Lynne Kiesling
I misunderstood the per-play royalty in my previous post on Internet radio royalties. It’s not 8 cents per play per listener, it’s 8/100 of a cent per play per listener. So I was off by 2 decimal places; my apologies, and thanks to commenters for pointing it out.
So the annual royalty would be $40,353.33 for Groove Salad alone. Which is still too much when you consider the share of the total listener market that Groove Salad serves.
[Corrected as per comments, thanks!]
Lynne Kiesling
While we’re discussing music, we are on the verge of another nail in the coffin of Internet radio, in the form of royalty payments. In mid-April the U.S. Copyright Royalty Board decided to affirm a prior ruling it had made to raise royalty rates that Internet-only radio stations pay:
Released March 1, the new rules (PDF) prescribe rate hikes of .08 cents per song per listener retroactive to 2006. The rates would climb to .19 cents per song by 2010, which amounts to a 30 percent increase per year. Each station would also have to hand over a minimum $500 royalty payment under the ruling.
The judges in their decision issued two clarifications–one about the way royalties would be calculated for 2006 and 2007 and another stating that the royalty rules would also apply to music streamed over mobile devices. But they left a number of other questions about the ruling unanswered.
Internet radio operators argue that, when compared with broadcast and satellite radio, they already pay the highest royalty rates in proportion to their revenue, and any further changes could imperil their offerings. A group of artists, labels, Webcasters and listeners has formed the SaveNetRadio Coalition to pressure Congress to get involved.
“As a former touring musician myself, I’m no stranger to the challenges facing working musicians,” Tim Westergren, founder of the Internet radio service Pandora, wrote in a Monday e-mail. “The issue we have with the recent ruling is that it puts the cost of streaming far out of the range of ANY Webcaster’s business potential.”
Take, for example, soma fm’s Groove Salad, which right now has 5774 listeners. In the past hour Groove Salad has played 10 songs. That means that in just the past hour alone, soma fm would have to pay 5774x10x0.08=$4619.20 in royalties. With 168 hours in a week and 52 weeks in a year, if this hour is representative, soma fm would have to pay annual royalties of $40,353,331 just for Groove Salad alone!!!!
This per-performance royalty structure for Internet radio differs substantially from the traditional royalty structure that traditional broadcasters pay, and it makes the royalty responsibilities on the Internet radio stations disproportionately higher relative to their listener base. For example, these recent statistics from BetaNews show how disproportionate these results are:
For our research, we wanted to compare what streaming radio providers would be charged by SoundExchange against the fees that broadcast radio stations today pay to the three major performance royalty organizations (PRO) – ASCAP, BMI, and SESAC. While indeed, some radio stations do pay as little as $972 per year in total royalty fees to PROs, as BetaNews reported Tuesday, in practice, we’ve since learned this isn’t an average that applies to all stations, and major metropolitan radio stations do pay significantly more.
Nonetheless, there’s still a considerable gap between PRO fees and SoundExchange’s proposed “per-performance” fees, as our updated statistics demonstrates.
Radio stations collectively bargain for the royalty fees they pay to PROs; and as Keith Meehan, the executive director of the Radio Music License Committee, kindly explained to us today, the compromises these bargaining parties make effectively set a cap on how much PROs can collect from all stations combined.
As Meehan explained, in 2002 for ASCAP and 2003 for BMI, the two organizations calculated the amount of maximum royalty collections they could each live with, based on a percentage of radio stations’ estimated revenue retroactive to 2001. Then they agreed to stop using stations’ revenue as a benchmark for determining royalty rates from that time forward, switching instead to a formula that takes the maximum collectable amount for each year, and works it backwards to determine a fair rate that each station can contribute to it.
As a result, we absolutely know the amount of royalties that these two firms are expected to receive for 2006. For ASCAP, the agreed upon amount is $208,650,000. That’s as much as it can collect from radio broadcasters in the US, no more. For BMI, the figure is $208,000,000 even.
