(A very dear friend of mine said that he hoped I was being ironic with the title of this post, since he is so sick of the cliche. I told him that a. the default with me should be to assume there is some sort of sarcasm or snark present, and b. if I was being serious there would be no question marks. Duh.)
Welcome to the longest blog post ever- hopefully it will keep you occupied in terms of weekend reading.
As an economist who really likes music, I am perfectly well aware that the music industry really doesn’t know what to do with itself nowadays. There’s a lot more competition among record labels than there used to be, there are artists flooding the market with free stuff (and listeners figuring out how to get stuff for free even when it’s not offered as such), and there’s a whole host of entrepreneurs looking to create new distribution channels (see Pandora, Jango, GarageBand, OurStage, StereoFame and so on). In addition to all of this, it may just be the case that people are less engaged with music than they used to be, probably because there are so many other entertainment outlets available. All of this is causing the recording industry to dig in its heels and try to hold onto whatever semblance of normalcy it can find, since psychologically people and organizations feel pretty much entitled to their status quo level of profit and are reluctant to accept anything that feels to them as a loss, regardless of what the cause of that loss (increased competition, paradigm shift, stupidity, whatever) might be.
I introduce to you the Performance Rights Act, or the “performance tax” as it is referred to by its opponents. You can find the actual wording of the proposed bill in the House here and the one in the Senate here. I do not recommend trying to read them, since they reference other laws that are not explicitly stated and you will end up chasing down a paper trail that is more than you bargained for. (You can also see the resolutions against the issue here and here, but they aren’t all that insightful.) I will summarize the main points for you, as I understand them at least:
- The “performance tax” is not actually a tax, it’s a royalty to be paid to the artist/label of the recorded work being broadcast. A tax would be if the money was going to the government, which it is not. The term “performance tax” seems to be a bit of propaganda cooked up by opponents of the bill. (This is not to say that the opponents are not justified in their view, but let’s call a spade a spade. You can see the opposition’s take on the issue here, but it’s not exactly objective.)
- Radio broadcasters (and entities that play recorded music on the Internet, etc.) already pay royalties to the songwriters and studio performers (the “originators” of a song, if you will) through organizations such as ASCAP (American Society of Composers, Authors and Publishers), BMI (Broadcast Music, Inc.) and SESAC (Society of European Stage Authors & Composers, which apparently is no longer limited to European artists). The new fee to be charged would be on top of this.
- There is already regulation in place to collect a performance fee for other forms of distribution (Internet, etc.) but “terrestrial broadcasts” were originally exempted. The new legislation is essentially worded such that the exemption is removed. Note that this doesn’t require a royalty to be paid, it just gives that right to the musicians/labels. (In other words, if the labels don’t want to bite the hand that supposedly feeds them, they can choose not to.)
- The existing legislation is found in United States Code/Title 17/Chapter 1/Section 114, “Scope of exclusive rights in sound recordings”. (I am now convinced that absolutely anything can be found on the Internet.) Basically, an annual royalty fee is negotiated for each broadcast entity rather than being charged per listener or per song or whatever.
- The proposed legislation makes exceptions for smaller broadcasters, religious stations, etc. by limiting the maximum amount that they could be required to pay. ($5,000 for broadcasters with less than $1,250,000 in gross revenues, for example)
Okay, let’s pretend that it’s the first day of Econ 101. When economists talk about demand, we acknowledge the fact that markets are interrelated and goods don’t exist in their own little worlds. We introduce the concept of substitutes- products that are consumed in place of each other, and complements- products that are consumed together. Put more concretely, Coke and Pepsi are substitutes while peanut butter and jelly are complements. In nerd terms, we have the following rules:
- When the price of a good goes up, demand for substitutes goes up. (Think: When Coke gets more expensive, the demand for Pepsi goes up.)
- When the price of a good goes up, demand for complements goes down. (Think: When peanut butter gets more expensive, demand for jelly goes down.)
Now let’s think about how this relates to the music industry. If you listen to the recording companies, what they really care about is the sale of recorded media (i.e. CDs) and concert tickets. (and merchandise, technically, but let’s focus) So we have some relationships:
- Free mp3’s and CDs: probably substitutes since you get the mp3 and then don’t need the CD anymore. (Cover art is nice, but not that nice.) One of my HBS professors would disagree, however, and wrote about it back in 2003-2004. He and his colleague find no evidence that the existence of Napster and similar systems had a significant negative impact on CD sales. I would take this finding with a grain of salt, since lack of evidence doesn’t technically prove that a relationship isn’t there.
- CDs and concert tickets: probably complements since listening to (and liking) the CD makes you want to see a band in concert. It’s not like people think “you know, I would go to that concert, but I am going to sit on the couch and listen to the CD instead because it’s here.”
- Free mp3’s and concert tickets: probably complements, as an extension to the above. (This is part of why bands are willing to give music away for free, since free is the ultimate lowering of price, unless of course you are going to pay people to take your stuff. Hmmm…)
- Internet radio and concert tickets: probably complements
- Broadcast radio and concert tickets: probably complements
- Internet radio and CDs: I don’t think this one is clear, especially since one can make a perfect copy of a digital stream if one is persistent and nerdy enough. (Or so I’m told. I really should look into this…er, I mean, go buy stuff on iTunes.) Maybe people listen to Pandora rather than to their iPods, or maybe they listen to Pandora to find new things to put on their iPods. I think the jury is still out on this one.
- Broadcast radio and CDs: This one is also not clear, but it’s certainly more to the complement side of the spectrum than the preceeding case. I think we are past the days of people trying to record stuff off of the radio, especially since I would guess that the share of radio listening that is confined to cars has gone up in recent years. (Who listens to a regular radio at home anymore?) Add in the availability of iPhone apps such as Shazam, which make it easy to tag music on the radio and then purchase it on iTunes, and it seems a bit unreasonable that an increase in radio availability would have a negative effect on CD sales (or vice versa).
