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Internet Radio Fairness Act: Pandora vs. Recording Industry Association of America (RIAA)

Prepared by: Yubi Gong Jolisa Salazar Wiriya Sarika

COMM 4395 Dr. Babbili December 4, 2012

2 Internet Radio Fairness Act The existence of the internet had clearly been one of the most important tools that human rely on greatly on a daily basis. The internet facilitates multiple ranges and fields of profession, from medical to leisure. It is widely use and is unarguably one of the fastest ways to reach millions of people across the world within seconds. Combining the accessibility of the Internet and radio together, it created what is simply called internet radio but indeed was a phenomenon that changed the music industry momentously. Its networks had brought new ways for people to be able to easily access to licensed music whenever and wherever they want, at fraction of a cost they would be paying for physical copies. A large number of people prefer to use Internet radio because Internet radio helps the struggling music industry to expand much faster since it cannot expand or grow without money. Also it offers up-coming artists a chance to get their work out in public. However, the rules also need to be changed. Copyrights and licensing become more complicated as internet radio spreads, and everyone involves all strive for their piece of the pie. The music industry grows faster than it ever could, but also was affected in many ways as well. We, as internet users, also find benefits by using Internet radio; we can easily connect with artists that we otherwise would not find on our own, since space on traditional radio is limited. If there was no Internet radio existing, access to music would be much more limited. The growths of the Internet and radio have been proportional. In other words, as the Internet develops, people are more easily able to share music files and also communicate on the Internet. The words of Internet and radio were not put together in a short period of time. There were timelines in order to reach the advent of Internet Radio, from the invention of the Internet to Internet radio.

3 The history of the Internet Radio began with the development of the Internet and the radio. It dates back to when both the Internet and the radio were first introduced. The radio such as AM radio appeared in 1920s. Later, in the early 1990s, the Internet had become available to the general public due to the development of the World Wide Web by Tim Berners Lee. In the period of 1992, the idea of listening to music on other devices, such as MP3s, was adopted, which became popular among people; MP3s enabled users to download their favorite songs to the devices. In the mid 1990s, the first few Internet radio stations were launched and started streaming music in addition to talk shows. Internet radio became popular in a short period of time because the access to Internet radio services was easier than traditional radio stations, and internet radio was readily available to everyone. However, as the numbers of the Internet radio users were growing, they were also sharing files and downloading music for free as well. As a result, it caused the decline in many record labels and bands sales. The number of users on the Web greatly increases because of the ongoing development of the Internet. The Internet, which was originally used as a form of communication, eventually started being utilized for commercial purposes (Cosper). Due to the controversial issues of sales and royalties in music industry, President Bill Clinton had signed a bill called the Digital Millennium Copyright Act in 1998. This Act created specific rules for the Internet broadcasters to adhere to in regards to copyright infringement and royalty fees which are as followed (The digital, 2001):
In general, limits Internet service providers from copyright infringement liability

for simply transmitting information over the Internet.

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service providers are expected to remove material from users web sites that

appears to constitute copyright infringement

Webcasters pay licensing fees to record companies.

This unexpected policy became a burden for many radio stations as they were not able to pay royalties. In the long run, some stations ended up playing unsigned bands or purchased some music from small indie labels. That way, there were only small fees they had to pay. By the end of the 1990s, thousands of stations appeared online. Even until now in 2012, the numbers of online stations are still growing due to the highly advanced speed of the Internet that increased the number of Internet users. Also, Internet radio became one of the best tools for artists to spread their work out to the public. Nowadays, there are a great number of internet radio stations available that use live streaming music and talk shows. Among those stations, Pandora has been one of the top and the most popular Internet Radio stations in the United States (Monika, 2012). According to Statistics Brain (2012) Pandora has about 80 million registered users. Pandora also offers free Internet radio service on any mobile devices such as phones and tablets. It was created by the Music Genome Project in 2000 and founded by Will Glaser, Jon Kraft and Tim Westergren. One of the advantages of using Pandora to consumer is that Pandora custom built playlists based on users personal preferences. Users can create their own stations, look up their favorite artists and music, and add them to their profiles. On licensing, Pandora pays fees to agencies such as BMI to benefit composers and songwriters. In order for users to access to Pandora, they must choose between two different subscription plans: (1) a free subscription and (2) a fee-based subscription. In the free subscription, users can listen to music for free, but the plan is supported by occasional