OK … so the entire broadcast radio industry pays royalties of $416 million annually, and these new royalties would impose fees of $40 million, 10 percent of that amount, on an online station with 5774 listeners? How fair is that?
Of course artists should be paid for their creations (but I think one would be naive to expect that record labels will pass most or all of this royalty on to the artists!), but is this royalty a good way to meet that objective? One consequence of the demise of stations like soma fm and WOXY would be that fewer consumers would be exposed to artists whose CDs they would then go out and buy. That would decrease artist incomes. How fair is that?
If you want some more background on this issue, soma fm has a nice overview page. If you care about this issue, visit SaveNetRadio.org, call your Congressional representatives, and urge them to support the Internet Radio Equality Act, HR 2060.
The new, unfair royalty structure is due to go into effect on May 15 unless this legislation passes.
UPDATE: my corrected understanding of the actual royalty rate is in this post; I was off by two decimal points, but it’s still an unreasonable royalty relative to those paid by radio broadcasters.
Lynne Kiesling
Such is the assertion in an article in today’s Wall Street Journal (subscription required) on how big box retailing is changing music retailing.
In past decades, deejays and music critics helped shape musical trends. Today, many music industry executives agree, the big boxes have become the new tastemakers. Even as compact disc sales fall, their choices dictate which CDs are widely available on store shelves across the U.S. Big boxes are the industry’s biggest distribution channel — and the rock, hip-hop, jazz and classical music titles they choose not to carry face drastically reduced chances of reaching mass audiences.
Thanks largely to aggressive pricing and advertising, big-box chains are now responsible in the U.S. for at least 65% of music sales (including online and physical recordings), according to estimates by distribution executives, up from 20% a decade ago. Where a store that depends on CDs for the bulk of its sales needs a profit margin of around 30%, big chains get by making just 14% on music, say label executives who handle distribution. One of these executives describes the shift as “a tidal wave.” Despite the growth in online digital music sales, physical CDs still are the core of the recording industry, accounting for about 85% of music sales.
Is that really true? Are big box stores really the new tastemakers? I’m not persuaded, and actually the lede of the story hints at why I’m not convinced:
When Wal-Mart Stores Inc. informed record labels it was looking for CDs to include in a promotion of Jewish music last year, executives at Naxos of America Inc. leapt at the chance to get some of their ethnic recordings onto the shelves of the big-box retailer.
But within months of shipping thousands of CDs to Wal-Mart, the classical music distributor’s loading docks were swamped with unsold copies of “Klezmer Concertos & Encores” and “Great Songs of the Yiddish Stage.” Since they hadn’t sold quickly enough to meet the retailing giant’s standards, 80% of the CDs Naxos shipped to Wal-Mart were returned. Record stores typically return only 20%.
“In hindsight, if we’d thought about this a little more, we wouldn’t have done it,” says Naxos Chief Operating Officer Jim Selby. “Jewish classical music, going into a Wal-Mart store, it’s pretty farfetched that we’d have 60% or 70% sell through.” He adds, “It’s niche-y music.”
If the big box stores truly are music tastemakers, then why such large return shipments? It sounds to me like WalMart forecast a higher ability to create demand for Jewish music than they were able to realize. That’s not a tastemaker. What this sounds like to me is WalMart doing its usual thing of shifting risk to its suppliers, not WalMart leveraging any ability to shape the music purchases of their customers. Of course the inventory of CDs that big box stores choose to carry shapes the music purchases of their customers at that store, but even though 65% of all CDs are sold at big box stores, if customers want something particular and WalMart doesn’t have it, they’ll get it at Amazon or Best Buy or Target or Borders or some other online or physical place.
Furthermore, the WSJ article begs the question of whether there are really tastemakers in music any more. So many commentators decry the fracturing of the music market, the decline in the shared pop culture experience, because of the ability that technology creates for long tail marketing. So here’s a simultaneous proclamation of new big box tastemakers and the demise of the tastemaker. Who’s right?
