Radio Dismuke

Note: Before reading my response to Cauthon, please first read this posting which explains where I stand on the subject of statutory licensing and performance rights in sound recordings

Cauthon, Blanket Licensing And The SoundExchange Monopoly

Cauthon has argued in support of the CRB rates on grounds that they reflect the wishes of the RIAA. The RIAA is a industry organization which is controlled by the four largest record labels which hold the copyrights to 90 percent of music that is sold (though not 90 percent of that which is produced). He dismisses my arguments that the RIAA is unjustly using the CRB process to destroy Internet radio and eliminate the very real and emerging competitive threat from independent labels and self-producing artists by pointing out that the CRB process does not prevent webcasters from negotiating directly with individual copyright holders. And it is indeed true that webcasters are able to bypass the statutory royalty process by licensing directly with individual copyright holders

What Cauthon overlooks or chooses to ignore is the fact that the statutory royalty process created a government sanctioned RIAA controlled monopoly called SoundExchange that all webcasters must go through if they wish to license music on a blanket or wholesale basis.   And the RIAA is using its government sanctioned monopoly in order to charge rates significantly higher that what would exist under a free market while, at the same time, making it impossible for the many potential RIAA competitors who would be more than willing to undercut the RIAA's prices from being able to efficiently bring their product to market.

For webcasters the need to be able to license music on a wholesale basis is crucial for the exact same reason that it is crucial for a small grocery store operator to be able to purchase from a wholesale grocery distributor. Even a small grocery store can easily carry several thousand individual products. If such a grocer had to negotiate purchases and make shipping arrangements with the manufacturers of every single product he carried - well, he would not be able to do so. The time and expense would make it impossible for him to effectively compete in the marketplace.   A large national chain might be able to purchase its products in such a manner, but a small operator cannot. That is why such grocers turn to the services of wholesale distributors which offer "one stop shopping" (as well as significantly greater buying power than the merchant can negotiate on his own). Now imagine for a moment that the ONLY wholesale distributor that such a grocer could turn to is a government sanctioned monopoly controlled by a cartel of the four largest national grocery chains who are terrified of the competitive threat posed by more efficient and increasingly popular independents and seek to eliminate that threat by forcing them out of business. That is pretty much the position that webcasters find themselves in.

It is the RIAA's monopoly through SoundExchange, not the fact that the RIAA wishes to charge high prices, that is the essential root of the injustice involved with Internet radio royalties. Through SoundExchange the CRB process has given the RIAA a monopoly over the blanket, wholesale licensing of not only its own copyrights but also of the copyrights of the would-be competitors it seeks to destroy,   And the way it seeks to destroy those competitors is to make it impossible for Internet radio stations which would give them publicity and exposure to survive.

Let's illustrate the absurdity of Cuathon's position by applying it to a totally different industry.

Suppose there is a country called Arkistan where 90 percent of all milk is produced by four very large dairies. These four dairies are members of and control a governmental lobbying organization called the Dairy Industry Association of Arkistan or DIAA for short.   There are historically valid reasons why the four dairies control such a large portion of the market. For many decades, producing milk was a highly capital intensive industry and one that operated more efficiently with a small number of very large operators.   However, in recent years, wonderful new technology has come along which enables other types of farmers and even people who have large backyards to produce milk as a sideline business at a fraction of the cost that the large and less efficient DIAA diaries are able to.   This situation has the DIAA executives scared. Since they have controlled 90 percent of the market for decades, they feel that they are entitled to that market share and seek to destroy the emerging competition by any means possible. Their efforts to get the new technology outlawed failed. Since that did not work, they sent their lobbyists to the national capital to get their bought and paid for politicians to come up with a brand new scheme which was enacted into law.