5 advertisements. With a fee-based subscription, Pandora charges users $36 each year in order to exempt advertisement service. According to the interviews and surveys we conducted, many of Pandora users use or would choose the free subscription plan. This fact may lead us to question exactly how Pandora is expected to make profits despite providing a free subscription service. The profits simply come from subscription revenues and advertisement revenues. The second plan, a fee-based subscription ($36/year) raises profits. Pandora also has partnered with many advertisement companies by delivering ads to listeners during the streaming music service. The total revenue that Pandora earns is $80.8 million; of the total revenue, $70.6 million is advertising revenue, and the other $10. 2 million comes from the subscription revenue (Bell, 2012). At the present time, Pandora is currently undergoing an issue over royalties; according to the Electronic Frontier Foundation, Pandora pays about 50% of their revenues to record labels and artists while satellite radio pays only about 10%, and traditional AM/FM stations pay nothing. The issue involves Pandora and the Recording Industry Association of America (RIAA), which was formed in 1952. The RIAA is a trade organization that supports the creative and financial vitality of the major music companies (Recording, 2012). RIAA mainly protects artists and music labels under different laws and rights such as the First Amendment right. Each side of the argument is aiming for is the total opposite; Pandora concerns more about their users whereas the RIAA want protect the artists and the recoding labels. Based on this fact, the issue between Pandora and the RIAA has initiated and expanded with the recent introduction of the Internet Radio Fairness Act by three representatives: Congressmen Jason Chaffetz, Jared Polis, and Senator Ron Wyden. Internet Radio Fairness Act, which is a bipartisan bill that was proposed to Congress in September of 2012, is designed to

6 reduce royalty fees paid by internet radio provider. The representatives believed the Act would remove discrimination in music industry and give Internet radio stations a fairer process for setting the price of their music while the RIAA is opposing it. The Act has brought upon many discussions and arguments which are increasingly becoming more controversial as time goes on. Also, Internet radio stations have visited the Congress twice, in 2008 and 2009, to get temporary relief from rates that would greatly affect their business structures. The Internet Radio Fairness Act is becoming such a big enough issue that it is stirring many opinions creating those who are for the act and those who are against it. We eventually see one big internet radio company, Pandora, who is greatly supporting the Internet Radio Fairness Act for their own purposes, is up against the RIAA, who are opposing the act on the behalf of music artists and the majority of the music industry. Upon the appearance of the Internet Radio Fairness Act, not only did Tim Westergren, who is the co-founder of Pandora, sent out an email but had also immediately posted a video on Pandoras website, including the explanation of unfair treatment of Internet Radio and pleading its faithful listeners to help support the Act. In this video, Westergren stresses that the Internet Radio (not just Pandora) are being discriminated against because of their high fees in music royalties. "The current law penalizes new media and is astonishingly unfair to Internet radio," Pandora said on its website, he continues, We are asking for our listeners' support to help end the discrimination against internet radio. It's time for Congress to stop picking winners, level the playing field and establish a technology-neutral standard (Pandora, 2012). So when asked the question: Why arent streaming music services making any money? and that is because they paying way too much money on music royalties fees. In Pandoras case, according to Louis Goddard, reporter from The Verge, they are paying over 50% of their revenue

7 to music royalty feesfar more than the 7 to 16% paid by other digital options while conventional terrestrial radio stations, on the other hand, are not required to pay any royalty fees at all (Goddard, 2012). Brad Chacos of Digital Trends states exactly how the music license fees works: to whichever is greater, $0.02 per listener per hour or 25% of the companys revenue. And the phrase to whichever is greater is what is causing Pandora to pay out over half its revenue in royalties (Chacos, 2012). With such a big cut into their revenue going into music royalty fees, Pandora appears to be struggling to make money of their own. According to one business graph provided by Gobry, we are shown the revenues and expenses of Pandora over the years of 2010-2012. The amount of revenue and the total operating cost are both steadily increasing over the period of time however the amount of revenue made usually falls short of the operating cost (the cost needed to keep Pandora in business). There are some rare cases, however, where the revenue would be just slightly more than the cost but it would be such a small increase that is hardly noticeable (Gobry, 2011). Pandora primarily receives money from its advertisements, but not just any ad will do. Gobry goes on to say that Pandoras desktop version advertisement is where the real money comes in. However, because 70% of Pandoras usage comes from the mobile version, where the advertisements shown there are lower-priced, it causes Pandora to have lower revenue per user (Gobry, 2011). Another issue when making money from advertisements is the little amount of ads Pandora carries compare to terrestrial radio. Pandora does not like to pester its users by interrupting their music with annoying advertisements; however, being too considerate is also hurting Pandora because they are getting even less revenue. According to Reuters, Pandoras