And another thing: mass audiences? I personally find the music that’s pitched at mass audiences to be utterly anodyne, devoid of any redeeming feature; granted, I’m not the target demographic, but I think there are enough people of diverse enough ages, tastes, and incomes to make the concept of the mass audience fast on the tail of the dodo bird: nearly obsolete. That’s another way of saying that on both the supply side and the demand side, technology has made the music market a lot deeper and broader than in the halcyon good-old tastemakers-create-mass-pop-stars days. And thank goodness for that.
In fact, just this week Chris Anderson wrote a Long Tail post about the decline in top album sales, referring to a recent Music Week survey:
The so-called “long-tail” impact on the singles market, since the introduction of legal downloads, is starting to reach the albums business, according to new Music Week research.
MW’s detailed study of quarter one trading patterns indicates that, while sales of the Top 200 sellers plummeted year-on-year by more than 20%, the rest of the market dropped by little more than 3%. It indicates that, as the top titles suffer the biggest falls in a clearly tough market, sales are being spread out more widely across a greater number of titles.
The apparent trend is being warmly received by labels and retailers alike, coming after a challenging opening three months of 2007 when artist albums were 8.94% down on Q1 2006, despite having had the added benefit of download album sales. These were not added to OCC sales figures until quarter two last year.
The drop was led by disastrous sales of the Top 200 artist albums, whose total of 11.29m physical units in the 13-week period was 21.13% lower than the first quarter of 2006.
Further down the chart, however, it was a different story, with sales of wider catalogue remaining relatively healthy. Excluding the top 200 best sellers, 13.10m physical artist albums were sold in the first quarter of 2007, down just 3.33% on a similar total for Q1 2006.
This all leads me to conclude that the WSJ article is off base, and that even though more than half of music sales in the US occur through big box retailers, that fact does not mean that such retailers are tastemakers.
Michael Giberson
Some financial analysts have concluded that maybe the XM-Sirius merger is not such a good idea, or at least not the outright winner that the companies themselves suggest. As the WSJ’s Deal Journal says: “Regulators may not present the only hurdle faced by Sirius and XM in their efforts to forge a successful combination.”
Which would be a shame, since then we would be spared the further lectures of National Association of Broadcasters president David Rehr on the evils of monopoly. Speaking to broadcasters in Las Vegas the day before the Senate Commerce Committee was holding a hearing on the merger, Rehr said:
No matter how much Mr. Karmazin and everyone else at Sirius and XM use the word, it is not a merger they seek. It is a monopoly.
A monopoly? Well sort of. They would be the only audio news and entertainment broadcasters that rely upon satellites to deliver programming to subscribers. But consumers have lots of other ways to access audio news and entertainment. (I tend to use internet “radio” in the office, and increasingly CDs or an MP3 player jacked into my car radio when driving. Don’t you find that most car radio ads are highly annoying?)
It is a government sanctioned monopoly.
So I guess that would make them the only government sanctioned audio news and entertainment broadcasters that rely upon satellites to deliver programming to subscribers. But consumers still have lots of other ways to access audio news and entertainment. And most car radio commercials are still highly annoying.
Now some of you might not be aware I am an economist by training.
This much was true, I was not aware even though Dr. Rehr picked up a PhD in economics from George Mason University, just like me.
A little googling reveals that Dr. Rehr’s dissertation was titled, “The Political Economy of the Malt Beverage Industry” (which certainly sounds more interesting than my own work, “Improving Coordination Between Regional Power Markets”). It looks like Dr. Rehr was working for National Beer Wholesalers Association at the time he did his dissertation – sounds like a clear case of spillover benefits!
I ask you, when has a monopoly ever served the interests of the consumer?
A good question, perhaps deserving of a dissertation or two all by itself. Alas, if the XM-Sirius merger collapses of its own weight we may be spared the natural experiment that might illuminate that inquiry.
