Let me point out one obvious fact: musicians and singers across all
musical genres depend on these royalties, which are often their only
compensation for their work.
Not surprisingly, this explains why more than 125 artists have
signed on to a letter expressing strong opposition to H.R. 6480.
It also explains why the bill is opposed by the AFL-CIO, NAACP,
musicFirst Coalition, SAG-AFTRA and the American Association of
Independent Music.
It is clear that we cannot ignore these serious concerns.
Another issue that must be examined is whether our efforts to
improve the music licensing scheme will be, in fact, truly fair if it
does not include performance rights for sound recordings.
As everyone here knows I am a strong supporter of artists and
believe that the current compensation system on terrestrial radio--by
which I mean AM and FM radio--is not fair to artists, musicians or the
recording labels.
When we hear a song on the radio, the individual singing the lyrics
receives absolutely no compensation.
To address this inequity, I introduced the ``Performance Rights Act
of 2009,'' that would have created both an AM/FM performance right and
set a new standard for digital services.
Every other platform for broadcast music--including satellite
radio, cable radio, and Internet webcasters--pay a performance royalty.
Terrestrial radio is the only platform that does not pay this royalty.
This exemption from paying a performance royalty to artists no
longer makes any sense and unfairly deprives artists of the
compensation they deserve for their work.
And, finally, the process for setting rates for music royalties
should be inherently fair.
Some, however, claim that the current rates are too high.
The compulsory license for digital music radio services dates back
to 1995 with the passage of the Digital Performance Right in Sound
Recordings Act.
This Act allowed digital musical broadcasters--like cable and
satellite services--to transmit sound recordings without asking
permission or negotiating rates with rights holders. Instead, the rates
would be set by statute.
In 1998, Congress granted Internet radio services permission to
take advantage of this compulsory license, but established that a
market-oriented ``willing buyer, willing seller'' would be put in place
moving forward.
Some, however, allege that this standard is not fair.
Thus, our goal should be to examine the bona fides of these claims
to ensure that our royalty system is, in fact, fair and competitive.
I look forward to working together with my colleagues to ensure
that the music licensing process is fair and does not have unintended
consequences that will harm artists.
ATTACHMENT
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Prepared Statement of the Honorable Jared Polis, a Representative in
Congress from the State of Colorado
I am pleased that the House Judiciary Subcommittee on Intellectual
Property, Competition and the Internet is holding a hearing today on
music licensing, and specifically discussing the Internet Radio
Fairness Act, a bill sponsored by Representative Chaffetz and myself. I
am thankful to Subcommittee Chairman Goodlatte and Ranking Member Watt
for holding this hearing on this very important and timely issue.
The Internet Radio Fairness Act (IRFA) is a common-sense proposal
to address the discriminatory and unfair royalty rates currently
imposed on Internet radio. The premise of the bill is simple: put
Internet radio under the same standard which is used to establish rates
for their competitors in the satellite and cable radio industries.
In 1998, the Digital Millennium Copyright Act established the
``willing buyer-willing seller standard now used by the Copyright
Royalty Board (CRB) to set performance royalties for Internet radio. As
time has shown, the ``willing buyer-willing seller'' approach is
unworkable and has required Congressional intervention every time it
has been applied. It assumes there is a competitive market for sound
recording performance royalties when a true market has never existed.
Under this broken royalty system, Internet radio providers pay
exorbitant royalty rates: approximately half of their total revenues go
to royalties. Without Congressional intervention, internet radio
companies would be paying more than 100% of revenue and most would have
shuttered their doors. In comparison, satellite radio will pay 7.5%,
and cable radio will pay 15% in revenues in 2012.
Before coming to Congress, I launched several online companies, so
I know the Internet's power to launch new businesses and to create
jobs. The existing standard has not only harmed the ability of Internet
radio providers' ability to grow and compete, it has prevented new
entrants from entering the marketplace. Several large companies have
attempted to enter the marketplace, but have failed because they can't
make a profit under the current royalty system.
Under this legislation, Internet radio would be judged under the
more equitable 801(b) rate-setting standard, which sets forth four
balanced objectives to maximize the availability of creative works to
the public, provide copyright owners a fair return, and support the
development of innovative technologies that offer copyrighted works to
the public. This standard has been used for 30 years to determine
copyright license fees, and is the same standard that satellite and
cable radio currently enjoy. Applying this same standard would promote
innovation, increase consumer choice, and generate economic growth.
The rate structure problems Internet radio faces are compounded by
the fact that the laws governing the CRB provide few procedural
protections for the parties. Current CRB proceeding rules do not allow
copyright users to present all relevant evidence, such as marketplace
agreements, which harms the judges' ability to accurately determine the
royalty rates. Moreover, the existing process to select CRB judges
prevents adequate Congressional oversight, and has resulted in
discriminatory rate decisions.
This bill attempts to address these problems by interjecting due
process and fairness into the royalty rate structure. It adds
procedural protections consistent with the Federal Rules of Civil
Procedure and Federal Rules of Evidence, as appropriate, to further
information-sharing between the parties, promote voluntary settlements,
reduce discovery and litigation costs, and subject the CRB decisions to
judicial review. It also calls for the appointment of judges by the
president, with the advice and consent of the Senate, instead of by the
Library of Congress.
Unfortunately, we have seen a pattern of misinformation from the
other side about the underlying bill. For example, claims that the bill
will cut rates by 85% are misleading. The bill does not set an actual
rate, it sets a standard. The rate set by CRB if this bill passes is
unknown, but the intent is to allow the CRB to set a sustainable rate
to allow Internet radio to grow and flourish. Simply put, claims about
an actual number at this point are purely hyperbole.
Also contrary to opponents' claims, the premise of the IRFA is not
about paying artists less, it's about allowing Internet radio providers
to thrive--resulting in more exposure and more revenue for singers,
songwriters, and record labels of all kinds. Further, allowing the
industry to expand will spur further innovation and improve artists'
ability to build a base of support and find new audiences.
As a co-sponsor of the Performance Rights Act, I share the concerns
raised by many witnesses at this hearing that we need to address the
broadcast radio problem. However, it is my belief that the Internet
radio royalty structure is an entirely separate and distinct issue and
the time for consideration of Internet radio rates is now. The CRB is
set to begin the next rate-setting proceeding in 2015. Internet radio's
potential must be unleashed now--not sometime in the future.
It is time for America's outdated laws to catch up with today's
technology so we can foster even greater innovation and job creation--
generating more opportunities for artists and radio competition--for
the benefit of us all.
Response to Questions for the Record from Joseph J. Kennedy,
Chairman and Chief Executive Officer, Pandora Media, Inc.
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Response to Questions for the Record from Bruce Reese,
President and Chief Executive Officer, Hubbard Radio, LLC
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Response to Questions for the Record from David B. Pakman,
Partner, Venrock
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Response to Questions for the Record from Jimmy Jam, Chair Emeritus,
The Recording Academy, Record Producer, Songwriter, Recording Artist
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Response to Questions for the Record from Jeffrey A. Eisenach,
Managing Director and Principal, Navigant Economics
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Response to Questions for the Record from Michael Huppe, President,
SoundExchange, Inc.
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