Promotional Effects and the Determination of Royalty Rates for Music

Abstract

When a terrestrial radio station plays a song during its over-the-air broadcast, the artists and their record labels receive no compensation for the sound recording right. Yet radio’s digital competitors — including streaming services and satellite radio — do pay performance royalties to performers and their labels for the sound recording. Terrestrial radio’s cost-advantage is not the result of marketplace deals or competitive forces, but from a statutory preference granted to radio broadcasters. Legislation aimed at leveling the playing field has been strongly resisted by broadcasters based on the claim that radio provides a promotional effect, or free advertising, for record labels and performers. In this BULLETIN, we demonstrate that any promotional effect is fully internalized in a marketplace bargain between the music and radio industries. As such, a promotional effect provides no basis for federal law to mandate the free use of music by the radio broadcast industry.