“Do not turn to mediums or necromancers; do not seek them out, and so make yourselves unclean by them.”
Leviticus 19:31
National Public Radio reporter Laura Sydell has raised a very interesting question about the “new boss” direct license agreements that Pandora is making with record companies: the return of payola (“Pandora’s New Deal: Different Pay, Different Play“). She notes correctly that at least one direct license contains a “steering” clause that promotes airplay in consideration of a lower royalty payment.
It’s not too much of a stretch to think that the timing of Pandora’s desire to make these deals did not just happen by accident or through market forces. Our bet is that Pandora makes these direct deals to manufacture evidence of “willing buyer willing seller” royalty rates for the rate setting proceeding currently underway before the Copyright Royalty Board in Washington, DC (“CRB”).
Ms. Sydell calls out a serious question that goes to the heart of the very direct licenses that Pandora is trying to use as evidence to lower webcasting rates for everyone. We have to ask if these licenses ought to be considered for rate setting before they are determined to be lawful in the first place. As Ms. Sydell reports, there’s every possibility that “steering” clauses are illegal.
Here’s the point: If anyone says they know whether steering clauses are legal, they have as much claim on predicting the future as a medium has of talking to souls in the afterlife. And you know why they say about that.
Steering or Payola?
Under its steering clause, at least as far as we can tell, Pandora promises to play more of the artists licensed to a label if the label does the direct deal. And that’s where the payola issue comes up. (An interesting question is whether the artists who are not featured take a royalty cut regardless, subsidizing those who are featured.)
As Ms. Sydell reports:
An Uneven Playing Field
Pandora recently signed a deal with a company called Merlin, a consortium of independent record labels that’s adding another factor to the 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.
This particular deal happens to be with Merlin, the indie label licensing organization (although Pandora refuses to say how many of the Merlin labels have opted in to the deal). Merlin has a long history of being committed to maintaining the value of music, so this payola issue should not blow back on Merlin no matter how hard Pandora tries. (Note that Pandora refuses to clearly state how many of the “thousands” of Merlin labels have opted in to Pandora’s agreement. On a November 28, 2014 conference call, Pandora’s CFO dodged the question by saying that Pandora had opt-in from over 90% of Merlin members who were part of the original pool that Pandora targeted with the agreement–whatever that means. This has been misreported as 90% of all Merlin labels, which is not at all what he said.)
But Pandora is in the middle of a rate hearing before the CRB that will set the rates for all webcasters and simulcasters–and all featured artists, session players and singers and recording owners. Pandora is using the Merlin agreement as evidence of a market rate deal–presumably to reduce the rates that Pandora pays everyone else. Because the “steering” component is consideration that only applies to Merlin labels at the moment, Pandora will have to get the CRB to ignore what may be the payola component and only focus on the lower rates. (This is also known as a “Chris Harrison Special” and is very similar to the screwing that Pandora lawyer Harrison did to songwriters when he worked at DMX–and he did such a good job of sticking it to songwriters, that may have commended him for the Pandora job.)
While Pandora filed a copy of their Merlin contract with the CRB, it’s so heavily blacked out FBI-style that no artist can find out what the terms are.
Is it Payola?
Here’s what the FCC says about its payola rules:
What the Rules Say
The Communications Act and the FCC’s rules require that:
When a broadcast licensee has received or been promised payment for the airing of program material, then, at the time of the airing, the station must disclose that fact and identify who paid for or promised to pay for the material. All sponsored material must be explicitly identified at the time of broadcast as paid for and by whom, except when it is clear that the mention of a product or service constitutes sponsorship identification;
Any broadcast station employee who has accepted or agreed to accept payment for the airing of program material, and the person making or promising to make the payment, must disclose this information to the station prior to the airing of the program;
Any person involved in the supply, production or preparation of a program who receives or agrees to receive, or makes or promises to make payment for the airing of program material, or knows of such arrangements, must disclose this information prior to the airing of the program. Broadcast licensees must make reasonable efforts to obtain from their employees and others they deal with for program material the information necessary to make the required sponsorship identification announcements;
The information must be provided up the chain of production and distribution before the time of broadcast, so the station can air the required disclosure; and
These rules apply to all kinds of program material aired over broadcast radio and television stations. Some of the rules also may apply to cablecasts.
