You think internet “fast lanes” were problematic? How about “payola lanes”  on terrestrial radio and webcasting? Payola is back! And it wants to go Legit this time.  That’s right, broadcasters are proposing a payola waiver from the FCC.  Here is the document they filed with the FCC.  Read it for yourself. It is freaking unbelievable.  PDF below or you can read it on the FCC website here. 

 DA-15-325A2. 

As a member of the public you can make an “express” comment to FCC.  It doesn’t have to be as long and as detailed as my comment.   It can simply be a couple sentences.   Proceeding number is 15-52.  Deadline is today!  Link here:

http://apps.fcc.gov/ecfs/upload/display

 

BEFORE THE FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554

MB Docket No.15-52

Comments of David Lowery In the Matter of Media Bureau Seeks Comments on Petition for Class Waiver of the Commission’s Sponsorship Identification Requirements Filed by the Radio Broadcasters Coalition – March 20, 2015….. (Continued).

 

Examples of Steering Agreements by Pandora and iHeartMedia

I wish to call the Commission’s attention to two categories of steering agreements. The first is the type of agreement between Pandora Media and Merlin[1] that Pandora may have replicated with Naxos Records.[2] The second is the type between iHeartMedia and Big Machine Label Group[3] that iHeart Media has stated that it has replicated with dozens of record companies including Warner Music.

Because these agreements are in large part secret and subject to confidential treatment, I can only point to press reports and some public disclosures in the Webcasting IV proceeding currently underway before the Copyright Royalty Judges.[4]

I respectfully suggest that steering deals should be of concern to the Commission in considering the payola waiver requested. As Billboard Magazine reported[5], these deals can be used to mask commercial shenanigans and Pandora hired an expert in these matters:
Back in 2007-2010, when ASCAP and BMI rate court judges were involved in litigation between DMX and performance rights societies, the judges examined the direct licensing deals DMX cut with publishers. During that process, judges did not review the advances or any of the other aspects of the deal, and only looked at the reduced per-store royalty rate. Consequently, in the case of BMI, this resulted in the per-store negotiated rate falling from $36.36 to a per-location fee of $18.91, much to the chagrin of the publishers, who stayed a part of the PROs’ blanket licenses. The ASCAP rate court returned a similar finding.

(Did we mention that Pandora VP of business affairs and assistant general counsel Chris Harrison was DMX’s vp of business affairs at the time of the rate court ruling in a lower per-location blanket fee?)

 

Pandora’s Steering Agreement with Merlin
The payola waiver offers the Commission an opportunity to consider the legality of steering agreements for both the Radio Broadcasters Coalition but also for Internet radio operated by an FCC licensee. Pandora is a great example.

As Pandora has sought the Commission’s approval and indicated its intention to become an FCC licensed broadcaster, I can infer that Pandora intends to comply with the payola rules over all of its businesses, both terrestrial broadcast and webcasting. If this were not the case, it would be a strange result that a broadcaster with an Internet radio offering could violate the spirit of the payola rules as an Internet radio operator but not as a terrestrial broadcaster. That would be quite a loophole.[6]

As National Public Radio reporter Laura Sydell wrote in the NPR Article about the Merlin deal (in which I am quoted):

“Pandora recently signed a deal with a company called Merlin, a consortium of independent record labels that’s adding another factor to the [Pandora music genome] algorithm: money.

Performers get paid a small royalty each time one of their songs is played on Internet radio, at a rate set by a Royalty Court at the Library of Congress. But Internet radio and labels can strike individual deals, as Pandora did with Merlin. The Internet service will recommend Merlin artists over those not affiliated with the consortium in exchange for paying Merlin’s musicians a lower royalty rate.

Merlin artists get more spins, and Pandora winds up paying less in royalties than it would if were giving those same spins to non-Merlin artists. Plus, consortium labels will get to suggest favorite tracks.”

 

There is no way for an artist like me to find out what the terms of these agreements are, even if the terms are being used to benchmark my royalty rates in Web IV.

I respectfully suggest that if the FCC grants this class payola waiver, the Commission should do so with specific guidance for how steering agreements are to be addressed by the payola rules. This is particularly true for Pandora. The lines between FCC licensees and Internet radio are rapidly blurring as companies like Pandora compete directly with broadcast radio and manipulate loopholes.

As CNN reported[7]:

Pandora is angry about the royalties it’s paying to [songwriters and] music publishers, so the company is making a bold move: It’s buying a terrestrial radio station in South Dakota mainly to score lower rates.

For reasons that are not obvious, Pandora has devoted itself to spending large sums to litigate royalty payments to artists and songwriters, to lobby in Congress against artist and songwriters, and to conduct public relations campaigns against us. Respectfully, the Commission should not allow them to also manipulate the public through steering agreements that skirt at best or may violate the payola rules and get away with it through an FCC loophole.

As Ms. Sydell reported in the NPR Article, Pandora’s CEO has an odd idea about what the payola rules require:

Jim Burger, a copyright lawyer and adjunct professor at Georgetown University, says this kind of deal would receive legal scrutiny if it were taking place on old-fashioned radio.