A monopoly is a monopoly is a monopoly, and we at NAB will continue to adamantly oppose it.
I’m please to see a fellow GMU grad out there fighting against the evils of monopoly. I am kind of surprised, however, that a trade association like NAB would go to such efforts — spending lots of its own time and resources — in what is apparently a public-spirited campaign.
I mean, after all if the merged XM-Sirius company would be a monopoly, that must mean that they are in a separate market from the localized, land-based radio broadcasters that make up NAB membership. And if the markets are separate, than clearly what goes on out there in that potentially-monopolized market won’t hurt NAB members. So NAB and its members — presumably determined in the Dr.’s analysis to be in some-other-market-not-related-to-the-satellite-radio-market — must be opposing this prospective monopoly out of the collective goodness of their collective hearts.
(Or maybe this is just another example of their long history of anti-consumer lobbying. HT Gizmodo.)
If radio broadcasters really want to do something good for the world, maybe they should direct less attention to lobbying against the competition and more to serving their consumers. For example, how about doing something about those annoying radio commercials.
Michael Giberson
If you, like J. Bradford DeLong, are wondering “what the hell they are doing that is worth that kind of money,” then Bookstaber’s book can help.
One point of Bookstaber’s argument is to illustrate the problems with the term “hedge fund.” While “hedging” has a particular meaning, and “fund”, too, is well defined, turns out that the joining together of two well-defined words gets you what has become an ill-defined conglomeration. Or, as Bookstaber puts it, hedge funds are the universe of possible investment firms, except for traditional firms. This part of the book should be required reading for anyone urging increased regulation of hedge funds. (Yes, New York Times editorial page, this means you.)
But, to the extend it is possible to generalized about what hedge funds do… well, the long answer to the question is “read the book.”
In short, however, I’d say the answer is taking risks while providing liquidity to the market at a lower cost than is offered by less sophisticated investors. What all the high-powered computation buys you as an investor is an understanding of clever ways to offset the known risks of various kinds of transactions. The transactions generally remain risky, but by structuring deals to minimize known risks and often leveraging investments to high degrees, hedge funds can take on positions that otherwise would promise too small of a reward given the risk involved. The presence of sophisticated investors lowers the cost of capital and makes it cheaper for non-financial firms to invest in physical assets.
This is not a zero-sum game; facilitating commerce has real benefits for the economy.
And while I don’t want to totally discount the problems caused by the occasional market meltdown, or the possibility of systemic risks, it seems obvious to me that we are better off now with all of this rampant financial innovation and lucky hedge fund billionaires than we were back when the economy would suffer a financial panic that spilled into the real economy with much more force on a regular basis.
Michael Giberson
Thoughtful, useful, inadequate and wrong-headed. That’s my reaction upon completing Richard Bookstaber’s book, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation.
As I mentioned last week (in The Perils of Financial Innovation, or Not), Bookstaber was among the MIT-trained economists lured from academia to Wall Street in the 1980s. In the book he gives an insider’s account of the development of financial innovations in the 80s and 90s, linking the innovations to the 1987 market crash, the failure of LTCM, and sundry less notable blow ups. For my taste, there was too much tracking of who did what where, and too little explanation of how various financial mechanisms were supposed to work, and why they sometimes went bad. About midway through the book, Bookstaber shifts emphasis from careers and organizations to his diagnosis of problems that underlie the system and a few ideas on how things could become better.
Overall, Bookstaber failed to convince me that “less complexity and looser coupling of markets” is a reform banner that I should be willing to march under. Bookstaber himself explains clearly the futility of hedge fund regulation, so it is less than clear what sort of public policy approach is warranted. (While last week I expressed concern that he might advocate reforms that simply shift risks back into the real economy, he avoids that temptation.) Individual investors, and particularly the firms that manage investments, may find some wisdom in Bookstaber’s hard won understanding of the limits of computational techniques – but this book is hardly the only place for finding these insights.