Under the new scheme, which was loudly touted as a "free market" approach, a monopoly DIAA controlled milk distributor called MilkExchange is set up.   Anyone who wants to buy milk in large wholesale quantities MUST buy it from MilkExchange.   And since MilkExchange is a monopoly, the prices it charges are determined by a government panel of three judges.   Based on advice and political pull from the DIAA, the judges have set the price of milk that MilkExchange charges at $10 per gallon - as compared to the less than $1 per gallon many independents were selling milk for. Small non-DIAA milk producers are free to sell their milk to whomever they please on a piecemeal, retail basis at whatever price under $10 per gallon they wish to charge. However, if any of their customers wish to purchase the small producers' milk on a wholesale basis, they MUST buy it through MilkExchange at $10 per gallon.

As a result of this scheme, manufacturers of ice cream and cheese, which have been among the very best customers of these new and lower priced small milk producers, are horrified.   At $10 per gallon for milk, they would have to raise their prices for ice cream and cheese to a level higher than the market can support. At that price, customers would simply substitute other foods in their diet.   The DIAA couldn't care less if the ice cream and cheese market went away. The DIAA dairies make their money by distributing bottled milk to supermarkets and, since they are distributing their own product, they are not impacted by MilkExchange rates.

In response to the ice cream and cheese producers' outrage and the flood of letters their customers have sent to their elected representatives, the shills for the DIAA respond by pointing out that such producers are still able to purchase milk directly from any independent dairy that wishes to charge less.   And, of course, such an observation would be correct. But let's say that the typical ice cream or cheese factory uses, on average, 100,000 gallons of milk every day while the typical small milk producer is only able to produce between 50 and 100 gallons of milk per day.   This would require ice cream and cheese producers to negotiate and purchase - and, of course, arrange for shipping - from hundreds of individual milk producers just to bypass the outrageous prices of the MilkExchange monopoly.   And since small milk producers who wish to participate in the wholesale milk market must charge $10 per gallon for their product, few buyers are willing to pay that price thus making it next to impossible for the small milk producers to participate in the wholesale trade. As a result, their very best customers, the ice cream and cheese manufacturers, no longer have a viable means of buying their product from them and most have gone to business.   So to survive, the small milk producers go back to selling milk on a small scale basis to local shops just as they did before they were in a position to be a competitive threat to the DIAA.   Thus the DIAA was able to accomplish what it set out to - to keep the small competitors in "their proper place" and to protect the market share it feels it is entitled to by divine right.

(If you think my scenario is absurd - well here is an actual real life situation involving milk prices that is just as bizarre and just as unjust)

According to Cauthon's warped logic, ice cream and cheese producers and customers who would complain about such a situation are nothing more than wannabe moochers out to get milk at a price lower than the DIAA dairies are willing to charge. According to his logic, the fact that it is not practical for ice cream and cheese producers to purchase milk on a non-wholesale basis is something that is either irrelevant or to be ignored. According to his twisted logic, there is nothing at all unjust about the situation on grounds that milk producers own the milk they produce and ought to be able to charge whatever they wish for it. According to his twisted logic, the ice cream and cheese manufacturers and the small milk producers who are deprived of their ability to sell wholesale through any other source besides the DIAA controlled MilkExchange monopoly should just shut up and go out of business quietly. Cauthon would chastise ice cream and cheese enthusiasts who write their elected representatives as statists seeking coercive governmental intervention - when, in fact it was coercive governmental intervention which brought the situation into being in the first place. Cauthon would say: "save ice cream and cheese - from whom? The owners of the milk that make it possible?"    Such logic gives sanction to the DIAA on grounds that, since it engages in the production of private property in the form of milk it must, therefore, be virtuous and taken seriously as an advocate of private property and free markets - ignoring the fact that it is nothing more than a government sanctioned cartel which has manipulated the laws to create an outrageously unjust process and a monopoly designed to protect its eroding market share from encroachment by more efficient competitors. Such thinking is profoundly rationalistic and, of course, dead wrong.

That is the situation that webcasters face today. The RIAA is, in this context, nothing more than a government sanctioned cartel which has manipulated the copyright laws in order to create an outrageously unjust process and a monopoly designed to protect its market share from encroachment by more efficient competitors. The SoundExchange monopoly is the ONLY source webcasters may use to license ANY music on a wholesale basis - even non-RIAA music. Copyright holders who are willing to sell for less or give it away for free are allowed to do so ONLY on a piecemeal, retail basis. If an independent copyright holder's potential customers wish to license his music on a wholesale basis, they are allowed to do so ONLY at rates the RIAA has set to drive both the webcasters and independent copyright holders out of business.