Since broadcast radio is free by design (a public good in econ speak), it doesn’t really make sense to think about the complement relationship in terms of price changes, but it is fair to say that with complements, less consumption of one good should lead to decreased consumption of the other.
Now let’s think about the radio industry. It’s actually pretty complicated- it’s a form of a two-sided market, since it relies on listeners to to get advertisers. Furthermore, it relies on content (read, music) to get listeners. Is your head spinning yet? Luckily, the fundamental supply and demand relationship is between the broadcasters and the advertisers, since it’s the advertising space that is the real product being sold and paid for. As the price of advertising goes up, more ad space is supplied, both because it’s worth it for an individual station to reserve more time for ads and also due to the fact that more stations find it profitable to enter the market.
So what would happen if this new royalty were imposed? In our Econ 101 classes we were taught how to think about the effect of a per unit tax. This fee is different, since it is essentially another fixed cost that the station will have to put up with. Economists will tell you that fixed costs don’t affect how much of something is produced, but they do affect whether a company stays in business in the long term. Therefore, it is possible that the fee could push some broadcasters across the line from profitable to not profitable and cause them to either exit the industry altogether or switch to a different format. IF (and this is arguably a bif if) the broadcasters aren’t forced out of business, the royalty represents a pure transfer of value from the broadcasters to the artists and/or labels. (The RIAA is the main proponent of this bill, in case you were curious. And I can hear your lack of shock from here.)
Based on the above argument, it would be unwise for the recording industry to push anything that would greatly decrease the availability of broadcast radio, since that is still in large part where people learn about new artists and music. But the labels do face a tradeoff- the revenue from the royalty versus the decrease in revenue from CDs, concert tickets, etc. The royalties, if you take the $5000 cap for stations with less than $1,250,000 in revenue as representative, seem like relative pocket change, and one should not underestimate the value of keeping the broadcasters happy.
The resolution supporting broadcast radio states the following as justification:
- Whereas the United States enjoys broadcasting and sound recording industries that are the envy of the world, due to the symbiotic relationship that has existed among these industries for many decades;
- Whereas, for more than 80 years, Congress has rejected repeated calls by the recording industry to impose a performance fee on local radio stations for simply playing music on the radio and upsetting the mutually beneficial relationship between local radio and the recording industry;
- Whereas local radio stations provide free publicity and promotion to the recording industry and performers of music in the form of radio air play, interviews with performers, introduction of new performers, concert promotions, and publicity that promotes the sale of music, concert tickets, ring tones, music videos, and associated merchandise;
- Whereas Congress found that ‘‘the sale of many sound recordings and the careers of many performers benefited considerably from airplay and other promotional activities provided by both noncommercial and advertiser-supported, free over-the-air broadcasting’’;
- Whereas local radio broadcasters provide tens of thousands of hours of essential local news and weather information during times of national emergencies and natural disasters, such as September 11th and Hurricanes Katrina and Rita, as well as public affairs programming, sports, and hundreds of millions of dollars of time for public service announcements and local fund raising efforts for worthy charitable causes, all of which are jeopardized if local radio stations are forced to divert revenues to pay for a new performance fee;
- Whereas there are many thousands of local radio stations that will suffer severe economic hardship if any new performance fee is imposed, as will many other small businesses that play music including bars, restaurants, retail establishments, sports and other entertainment venues, shopping centers, and transportation facilities;
- and Whereas the hardship that would result from a new performance fee would hurt American businesses, and ultimately the American consumers who rely on local radio for news, weather, and entertainment, and such a performance fee is not justified when the current system has produced the most prolific and innovative broadcasting, music, and sound recording industries in the world…
It’s interesting to note that several of these items refer to benefits of broadcast radio that accrue to the public rather than to the recording industry. Perhaps in that case, if we’re going to make a fairness argument here, the government should be providing some compensation to partially cover the cost of the royalty. What, an economist just used the s word? You heard right…the benefits to the public of broadcast radio are technically a positive externality, and the government can increase well-being by subsidizing things that generate positive externalities. The current royalty exemption that is in place is a form of subsidy for the broadcasters, but why should the recording industry have to effectively pay all of that subsidy?
My suggestion: If you (as the musician/label, or the government if you think the labels are being too short-sighted) are going to impose a royalty, keep the royalty rates low, i.e. lower than for other forms of distribution, to respect the benefits that broadcast radio confers on the music industry while still respecting the rights of the intellectual property owners. If you (as the government) are that worried about radio stations going under, give them a bit of a subsidy (or tax break, whatever) to respect the benefits to the public that they provide. You will notice a general theme of “give credit where credit is due.”
At the very least, can we play nicely here? No “performance tax” propoganda please- it’s very misleading, and I am seriously annoyed that I almost fell for it. (I first learned of the issue from an ad on the radio- WBOS if you are curious. The ad then led me to www.noperformancetax.org, which gives, not shockingly, a very one-sided view of the matter.)
If you are interested in reading more about this issue, here are some links to get you started:
http://www.noperformancetax.org/newsroom.asp – clearly this is biased to the “no performance tax” side
http://www.tennessean.com/article/20090528/OPINION01/905280324 – this is a pretty well thought-out piece on how the bill would make the industry fairer, though I’m not quite sure that I agree that technology has “shattered” the link between radio and music sales
http://www.freeradioalliance.org/news.html – it sure seems like the opposition to the bill is louder, if the news coverage is any indication
What are your thoughts on the matter?