8 success has been double-edged, meaning The more customers it gains, the more money it has to pay overall for rights to stream music (Reuters, 2012). Other reasons to support Pandora are because it offers a more personalized system where users can create their own radio stations. Much of the music that is played there does not even get played anywhere else and with the Internet Radio Fairness Act, it will level the playing field for internet radio and help fuel more innovation, allowing for more music choices for the listeners and enabling greater exposure for thousands of artists who are not otherwise heard in standard commercial radio. While Pandora offers good points to support the Act, the Recording Industry Association of America believes Pandora is full of lies. This issue is critical to the tens-of-thousands of recording artists we represent all of whom rely on this digital performance revenue stream to make a living, said the SoundExchange President Michael Huppe. It is important that we protect artists and the long-term value of their music, which is, after all, the foundation of Internet radio (quoted in Quinn, 2012). The RIAA are claiming that this Internet Radio Fairness Act will cut paychecks to good hard-working artists and labels just so Pandora will have more money in their pockets that they do not already need. Ponder, a reporter from Pagosa Springs, Colorado, who greatly opposes the Act, says that Pandora is fine with their revenues. He says Pandora is expected to clear $600 million in revenues next year under the current system, and has seen year to year revenue growth that would be the envy of many businesses and families in this time of slow economic growth (Ponder, 2012). The Internet Radio Fairness Act is facing significant resistance from both recording industry bodies and their congressional allies. Most notably, one Representative named Jerrold Nadlar has recently introduced a draft bill called the Interim Fairness in Radio Starts Today

9 (FIRST) Act. According to Goddard, the Interim FIRST Act aims to place satellite and cable radio royalty rates in line with the higher fees paid by internet services (Goddard, 2011). So he is helping to push all types of radio to pay as high fees as Pandora is currently paying. A quote from Nadler himself says that the lack of a performance royalty for terrestrial radio airplay is a significant inequity and grossly fair (Goddard, 2011). With all this said one can wonder exactly how much money do artists make generally online. According to one very long graph in an article done by Schroeder, for an music artist to make approximately $1,160/month (at minimum), they must sell over a variety of 6,000 CD albums, have over 16,000 MP3 downloads from sites such as iTunes and Amazon, and have over 6,000,000 music streams played per month from three major internet radio sites (Rhapsody, Last.fm, and Spotify. Note that this excludes Pandora) (Schroeder, 2010). It may sounds like a lot to accomplish in one month but it can be fairly done by major and highly popular music artist. And this is money made from online sources only. We would also like to point at that there are other ways that music artist can earn money and that they shouldnt rely solely on Pandoras or any other radio music royalties. Paul Resnikoff from Digital Music News wrote an article stating 42 different ways a music artist can earn money. Theses ways include six different categories of revenue such as:

Songwriter & Composer Revenue (earning revenue from publisher advance, mechanical royalties, commissions, PRO royalities, composing original work for broadcasting, revenues from ringtones, synch licenses, sheet music sales, ASCAPlus Awards Program, and publisher settlement);

Performer & Recording Artist Revenue (includes having a salary from being a member of an orchestra or ensemble, earning money from shows and performance

10 fees, record label advance, record label support, retail sales, digital sales, and sales at shows, interactive service payments, digital performance royalties, AARC royalties, neighboring rights royalties, AFM and secondary market funds, AFM and sound recording special payments, AFTRA contingent scale, and label settlements);

Session Musician Revenue (include session musician fees for studio work or live work and AFM/AFTRA payments);

Knowledge of Craft (earn revenue if a music teacher, producer, or have honoraria or speaker fees);

Brand-Related Revenue (revenue earned from merchandise sales, fan clubs, YouTube Partner Program, advertisements, persona licensing, product endorsements, and through acting);

Fan, Corporate and Foundation Funding (receiving funds directly from fans, sponsorships, and grants); and other ways such as arts administrator where money is paid for managing the administrative aspects (Resnikoff, 2012).