So the book is useful as a report on the financial innovations of the 80s and 90s, and inadequate and somewhat wrong-headed in his suggestions of a reform agenda. But my final reaction is in the word I led with: thoughtful. While I’m not convinced by Bookstaber’s talk of normal accidents and tight coupling, the book does offer a deeper understanding of working of financial markets and in particular of the contributions of hedge funds to “greasing the wheels of capital.” In a world where financial innovation continues to reshape markets and therefore the economy, deeper understanding of financial markets will prove invaluable to economists, business managers, and particularly policy makers.
Michael Giberson
Former Apple CFO Fred D. Anderson reached a deal with the U.S. Securities and Exchange Commission over the backdating of stock options, including an agreement to pay $3.5 million to settle civil charges. As many of the newspapers stories report, backdating options is not necessarily illegal, but must be properly disclosed and accounted for.
At Economic Principals last week, David Warsh noted that the Wall Street Journal received the Pulitzer Prize for public service for its “creative and comprehensive probe” into backdated stock options. Warsh reports the back story of the options backdating affair, including how “the story itself began with an alarm raised by a finance professor.”
In addition to revealing the role that statistical analysis by a couple of academics played in bringing the story to the attention of the Wall Street Journal and federal regulators, Warsh also puts the right spin on the ethics of the practice:
The basic problem with backdating is fabrication…. It has to do, not with fleecing shareholders, but with misleading them. Deceptive practice is the issue, not some purely economic crime.
Michael Giberson
According to the New York Times, Institutional Investor’s Alpha magazine is coming out today with its annual list of the the top 25 hedge fund earners. Cue the weeping, wailing, and gnashing of teeth:
“There is some question as to what the hell they are doing that is worth” that kind of money, said J. Bradford DeLong, an economist at the University of California, Berkeley. “The answer is damned mysterious.”
At least two of the 25 on the list made some of their money in energy:
John Arnold, the 32-year-old from Centaurus Advisors who amassed net gains of 200 percent last year. … His $3 billion fund, among the largest energy funds in the world, racked up huge gains by taking the other side of a natural gas bet that caused Amaranth to lose more than $6 billion in a week.
Boone Pickens, the 78-year-old oil tycoon, made $340 million on the back of strong returns at his energy funds….
It is kind of an amusing coincidence that 32-year old Arnold was on the winning side of the gas market changes that sent Amaranth Advisor’s down the tube. Amaranth’s big energy bettor was 32-year old Brian Hunter. (Just guessing here, but I would bet that Hunter didn’t make the Alpha top 25 this year.)
Michael Giberson
In the Fort Worth Star-Telegram, Jim Fuquay tries to answer the question that may be on the mind of power traders in Texas and elsewhere: When is electricity trading illegal?
“They exercise market power. They just come right out and tell you,” [energy market consultant Steven] Stoft said of his experience working for a Canadian generator. “Every other company in the world does it to the extent it can. The difference is, it’s illegal in electricity.”
Of course, whether it is illegal in any particular case depends on the locally prevailing law.
As a matter of policy, I think generators ought to be free to excercise all of market power they can get, and generators should be free to agree to contracts in which they give up that freedom, and networked consumers ought to demand that any generator holding significant market power contractually yield that freedom as a condition of interconnecting to the network.
Lynne Kiesling
I’m going to spend a couple of days in London on the way home from my conference, and in the course of looking up a shop address I found this fantastic resource: Street Sensation. For many neighborhoods in London, you click on a map and there will be a panning landscape of all of the store fronts on that side of the street.
For example: the south side of Brompton Road, between the Knightsbridge tube station and Harrod’s.
Whether you are interested in shopping or just wandering, these maps are fantastic, and a great use of technology. And if you’re looking for me Monday morning, I’ll be puttering around and running errands on Marylebone High Street.
How cool is that?
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