Latest move by broadcasters to mandate implanting radios into cell phones

Fearing that over-the-air radio may be nearing extinction faster than predicted, the US National Association of Broadcasters has been backing legislation requiring mobile phone manufacturers to install "radio-activated chips," making them into de facto FM radios. . . whether consumers actually want them or not. But in an effort to accelerate legislation to make this happen before, say, next January, the NAB signaled yesterday it's willing to make a bargain with its most valuable negotiating chip: radio's decades-old exemption on paying performance royalties.

For over a year, the NAB has boasted that it has the support of a majority of members of the US House of Representatives, backing a bill that would extend the broadcast radio industry's exemption from paying performance fees to musicians (and their designated rights holders) indefinitely. But the political careers of many of those representatives are now somewhat less than definite, as many pollsters predict a change of party leadership in the House next January.

Apparently sensing that the handwriting on the wall was made with permanent marker, yesterday the NAB made an unprecedented proposal to its chief adversary: the musicFIRST Coalition. NAB member stations would agree to pay rights holders a flatter fee of 1% of "net revenue" (historically, the formula for attaining "net revenue" has been enormously complex), if the Coalition would agree to support certain key legislative provisions. . . the immediate likelihood of which appears doubtful, but the mere proposition of which denotes the increasingly desperate situation in which broadcasters find themselves.

As an NAB statement last night explained, broadcasters want the Coalition to agree to remove the US Copyright Royalty Board as the designated arbiter of terrestrial radio's royalty fees for both over-the-air and streaming Internet radio. Royalty rates set by the CRB tend to escalate on an established schedule; the NAB appears to be saying that any escalation should be negotiated privately between broadcasters and rights holders.

The NAB also wants musicFIRST to back the FM chip mandate, on the theory that it would increase the base of listeners beyond those who already own radios. Betting on the theory that it's the rights holders whom musicFIRST represents whose voice in Congress could make the FM chip mandate happen, the broadcasters are proposing a staged implementation of performance fees, contingent upon the saturation level of FM chips in US cell phones. Initially, broadcasters would pay 0.25% of their net revenue. That rate would escalate to 1.0% once it has been determined that FM chips have penetrated "75 percent of all mobile devices," according to the NAB statement last night.

But the broadcasters are also adding leverage to the leverage, asking the Coalition to agree to reduce their fees for streaming Internet radio. Back in January 2009, the CRB set forth new terms and conditions for all streaming radio providers to follow, starting with a base rate of 10.5% of net revenue, and then adding and/or subtracting values from that base. The new rates enabled online services such as Pandora and Last.fm to continue doing business, as rate structures that had been in place earlier would have escalated their liability beyond the 100% net revenue mark. However, they've had to implement premium-tier subscription services to do so, and add advertising to their unpaid streams.

The revenue problem has apparently yet to be solved for streamers. Last week, Last.fm announced it will be shutting down some of its subscription-tier stations on November 17. Subscribers had been paying a $3-per-month charge for stations that featured more of their own personal selections (royalty rates for songs chosen by subscribers are higher than rates for automatically or randomly assembled playlists).

In the wake of recent studies including from research service Bridge Ratings showing the ratio of younger listeners' preference for online radio over broadcast radio hovering at about 9:4, traditional broadcasters feel they need more accessibility. What's more, they apparently believe radio receivers aren't enough to guarantee that accessibility. They want back in the streaming game themselves, which is why they want musicFIRST to agree to take the CRB out of the picture, making the 10.5% base rate that Pandora and Last.fm pay, inapplicable to them.

Broadcasters are also seeking a resolution, the NAB said yesterday, to the so-called "AFTRA issue," which is the sole reason why some successful US radio stations stopped streaming online. AFTRA is the union that represents, among others, the performers who appear in radio commercials; and because their royalty rates for terrestrial broadcast ads are different than when those ads are streamed on radio (a rate some claim to be three times higher), many broadcasters opt to dub over their terrestrial ad blocks with lower-cost ads, often produced in-house that take in lesser revenue. Rather than support two ad tracks, many stations opt simply not to stream at all.

The NAB refrains from specifying just how the AFTRA issue would be resolved, though it does say that doing so would "facilitate simulcast of over-the-air radio commercials on the Internet." That notion has already been called a "bad idea" by radio ad industry analyst Jennifer Lane. "It discourages advertisers and broadcasters from developing ads that have an online/interactive call to action," Lane wrote last month. "It encourages broadcasters to view their streams as simulcasts of their broadcasts. Which they are not. It's the fast lazy train to ineffective online radio."

This morning, ad industry strategist Mark Ramsey called the NAB's AFTRA proposal "brilliant," although with a very heavy dose of sarcasm. "As I and others have long argued, one key value of Internet delivery is to match messages to consumers which are relevant and accountable. The idea of repurposing over-the-air spots on digital streams using the same one-size-fits-all radio model is like buying a new Maserati and putting a saddle on it! And I don't mean a saddle custom-made for your butt, either. . . Go ahead and ask Pandora why they don't do this with their 75 million registered users, a good-sized audience to be sure. And their answer would be, 'Why in the world would we do that when we have age, sex, zip code, music preferences, and other personally identifiable data on 75 million consumers?!'"

In a statement issued yesterday, the chairman of the NAB's Joint Board which issued the proposal, Commonwealth Broadcasting CEO Steve Newberry, said, "No broadcaster that I know relishes paying a new fee, but the terms of this agreement provide badly needed certainty for our business to move forward, and the positives of this accord far outweigh the negatives."

For his group's part, musicFIRST spokesperson Tom Matzzie issued a response late yesterday evening. Alluding to negotiations that had not been reported before in the press, Matzzie said, "While we are pleased that the radio broadcasters have for the first time acknowledged their obligation to pay the artists who are the foundation of their business, we are disappointed that they failed to vote on the deal both parties agreed upon in July. After a quick review, this new term sheet differs significantly from that agreement. We will be reviewing their term sheet further."

The existence of negotiations last July surprised the very people who would have taken part in these negotiations. This morning, NAB CEO Gordon Smith issued this statement to press services: "We are disappointed by comments from our friends at musicFIRST representing that there was a definitive July agreement or a handshake settlement with NAB on terms for resolving the performance royalty issue. This is demonstrably false. If this were true, why would our two sides have continued with negotiations in August, September, and October?"

Scott M. Fulton, III is editor and publisher of Net1News