The Internet Radio Fairness Act will undeniably affect the artists paycheck as well as how they utilize internet radio as part of their outlets. Though the artists have many different ways they can make money, music sales are still the main source of revenue that they rely on. In an interview of a Corpus Christi local DJ, DJ Dust, who apart from being a DJ, also have series of music singles out on iTunes. He mentioned he is also one of the internet radio users himself, as he uses them to find new music and also for his own personal time as well. He agrees that internet radio is something that helps artists expand their work and mostly help them more than it would hurt them. When asked to provide an insight on the Internet Radio Fairness Act, he said,

11 50% is a good rate. If they can keep it at that, that would be awesome. But I dont know how that would balance out. This radio is only paying this much, and then your business is paying 50%. I can see why theyre upset, he added, but of course, as an artist I would say stick with the 50%. Since the artists do not generally make much money on their own without tools to help them get their music out, it is crucial for them to be able to make money off of outlets such as internet radio as much as they could. The fact that internet radio can play bulk amounts of songs without having users pay for each one as much as they should, the radio is responsible for compensating the artists for their work. Ultimately, no artists would want the rate to be brought down since it is what they make a living out of. On the other hand, great number of internet radio users is generally fond of the fact that the services are free. They might not be aware of the fact that internet radio is actually paying roughly half of their revenue to the music companies. In a paper-based survey conducted based on 50 participants who are internet radio users at Texas A&M University Corpus Christi, more than 65% use internet radio on a daily basis, while 80% of the participants use internet radio on their handheld devices. Additionally, over 75% are Pandora users, and only 4 out of 50 people actually have to pay for the services they use. From these data collected, it can be concluded that internet radio is large part of the music industry and that it has huge amount of loyal users that will be affected from the act if it were not to be passed. Pandora, aforementioned, constantly running a revenue deficit because of the high royalty fees they have to pay. Just as in any other business, if the company has to continue paying out their own pocket, at one point they might not be able to operate at all.

12 While one could argue that users are just benefiting from these services because they are free, the artists actually benefit from internet radio and its user base as well. Savitz, a Forbes reporter, stated, The breadth of music available online simply cannot be replicated in a mainstream terrestrial context. Artists that have had no airplay can find sizable audience online and be compensated accordingly he continues The more equitable the royalty terms, the more likely online radio will flourish. The more it flourishes the more artists stand to benefit (Savitz, 2012). From the survey conducted, 92% of the participants said that they have discovered new artists via internet radio. In the interview of internet radio users on campus, one of the participants said, Often I will type in artists that I know and then it will bring up artists that I have not even heard of before because they offer similar types of sound and genres of music. One participant was even able to name an artist that he discovered recently. Users were able connect with artists they otherwise might not have known at all, and artists were able to reach new audiences and spread out their work to different groups of listeners. The Internet Radio Fairness Act is being presented from two perspectives; Pandoras and the RIAAs. Therefore, to determine their ethical aspects, there are a few questions to consider if the Act is something one should be supporting. First of all, does the fact that Pandora is pleading for support to reduce the royalty fees paid by internet radio equals stealing out of the artists pocket? Secondly, does the Internet radio really help the music industrywhat are both parties intention behind their actions? And the final question is, should we or should we not support the Act for it to be passed? One way of analyzing this issue is to look at it through the Potters Box model of reasoning. First and foremost, the definition, which is the current issue that the Internet Radio Fairness Act is being proposed is to reduce internet radio royalties by leveling it with traditional

13 and satellites radios. Second, the values Pandora and the RIAA possessed regarding the issue. Pandora, in this case, wants fairness for internet radio as a whole, and by doing so; they could support non-mainstream musicians as well as provide more choices and freedom to listeners. The RIAA, on the other hand, is supporting the artists with fair compensation, and valued fairness for all radios by supporting the Interim FIRST Act instead. Pandora and RIAA also have different views on their principles as well. Pandora wants solely to end discrimination against internet radio, while the RIAA is aiming to compensate artists for their hard work as much as they could. Finally, the loyalties both parties have are on the opposing sides. Pandora has loyalties for their users, other internet radio providers, and the organization itself. On the contrary, the RIAA has loyalties to the artists and the music owners instead. After looking at the issue through the Potters box model of reasoning, we, as Internet radio users ourselves, believe that the Act is something that we would give our full support. We are confident that if the Act were to be passed, it will help the music industry and internet radio more than it would hurt them as a whole. By reducing royalty fees paid by internet radio providers, the music industry will grow, which ultimately means more revenue for the music artists and more choices for the listeners as well. When there is less cost for internet radio operations, they will be able to afford hosting more artists and expand their company for a better service and continuity of free services. That will result in more users interests in internet radio, and eventually the users, the company, as well as the artists will all benefit from the Act all together. The internet is indeed something that was created to easily reach millions of audience around the world. There are costs of being able to do so, as mentioned earlier regarding the free and easy sharing of music uses that are uncontrollable at some point. Though one could argue