To support such an injustice is outrageous. If a case is to be made that someone is sanctioning statism and anti-capitalism, it is Cauthon, not me.

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Cauthon's Reply

Here is Cauthon's reply made in Gus Van Horn comments section.

I will respond to some of the things said in response to my original post in a while, but because I'm running a little short on time right now and I didn't mean for this debate to spill over to Gus' site, I'll keep this pretty short.

First, I don't think that SoundExchange constitutes a "monopoly." It is true that SoundExchange is the only place for webcasters to go if they want a blanket license over all music recordings, but this is true because of two reasons:

1.) The government used its power to create the blanket license (which we all seem to disagree with), and
2.) Every copyright holder to a sound recording have never gotten together and agreed to create such a blanket license.

There are thousands and thousands of copyright holders and more are created (and lost) every day, so I don't think a license that covers all recordings could ever exist in the free market. It only takes one copyright holder to pull his music out to destroy the blanket license.

A blanket license such as the one SoundExchange offers can only be created by the government through coercion (by keeping dissenting copyright holders from pulling out). So yes, SoundExchange does have a "monopoly" on that type of license in the sense that they're the only ones that have it and nobody else can get it, but that type of license should not exist at all.

A proper license is one in which all copyright holders have voluntarily agreed to be a part of. Such a license is possible, even in today's market. Like Dismuke stated, webcasters do have the ability to negotiate with individual copyright holders. That also means that copyright holders have the ability to form their own licensing organizations that cover their own music, if they wish. SoundExchange does not have a monopoly on the establishment of royalty rates.

As for the claim that I am sanctioning statism by siding with SoundExchange in this matter, I think I've made it clear that I'm against the very existence of such an organization. I would love if the debate were about whether we should demolish it, but unfortunately that option is not on the table. What is, though, is how much damage will be done to copyright holders who are forced into this situation. When I say that I want the fees to be set according to what organizations like the RIAA want (as opposed to lowering the fees to accomodate webcasters), I'm doing so because I want to lessen the damage that copyright holders face. If we must have an organization like SoundExchange, I want it to operate as close to the free market as possible. And in a free market, the copyright holders have the final say.

My position is no different than, say, if I voted for a law that allowed me to control how some of my Social Security payments are invested. My vote does not sanction the Social Security system, I'm just trying to put a limit on how much I'm hurt by being in such a system.

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MY REPLY TO CAUTHON

Here is my rebuttal to Cauthon's remarks above originally posted in Gus Van Horn's comments section. I have corrected a few spelling and grammar mistakes which appeared in the original posting in the GVH coments.

Cauthon wrote:

"There are thousands and thousands of copyright holders and more are created (and lost) every day, so I don't think a license that covers all recordings could ever exist in the free market. It only takes one copyright holder to pull his music out to destroy the blanket license.

This is a good example of why it is important to have some actual knowledge about the issues involved before going off half cocked and to actually read what I write and keep it in context before misrepresenting my positions.

It is indeed correct that a license which would cover all recordings would not likely exist in a free market - and I never said it would. Either you did not read the posting I reproduced above describing what a free market might look like or you were too focused on trying to rationalize your position to grasp what was actually said.

Furthermore, you reveal your ignorance on the relevant issues by betraying the fact that you clearly do NOT understand what a blanket license is. A blanket license is NOT the same thing as a statutory license or a license which "covers all copyright holders."