Does the payola law apply to Internet radio? Here’s a helpful 2008 article from a very important Internet radio lawyer, David Oxenford of Washington, DC who has represented Pandora. Mr. Oxenford is a powerful lawyer and has been a major player who influenced the current artist royalty rates in and out of the back rooms of Washington, so we should pay close attention to what he has to say on the subject:
[A] pay for play scheme would limit royalties that a digital music service would pay – as it is likely that any service that is getting paid to play songs would also get a waiver of the royalties for those songs (see our post on waivers here). When confronted with a proposal where artist would waive royalties in exchange for airplay [including a label waiving part of their artist’s royalties?], artist groups [including the Recording Artist Coalition] complained that the waiver of royalties without disclosure, in and of itself, constituted consideration for airplay and would be “payola” if not disclosed. We’ll save discussion of that issue for another day, but disclosure solves any issue that may exist.
Remember, the “disclosure” that Mr. Oxenford describes must occur at the time the song is played on Pandora. This could get tricky given Pandora’s business model. It’s hard to imagine how they would comply, but surely the Silicon Valley can produce a transparent solution to that disruption to offer a lawful consumer experience to users.
If “Pandora Is Radio,” Is “Steering” Payola?
Is the “steering” clause unlawful payola? Until the FCC rules on the issue, we won’t know. But until we know, how can the CRB take notice of a potentially illegal contract as evidence of anything?
As Ms. Sydell reports:
Jim Burger, a copyright lawyer and adjunct professor at Georgetown University, says [steering clauses] 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.”
Wrong again, Brian. The payola laws put the disclosure responsibility on the FCC licensed broadcasters. Not the labels. In fact, we have to believe that Merlin got promises from Pandora that the contract is in fact legal. So if there’s a payola problem with the Merlin deal, it’s not Merlin’s fault or Merlin’s problem. It’s Pandora’s problem.
Does McAndrews really want to stand in the witness box with right hand to God and try to convince a judge that Pandora didn’t get paid to play, they just paid less to play more of certain artists? You know, less is more your honor.
You may be thinking that Internet radio doesn’t require an FCC license so how can the payola rules apply to webcasters? A good point. We’re not saying that the payola rules apply to all webcasters (although Mr. Oxenford mused that payola might apply to Internet radio, and we agree with Mr. Oxenford. Given the current power of Internet radio and Pandora’s near-obssessive desire for a level playing field, it probably should).
But–Pandora is desperately trying to acquire an FCC licensed radio station in South Dakota in an attempt to make an end run around songwriters and characterize themselves as radio station. And as Pandora will tell you, “Pandora Is Radio”. So if Pandora is radio, and if Pandora acquires an FCC broadcast license, why shouldn’t Pandora be subject to the same payola rules as any other radio station and on all their platforms?
As Pandora lawyer Mr. Oxenford tells us:
The payola statute, 47 USC Section 508, applies to radio stations and their employees, so by its terms it does not apply to Internet radio (at least to the extent that Internet Radio is not transmitted by radio waves – we’ll ignore questions of whether Internet radio transmitted by wi-fi, WiMax or cellular technology might be considered a “radio” service for purposes of this statute). But that does not end the inquiry. Note that neither the prosecutions brought by Eliot Spitzer in New York state a few years ago nor the prosecution of legendary disc jockey Alan Fried in the 1950s were brought under the payola statute. Instead, both were based on state law commercial bribery statutes on the theory that improper payments were being received for a commercial advantage. Such statutes are in no way limited to radio, but can apply to any business. Thus, Internet radio stations would need to be concerned.
So as Pandora’s lawyer tells us, if the FCC can’t get jurisdiction over pureplay webcasters, state attorneys general may be able to under applicable state law commercial bribery statutes. That’s potentially what’s called a 51 jurisdiction issue (50 states plus federal law).
Presciently, Mr. Oxenford also warned of potential jurisdiction of the Federal Trade Commission:
[T]he FTC has in the last few years expressed concerns about viral marketing and other advertising schemes where the consumer is not aware that he or she is being subjected to advertising. Whether it be the stranger in the bar who is paid to brag about the taste of some brand of beer or the chain email that endorses some product without revealing that the testimonial was bought and paid for, the FTC has been concerned that these techniques are false and deceptive trade practices. Again, an all-payola channel would seem to trigger these concerns.
But of course the real question is whether an FCC licensee like Pandora wants to be would have to comply with the payola statutes on its Pureplay webcasting affiliate. We agree with Mr. Oxenford that there definitely seems to be an issue.
It’s such a big issue that it’s hard to understand how the CRB should accept a “steering” deal as evidence of anything for Pandora’s rates. It seems that the CRB would be well-advised to at least delay consideration of the agreement until the FCC rules on the sale of KXMZ to Pandora and if the license is granted, also wait until the FCC further rules on whether Pandora is subject to the payola statutes as an FCC licensed broadcaster. Not even a necromancer can predict how that ruling would turn out.
That ruling would answer the question of whether and why an Internet radio company like Pandora should be treated differently than a broadcaster, especially if Pandora turns out to be both.
You know–platform parity and all.
The Trichordist 
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