14 that the fact that music was able to spread so quickly could only benefit the artists, it is also a way that the artists work could be abused and not be compensated for. As internet radio providers are helping the industry expand and bringing more opportunities to upcoming artists, rules and regulations must be followed indisputably. The Internet Radio Fairness Act, if passed, will bring fairness to the providers and enable them to continue their contribution to the industry without breaking any rules of copyright and intellectual properties.

References Anonymous, (2012, November 14). Billy Joel, Rihanna fight Pandora over Compensation. Reuters. Retrieved November 30, 2012 from http://www.reuters.com/article/2012/11/14/pandora-musiciansidUSL1E8ME83H20121114 Bell, Killian. (2012, May 24). Pandora boasts 52 million active users, $80. 8 million revenue for first quarter. TechnoBuffalo. Retrieved from http://www.technobuffalo.com/news/music/pandora-boasts-52-million-active-users-80-8million-revenue-for-first-quarter/ Chacos, B. (2012, October 12). Does the RIAA even want Pandoras Golden Eggs? Digital Trends. Retrieved November 13, 2012 from http://www.digitaltrends.com/music/doesthe-riaa-even-want-pandoras-golden-eggs/ Cosper, A. (n.d.). The history of internet radio. Retrieved from http://www.tangentsunset.com/internetradio.htm

15 Gobry, P.E. (2011, December 16). How Pandora Makes Money. Business Insider. Retrieved November 13, 2012 from http://articles.businessinsider.com/2011-1216/research/30523900_1_music-genome-project-pandora-s-revenue-tim-westergren Goddard, L. (2012, September 24). Pandora backs Bill to Cut Internet Radio Royalty Rates. The Verge. Retrieved November 13, 2012 from http://www.theverge.com/2012/9/24/3381396/pandora-internet-radio-royalty-bill Monika. (2012, January 25). Top 10 best internet radio stations of 2012. Retrieved from http://savedelete.com/top-10-best-internet-radio-stations-of-2012.html#.ULzzyeOe-2u Pandora. (2005-2012). Press. Retrieved from http://www.pandora.com/press Ponder, H. (2012, October 4). Pandora Threatening Americans Musicians. Pagosa Daily Post. Retrieved November 13, 2012 from http://www.pagosadailypost.com/news/21641/%27Pandora%27_Threatening_American %27s_Musicians/ Quinn, G. (2012, November 14). Artist Oppose Internet Radio Fairness Act Pushed by Pandora. IPWatchdog. Retrieved November 30, 2012 from http://www.ipwatchdog.com/2012/11/14/artists-oppose-internet-radio-fairness-actpushed-by-pandora/id=30031/ Recording Industry Association of America. (2012). RIAA. Retrieved from http://www.riaa.com/aboutus.php?content_selector=about-who-we-are-riaa Resnikoff, P. (2012, February 15). 42 Different Ways That Artists Can Earn Money. Digital Media News. Retrieved November 13, 2012 from http://www.digitalmusicnews.com/permalink/2012/120215fortytwo

16 Savitz, E. (2012, November 30). The Case for Internet Radio Music Royalty Reform. Forbes. Retrieved November 30, 2012 from http://www.forbes.com/sites/ciocentral/2012/11/30/the-case-for-internet-radio-musicroyalty-reform/ Schroeder, S. (2010, April 15). How Much do Music Artist Earn Online? Mashable. Retrieved November 13, 2012 from http://mashable.com/2010/04/15/music-artists-earn-onlineinfographic/ Statistics Brain. (2012, July 31). Pandora radio statistics. Retrieved from http://www.statisticbrain.com/pandora-radio-statistics/ Stoltz, M. (2012, October 31). The internet radio fairness act: what it is, why its needed. Retrieved from https://www.eff.org/Internet-Radio-Fairness-Act-Explanation The digital millennium copyright act. (2001 February 8). Retrieved from http://legacy.gseis.ucla.edu/iclp/dmca1.htm