For example, blanket licenses exist and have existed for decades in the realm of composers' royalties. If the RIAA gets it way on July 15 and my service providers (which currently pay all royalties on my streams) are bankrupted - well, the recordings I play are not covered by Federal Copyright which did not apply to sound recordings until 1972. Strictly speaking, SoundExchange does not have jurisdiction over vintage material. I will probably go out and get a blanket license from ASCAP to cover the composers royalties on those compositions I play that are still under copyright. That BLANKET LICENSE will entitle me to play ANYTHING I want that is in the ASCAP repertoire. It will NOT entitle me to play anything in the repertoires of BMI or SESAC which are competing Performance Rights Organizations (PROs) for composers' royalties. If I wanted to play such material, I would need to get a BLANKET LICENSE from one or both organizations or else negotiate directly with the individual copyright holder (which I am not likely to do as BMI and SESAC, to the best of my research to date, mostly license songs written later than those which I feature).

Composers do have the option of not licensing their material through any of the above three organizations - but few who wish to receive royalties choose that option because it is not commercially viable as they would lose access to potential customers, almost none of which are going to bother with the enormous and costly hassle of contacting copyright holders directly. Composers NEED and DEPEND on PROs such as ASCAP/BMI and SESAC because it is not practical for their customers to license music by any other means than blanket licensing.

What I am describing is STANDARD PRACTICE in the music industry and has been in place for DECADES.

The difference between SoundExchange and ASCAP/BMI/SESAC is that SoundExchange is a government sanctioned monopoly created by the RIAA which is currently the ONLY alternative that exists for wholesale licensing of sound recordings - and which is set up in a way to prevent non-RIAA recordings from being competitive in the marketplace for Internet airplay.

Cauthon wrote:

"As for the claim that I am sanctioning statism by siding with SoundExchange in this matter, I think I've made it clear that I'm against the very existence of such an organization.

Excuse me, Mister - but YOU are the one who accused ME of sanctioning statism. I NEVER made any such accusation about you. What I said in response to your accusation was that IF someone here could be accused of sanctioning statism, the shoe fits on you far more than it does on me.

Again, please read what I write and keep context so that you do not continue to misrepresent what I say.

Cauthon wrote:

""What is, though, is how much damage will be done to copyright holders who are forced into this situation.

Yes, exactly - the damage that will be done to the copyright holders whose recordings the RIAA does not want the public discovering or listening to because they know that the popularity of Internet radio which provides lots of airtime to non-RIAA artists will spell the end of the ability they have enjoyed for decades as a result of technological limitations which no longer exist to heavily influence which music comes to the public's attention and which does not.

Cauthon wrote:

"I'm doing so because I want to lessen the damage that copyright holders face. If we must have an organization like SoundExchange, I want it to operate as close to the free market as possible. And in a free market, the copyright holders have the final say.

For your information, the RIAA is no more a valid spokesman for all copyright holders than Jesse Jackson is a valid spokesman for all black people or Orran Boyle is a valid spokesman for all steel producers.

And if some form of "getting what one wants" is what you equate with "as close to a free market as possible" - well, you could not be more wrong. In a free market a pencil manufacturer does have a right to demand $100 for an ordinary pencil - but in a free market a pencil maker would never do such a thing as his his competitors also have something to say about what sort of price he is realistically going to get for it. The only way that a pencil manufacturer could ever seriously demand $100 for his product would be if he uses the government to make it impossible for those who would sell pencils for 10 cents to bring them to market.

I agree that, so long as an evil such as statutory licensing must exist, it should function as closely to a free market as possible. But creating a marketplace for Internet airplay is NOT the purpose of the CRB rates. Those rates were set at a level which is designed not to create or facilitate such a market but rather to KILL it. Please name me a SINGLE example in ANY free market which has ever existed where a product is sold at a price that is between 300% and 1,500% of its most successful and commercially viable customers' TOTAL annual revenues? That is the sort of absurdity that you are trying to rationalize and justify.

And if you wish to assert that in a free market the RIAA labels would somehow seriously consider refusing Internet radio stations airplay of their material - well, that would be bizarre. In a free market it would be SUICIDAL for them to do that because it would mean that they would be abandoning a wonderful and increasingly influential and popular medium to their competitors. In a free market, the RIAA labels would be BEGGING for stations to play their material just as they currently beg FM stations to play their material. Why do you suppose the word "payola" exists in our language - and why do you suppose the RIAA labels try to get around the anti-payola laws (which are irrational and need to be abolished) by hiring staffers to smile nicely at influential FM program directors and invite them to parties with lots of rock stars, drugs and prostitutes? It would be absurd to think that the RIAA would wish to refuse to participate in a free market for Internet airplay if one was ever allowed to come into existence.

