During the Obama years, Americans have become well acquainted with crony capitalism. But it is hard to imagine a more audacious attempt to use government to help a favored industry than legislation just introduced by Rep. Mel Watt (D-NC).
In a bailout for Hollywood and the Recording Industry, Wattâ€™s bill would force AM/FM radio stations to pay a â€śroyalties taxâ€ť for music played on the air. Worse, the bill would let the record companies themselves set the fees, or tax, that radio stations play.
Historically, music played on the radio has been seen by stations, record labels and artists alike as a form of advertising for the performers. Artists want their songs played on the radio, because that air time can make their song a massive hit, making them millions of dollars. Companies like Apple or Coke pay radio stations for their advertising, but performers get their ads, their music, to run for free.
The current system recognizes the value artists receive and so broadcast radio does not have to pay royalties. For music streamed on the Internet or played on satellite radio, artists receive royalties at a rate set by the Copyrights Royalty Board at the Library of Congress. This board has contributed to an erratic, disparate treatment of various mediums. Rates for Internet radio stations are six times those for satellite radio requiring them to pay a majority of their revenue in royalties fees. Worse yet, broadcast stations streaming music online, pay rates twice as much as stations like Pandora.
Record labels are having trouble adjusting to a market dominated by digitalized consumer choice dominated market place. Rather than innovate and negotiate in the marketplace, record labels are trying to use the government to generate new revenue by pulling broadcast radio into the byzantine one-sided royalty payment scheme that has benefitted them in the past. Mr. Wattâ€™s bill gives them everything they want and more.
Worse, Mr. Watt is proposing to give the Recording Industry a monopoly in determining what the royalty rate should be. Wattâ€™s bill would give an RIAA-founded and dominated organization known as the Sound Exchange, the ability to set the rates. The Sound Exchangeâ€™s Board of Directors is made up exclusively of recording industry executives and artists.
Wattâ€™s has named his bill the â€śFree Market Royalty Act,â€ť in a bid to attract conservatives. Giving an industry the ability to collude and set market prices that are then enforced through government sanction to set market prices is almost the furthest thing from a â€śfree marketâ€ť.
Once Sound Exchange sets the rates, these rates will be binding for all music. Aside from the fact that the recording industry will have no incentive to negotiate against the prices it just set for itself, it will become functionally illegal for radio stations to negotiate lower rates with individual labels.
Payola laws from the 1930â€™s prevent radio stations from charging or receiving compensation for airplay. Under Wattâ€™s bill, these laws will functionally prevent broadcasters from negotiating a lower rate with an individual label. If they negotiated a lower price, they would have to run a disclaimer after the song that it was â€śsponsored content.â€ť
Sounds complicated, right? The actual free market isnâ€™t complicated. Warner Music and Clear Channel, two leading broadcast and music companies, recently came together to cut their own mutually beneficial deal without the government. Warner musicians now will receive a royalty for music played on the air and Clear Channel will get a discount on the outrageous and unfair rates the government has set for streaming songs over the Internet. A win-win.
The Warner/Clear Channel deal shows what a real free market deal looks like. Itâ€™s not a bailout or giveaway to one industry at the expense of another. Itâ€™s a mutually beneficial exchange without the heavy hand of the state.