“If they were a terrestrial radio station and they were getting a discount on certain music as long as they played it more than other music, that would be considered illegal,” Burger says, adding that stations would have to announce such an arrangement upfront….

Pandora CEO Brian McAndrews says there’s no comparison between that and what his company is doing.

“Payola is where record labels pay radio stations to get airplay,” McAndrews says, “and the opposite is what happens today. As Pandora, we pay the record labels and the artist to allow airplay. So it’s completely different.”

 

Mr. McAndrews clearly never read Hit Men.[8] He may be confusing the $50 handshake with a liquidation preference. This is troubling because Pandora is going to great effort to become an FCC licensee and their CEO evidently has a poor understanding of the payola laws.

As Mr. Burger told National Public Radio (arguably concurring with Mr. Oxenford’s prescient 2008 article), if Pandora were a terrestrial station, the “discount” from the steering agreement would be considered illegal—and Pandora is trying hard to become one. As Mr. McAndrews is eager to tell investors, “Pandora is Radio”.[9]

Respectfully, I do not see how the FCC can ignore Pandora’s efforts at skirting the payola laws either in the current waiver proceeding or in Pandora’s assignment application for KXMZ.

 

iHeartMedia Steering Agreements
The iHeartMedia “steering agreements” were described in a heavily redacted statement filed under a protective order in Web IV by Mr. Steven Cutler, Executive Vice President of Business Development and Corporate Strategy at iHeartMedia.[10] In the unredacted part of his statement, Mr. Cutler confirms that iHeartMedia has 26 similar deals with independent labels and another with Warner Music Group.

Mr. Cutler states:

Although listener demand for iHeartRadio had more than doubled in the past year, iHeartMedia recognized that the cost of licensing music for the services was so high relative to the revenues these services could generate that it constrained the company’s ability and incentive to grow the services.   [REDACTED]

To address this problem, iHeartMedia developed a multi-pronged approach to reducing its music licensing costs. It began a campaign to negotiate performance licenses directly with individual record labels. These licenses were designed to promote the growth of iHeartRadio and increase overall digital promotion of the participating labels’ music. [REDACTED] [Emphasis added.]

Mr. Cutler clearly identifies the purpose of these direct agreements as being to (1) “promote the growth of iHeartRadio” and to (2) “increase overall digital promotion of the participating labels’ music.” I would add that there may well have been was a third purpose—to manufacture benchmarks for use in Web IV to influence the royalty rates to be paid to artists like me who are not party to one of these iHeartMedia agreements.

Ben Sisario of the New York Times reported[11] on iHeartMedia’s steering deal with Warner Music:

…that would for the first time allow the label and its acts to collect royalties when their songs were played on Clear Channel’s 850 broadcast stations. In exchange, Clear Channel will receive a favorable rate in the growing but expensive world of online streaming.

 

This quotation from the iHeartMedia press release also suggests that the labels are participating in iHeartMedia’s broadcasting revenues, further highlighting the quid pro quo:

“Focusing that same creativity on how best to grow the music business, [Big Machine] has developed this new model with [iHeartMedia] to let [Big Machine’s distributed] labels and artists participate in the revenue of broadcast radio immediately and in digital radio as it builds.”

 

Mr. Cutler’s testimony includes this statement regarding what I suspect are “steering” payments:

Prior to the [Warner agreement] being signed, my staff and I prepared a set of projections for iHeartMedia’s Board of Directors that demonstrated what iHeartMedia would pay Warner for the use of its sound recordings absent a deal, as well as what it would pay [the quid] – and the additional performances it would receive [the pro quo] – if the deal were signed. [Emphasis added.]

This reference raises the question of what the form of iHeartMedia label agreements said regarding steering payments and the method by which those payments are triggered and then calculated. If the purpose of the agreement was in part to lower royalty payments as stated by Mr. Cutler and if Mr. Cutler prepared projections for the approval of iHeartMedia’s board showing what iHeartMedia would pay without the agreement (presumably more) than with the agreement (presumably less), then the reference to “additional performances” would again seem to be the quid pro quo for the lower royalty payments. In other words—arguably the exact type of transaction that the payola statutes address.

I am also more persuaded that this quid pro quo was the very purpose of the agreement because there is a section of Mr. Cutler’s testimony entitled “iHeartMedia’s Efforts to Use Lower Royalty Music” that is entirely redacted.

In other words—the agreements that iHeartMedia negotiated and its board of directors approved are for consideration for airplay that seems to me would require disclosure under the payola rules. As Mr. Cutler stated in his sworn testimony, this was the purpose of the deals.

I would respectfully suggest to the Commission that these steering agreements are of vital importance to the public interest because of the vast number of recordings that we know are involved and that likely will be covered in the future. Over time, steered recordings could easily crowd out recordings by artists who were not party to a steering agreement—and the public would be none the wiser absent the FCC’s robust sponsorship identification requirements.

