Big Machine's Deal with Clear Channel: A Win for the Music Business?

At the beginning of June, it was announced that Big Machine Label Group struck a groundbreaking deal with Clear Channel that will provide payment of royalties to artists and record labels for terrestrial radio play. What does this mean for the music business? Let’s break this down:

Since the dawn of Performance Rights Organizations in the United States (circa 1909), terrestrial radio has been paying performance royalties to the Publishers and Composers of musical works that are broadcast. Until now, radio has NEVER paid royalties to record labels or artists who have recorded the songs being played. In most other countries labels and artists have received these royalties (a.k.a. Neighboring Rights), but U.S. artists and labels have been out of luck. Since U.S. radio hasn’t paid artist/label royalties, there is no framework for a reciprocal agreement between countries. For may years the U.S. music industry has been fighting to establish artist/label royalties for terrestrial radio to no avail. Then, along came the Digital Performance Right in Sound Recordings Act of 1995, which established artist/label royalties only for digital broadcasts (i.e. internet radio, podcasts, digital cable music channels, etc.) This new right is administered by a wonderful organization called SoundExchange. Terrestrial radio (AM/FM) still got a free pass.

According to Billboard, the details of the deal between Scott Borchetta’s Big Machine and Clear Channel provide that the radio giant will pay the label an undisclosed percentage of terrestrial ad revenue to be split 50/50 with the artists. This royalty will be paid in lieu of the Sound Exchange royalty, which is currently set at $0.002 per play for 2012. This deal makes sense for Big Machine because right now terrestrial radio accounts for 98% of Clear Channel’s listener base. The label stands to make a lot more money for itself and its artists by taking a cut of terrestrial radio ad revenue instead of the two-tenths of a cent for each digital play. But the question is: Why would Clear Channel agree to such a deal? It seems that Clear Channel is looking into the future. Just like physical albums are being overtaken by digital downloads and online streaming, it is reasonable to assume that radio will undergo a similar shift. As fewer and fewer people listen to terrestrial radio, more are listening to digital streams. Clear Channel’s iHeartRadio app is at the forefront of digital radio and has been growing. As their terrestrial radio dwindles and their digital radio grows, I predict Clear Channel will come out on top and end up paying less money to artists and labels.

So is this a win or a loss for the music industry? Only time will tell, but here are a few things to keep in mind:

As far as the companies involved, Big Machine will make more money from this deal for now but if Clear Channel’s digital radio overtakes terrestrial, they will be in trouble. Clear Channel will pay out more money to Big Machine now, but it looks like they are preparing for some major growth in their iHeartRadio app, and this deal would save them money in the long run by bypassing SoundExchange royalties altogether. This can end up hurting the music industry. On the bright side, this deal has set a precedent for artist/label performance royalties in the United States. One can only hope that in time other radio stations and record labels will follow suit, and maybe the broadcast television can also be won over. Not only would this strengthen the domestic music business, but it would also lay the groundwork for reciprocal arrangements with other countries to collect Neighboring Rights. In 2007 it was estimated that the U.S. loses about $70 million a year in potential foreign performance royalties, and that number will continue to grow. It would sure be great to get that money back to the artists and record labels that deserve it.

Ben Thompson is the owner of BT Productions, LLC. He works with independent artists on publishing, licensing, and management. His blog is still in its infancy, but can be found at www.BTMusicBusiness.com