A Free-Market Fix for Music Copyrights

It's time to end compulsory licensing.

If a federal policy strips owners of their rights to dispose of their property as they see fit, institutes price-fixing by unelected bureaucrats, and in the process picks an industry's winners and losers, you'd expect Republicans in Congress to be against it. But when it comes to copyright, all bets are off.

An incredibly convoluted maze of statutes and rules determined who gets paid what by whom when sound recordings are broadcast. Interactive music services that let you choose the songs you want to hear, such as Spotify and Rdio, must negotiate with copyright owners for licenses. If they can't come to an agreement, they can't play the music, which is why Metallica can have an exclusive deal with Spotify. When it comes to non-interactive music services that don't let you choose what song to hear, such as Pandora or Sirius XM, the broadcaster can instead choose to use a compulsory license.

A compulsory license is just that: compulsory. Broadcasters can legally take a copyright owner's music and play it without first asking for permission. Pandora streams Metallica whether the band likes it or not—something that should give pause to Republicans who believe copyright protects property rights.

It gets even more convoluted.

While AM, FM, cable and satellite radio, and Internet radio services like Pandora can all opt for compulsory licenses, they each pay different royalty rates. The rates are set by a panel of government lawyers called the Copyright Royalty Board, and they have the effect of favoring some business models over others. Internet radio services pay over 60 percent of their revenue in royalties, while Sirius XM, the only satellite radio company, pays only 8 percent. AM and FM radio aren't subject to a digital sound recording right, so it pays zero.

Although the board does the price-fixing, it's Congress who picks the winners and losers, because it decides the standards the board uses. Which standard applies to a service depends on whether or not the service was "preexisting" in 1998 when the Digital Millennium Copyright Act was enacted. New technologies, such as webcasting, are subject to a standard that results in much higher rates than those faced by "old" technologies like satellite radio.

The standard that applies to Internet radio is known as the "willing buyer/willing seller" standard, and it's meant to mimic the price that a free market would produce. The Board engages in a proceeding in which the different sides present evidence from economists and other experts, and then voila, it comes up with a "market rate." If such a process worked, the Soviet Union would still be around.

Cable and satellite radio's rates are set using a different standard outlined in Section 801(b) of the Copyright Act. Among other things, as the Board considers the rate to fix for these "old" services, the statute requires it to "minimize any disruptive impact on the structure of the industries involved." That's right. The board must set a rate that protects incumbents, presumably by fixing the current industry structure in stone.

This cronyist state of affairs is precisely why so many believe that copyright reform is an issue ripe for the G.O.P. to take on, especially as it attempts to redefine itself for the 21st century. So it was heartening to see Rep. Jason Chaffetz (R-Utah), introduce the Internet Radio Fairness Act, which seeks to fix the royalty rate mess.

Unfortunately, the bill goes about it the wrong way. It would bring Pandora and other webcasters under the lower-rate 801(b) standard, which certainly would level the playing field. But that's a giveaway to Internet radio companies, since it's likely that a negotiated rate would be higher than what the board would set.

Unsurprisingly, the bill was met with stiff opposition from others in Congress who, backed by the music industry, instead want to normalize rates by bringing satellite and cable radio up to the "willing seller/willing buyer" standard, and to make AM/FM radio start to pay as well.

Now we are in the midst of a lobbying war between Pandora, the music industry, Sirius XM, and traditional broadcasters. Each wants Congress to gore the other one's ox; all claim to have consumers' and artists' best interests at heart. No one seems to be considering the true free market alternative: get rid of compulsory licensing.

If Republicans really care about copyright as a property right, they should treat it as property and allow copyright holders to decide to whom they will license their music. That would mean prices negotiated in a free market, not fixed by apparatchiks, and an end to politically determined winners and losers.

Some argue that without compulsory licenses it would be too costly for Internet radio startups to negotiate deals with tens of thousands of artists for hundreds of thousands of songs. But that's why the recording industry has set up copyright collecting societies, like SoundExchange, to deal on behalf of labels and artists. And as technology advances, it continuously lowers the transactions cost associated with negotiating.

What's more, if interactive music services like Spotify and Rdio can negotiate licenses in a free market without compulsory licenses, so can Pandora and other webcasters. And if Metallica doesn't want to be on Pandora, then tough luck. Markets are messy. We don't always get the outcome we want in each case, but in the long run markets are more efficient and create more prosperity than any order Congress could possibly plan.

Members of Congress, and in particular Republicans, need to understand that a belief in property rights and market processes can't be selective. They should end compulsory licensing now.