In a free market, the RIAA labels would have NO CHOICE but to participate in Internet radio at rates that webcasters could afford because to do otherwise would be to surrender exposure and market share to their COMPETITORS. The purpose of the CRB rates is to PREVENT such competition from ever coming about. The ENTIRE purpose of these rates are to keep RIAA competition locked out of the Internet in the same way that technological limitations have for decades locked them out of the market for FM airplay.

"Like Dismuke stated, webcasters do have the ability to negotiate with individual copyright holders. That also means that copyright holders have the ability to form their own licensing organizations that cover their own music, if they wish. SoundExchange does not have a monopoly on the establishment of royalty rates.

Do you know for a fact that copyright holders do have a right under the present laws to form their own sound recording licensing organization? I, for one, am not sure what the law says about it. If it permits it - well, that would be a silver lining in the context of a rather crappy situation. If that is the case, than I guarantee you over time that is exactly what WILL happen - and, yes, something like that would basically render the SoundExchange monopoly and the CRB more or less obsolete when and if it ever happens.

But that does not address the injustice that is being done to CURRENT copyright holders and CURRENT webcasters who will be forced into bankruptcy on July 15 by laughably ABSURD rates announced and imposed RETROACTIVELY. I don't think the RIAA even cares what will happen in the long run or whether competitive PROs eventually emerge because everybody already knows that they will not be around in the long run. This is nothing more than a Luddite's attempt to kill off an emerging technology (or at least slow it down) and thereby enable them to try and hang on to their legacy markets for as long as they can.

Prior to the DMCA which set the current system up, our copyright laws recognized NO public performance property rights AT ALL in sound recordings - and such rights were granted ONLY within the context of satellite and Internet transmissions. A marketplace is not something that just pops into being overnight. It takes time for the people involved to set up the infrastructure and such. What we have gone from is anarchy where NO rights existed to a system that is basically a form of fascism where a government sanctioned cartel of private interests gets to dictate the conditions that all other players and competitors in the market must abide by.

I think valid points can be made in the argument that, if we are to have statutory royalties, it is better for those rates to be set well above the market rate to protect those very rare and isolate instances where a player wishes to exclude himself from the marketplace altogether. But, if so, one has to keep in mind the CONTEXT in which such a system is imposed. The relevant context here is that technology is developing at a rate much faster than the government is able to keep up with regard to copyright implications and that new rules are being applied to a PRE-EXISTING industry. If one wishes to make the case that the CRB rates should be set very high on the premise that competitive PROs will emerge as a result - I would be perfectly fine with that so long as enough time is given to all players involved for such PROs to emerge. To impose such rates on webcasters overnight from the get go - well, all that is going to do is kill the existing players in that industry off. It was YEARS after the first webcasts started before the government finally got around to announcing in 2002 what the royalty rates would be - and they were very high and retroactive back to 1998. The injustice of that alone ought to be obvious. Webcasters operating from 1998 to 2002 knew that they would have to pay SOME royalty but had no idea how much. Imagine trying to operate a business where your major supplier tells you he will send you a bill later for an unspecified amount his buddies in Washington will eventually come up with. How is one supposed to know how much to set aside each month as a contingency? In other words, webcasters are supposed to be omniscient.

There has been NOTHING about the entire CRB process from the get go designed to encourage anything even remotely resembling a free market to emerge. The ONLY objective from the get go has been to DESTROY an emerging industry.

To rationalistically defend the RIAA's agenda in the way that Cuathon does on ground that, since the RIAA represents "creators"of values such as recorded music and have a substantial portion of market share, they must, therefore, be heroic "producers" who are examples of virtuous businessmen looking out for their rational interests - well, that's no different than saying the same about James Taggart and Orren Boyle on grounds that they ran railroads and steel mills.

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