Other Steering Agreements

I am not aware of other steering agreements, but the Commission is in a position to ask members of the Radio Broadcasters Coalition to present any such agreements in evidence as part of the waiver hearing and is also in a position to ask Pandora to present their steering agreements as part of the evidentiary record for the KXMZ license assignment.

Pandora’s direct agreement with Naxos Records might be just such a candidate. The agreement was announced after the NPR Article and others raised questions about the payola implications of “steering agreements.” As the Radio and Internet Newsletter explained[12]:

[Pandora’s p]rivate licensing deals are significant for another reason. The CRB process of setting government-mandated rates has been distorted, some audio publishers believe, by a lack of real-world deal-making examples which could establish a value of licensed music that isn’t theoretical. Pandora used its Merlin [steering] deal as an anchor example in its initial argument brief. Presumably, the Naxos agreement could bolster Pandora’s case during this year-long lead-up to new rates….We reached out to Pandora to ask whether the Naxos licensing agreement includes similar “steering” as with Merlin, and received a polite “no comment.”

Why “no comment” and why all the secrecy regarding “steering agreements”?

1. Conclusion

I would respectfully suggest that the Radio Broadcasters Coalition appears to be seeking to create a “payola lane” on their stations by further obfuscating from artists, songwriters, and the public the kinds of disclosure that would make them remind their listeners about steering deals.

Not only would the proposed class payola waiver potentially deceive the public, iHeartMedia and Pandora appear to be using steering agreements as benchmarks in rate proceedings that affect the rates paid to all artists. The FCC has the opportunity to address the legality of steering agreements in this proceeding and the Commission’s decision to act or refrain from acting could have far reaching effects.

From my perspective as an artist and songwriter, I see no reason why any broadcaster should be relieved of its obligations under the payola rules further to blur a quid pro quo that is exactly what the payola rules were designed to prevent.

Respectfully submitted.

 

David C. Lowery /s/

[1] Laura Sydell, “Pandora’s New Deal, Different Pay, Different Play” (Nov. 26, 2014) available at http://www.npr.org/2014/11/26/366339553/pandoras-new-deal-different-pay-different-play (hereinafter, “NPR Article”)

[2] “The Return of the $50 Handshake: Naxos Says “No Comment” About Steering Payola In Pandora Deal” available at https://thetrichordist.com/2015/02/17/the-return-of-the-50-handshake-pandora-says-no-comment-about-steering-payola-in-direct-deal-with-naxosrecords/

[3] Press Release, “Big Machine Label Group and Clear Channel Announce Groundbreaking Agreement to Enable Record Company and Its Artists to Participate in All Radio Revenue Streams and Accelerate Growth of Digital Radio” (June 5, 2012) available at http://www.iheartmedia.com/Pages/Big-Machine-Label-Group-and-Clear-Channel-Announce-Groundbreaking-Agreement-to-Enable-Record-Company-and-Its-Artists-to-Par.aspx

[4] In the Matter of Determination of Royalty Rates for Digital Performance in Sound Recordings and Ephemeral Recordings ) (2016–2020) (Web IV) Docket No. 14–CRB–0001–WR (hereinafter “Web IV”).

[5] Ed Christman, “Less Could Mean More: Why Merlin’s Deal With Pandora May Pay Off” (Billboard, Dec. 11, 2014) available at http://www.billboard.com/articles/business/6405575/analysis-merlin-deal-pandora (emphasis added).

[6] As Mr. Oxenford persuasively argues, the Internet radio provider might well be subject to prosecution for commercial bribery.

[7] “Pandora buys South Dakota radio station in bid for lower fees” (June 11, 2013) available at http://money.cnn.com/2013/06/11/technology/pandora-buys-radio-station/index.html

[8] Fredric Dannen, Hit Men: Power Brokers and Fast Money Inside the Music Business (1990).

[9] Pandora Media’s CEO Discusses Q1 2014 Results – Earnings Call Transcript http://seekingalpha.com/article/2164393-pandora-medias-ceo-discusses-q1-2014-results-earnings-call-transcript?page=2

[10] Testimony of Steven Cutler, Webcasting IV Proceeding, available at http://www.loc.gov/crb/rate/14-CRB-0001-WR/statements/iHeartMedia/Vol%203_02%20Testimony%20of%20S%20Cutler/2014_10_07_Testimony_of_S_Cutler (“Re_PUBLIC.pdf (“Redacted Cutler Testimony”).

[11] Ben Sisario, “Clear Channel-Warner Music Deal Rewrites the Rules on Royalties” New York Times (Sept. 13, 2013) available at http://www.nytimes.com/2013/09/13/business/media/clear-channel-warner-music-deal-rewrites-the-rules-on-royalties.html?_r=0 (emphasis added)

[12] Brad Hill, “Pandora closes direct licensing deal with leading classical label Naxos”, Radio and Internet Newsletter (Feb. 12, 2015) available at http://rainnews.com/pandora-closes-direct-licensing-deal-with-leading-classical-label-naxos/.