Recording Industry v. XM

Steven Pearlstein
Washington Post Columnist
Wednesday, July 19, 2006; 11:00 AM

Washington Post business columnist Steven Pearlstein was online to discuss the recording industry's legal assault on XM Satellite Radio over its "Inno," a new handheld device that can store up to 50 hours of music.

He writes in today's column that there is nothing more amusing than watching business interests work themselves up into a righteous frenzy over a threat to their monopoly profits from a new technology or some upstart with a different business model.

A transcript follows.

About Pearlstein : Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here .

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Arlington, VA: Why is XM getting sued for Inno and copyright enfringement and not Sirius which has a similar product/service? Do you think companies such as XM and Sirius can really monetize their service and break even or make a profit in the near future? Do you see a media or broadcasting company such as AOL/Time Warner or CBS buying out XM or Sirius?

Thanks!

Steven Pearlstein: Sirius wasn't sued because they struck a royalty deal with the RIAA members, as I mentioned. XM was offering a similar deal, but for some reason it was rejected.

Yes, I think it is a sustainable and profitable business model (content for a fee)that will compete with an advertising based model. There is no particular reason why XM or Sirius needs to sell out, since there aren't very obvious scale economies that would come from joining a media conglomerate, with all the diseconomies of being part of being part of a large organization.

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Cookeville, TN: Monopolist rights are worth a great deal. Why not make the monopoly holders pay for their rights?

Studies have shown that the vast majority of revenue received for a copyrighted item is received in the first 10 years after it is created. So, a copyright grants monopoly rights for 10 years after the creation of an item. Then, if the copyright holder wants to extend the copyright for a year, they have to pay a fee equivalent to 0.1% of the total revenues received for the item over the first 10 years - with appropriate penalties for substantial underreporting of the revenues. For a second year, the fee would be an additional 0.2% of the initial revenue (defined as the revenue for the first 10 years). For a third year, another 0.3%, etc up to a maximum of 5% for the fiftieth year. After year fifty (sixty total) the item goes into the public domain. This means that items that aren't worth much end up in the public domain quickly, those that have commercial value will go into the public domain as soon as the cost of maintaining the copyright exceeds the revenue to be derived from it. Studios like Walt Disney that have a significant investment (and derive considerable income from) older works can still protect them, and derive income from them.

Of course the percentages, and time limits are subject to discussion, but something like this seems to most fairly balance the rights of copyright holders with the rights and concerns of the public -- If you want to hold onto your copyright, you have to pay for the right to do so.

Steven Pearlstein: That's really a very clever idea. I suspect the problem is that the government would have to be in the position of checking up on royalty payments so it doesn't get cheated for its percentage. But I suspect there is a technological solution to that one.

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Ashburn, VA: Is price-fixing really illegal for this sort of business, whether it's satellite radio or the labels? Also, what in today's terms is the definition of the recording industry compared with pre-1993 for instance. I mean at some point (tomorrow) I think we'd all like our cell phones to record our voice to recognize a music request, right?

Thanks!

Steven Pearlstein: The cell phone is the next distribution device for music, no doubt about that.

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Vienna: Steven:

Your column was a home run. The most important point in the article, in my opinion, is that in the past the industry has agreed to a royalty fee on recording equipment to cover the issue of consumers (you know, their customers) being able to record music for their personal use. It also should be pointed out that, in many cases, the reason you can't buy certain music on a download site or on CD for that matter is that the record companies won't release it. The artists usually has no say over the use of their own material. Maybe the RIAA should do something about that, but of course, then they'd have to sue a record label, instead of their customers.

washingtonpost.com: Today's Column: A Sound Marketplace For Recorded Music

Steven Pearlstein: When I spoke with the general counsel of the RIAA yesterday (yes, folks, I actually DO do reporting), I asked why the suit and all other materials put out by the association failed to mention the 1992 legislation that specifically grants royalties for the home digital recording machines, and why that was no relevant. Their explanation is that, as long as it is more sophisticated than a simple tape recorder that forces you to listen to everything you recorded every time, then its not a home audio recording device. They may be able to convince some judge of that, although I doubt it. But it certainly isn't obvious from the plain meaning of the words involved. The unwillingness even to acknowledge the existence of the act is a pretty good tipoff that their legal position is actually quite weak.

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CD prices: Here's a question that I'd like the RIAA to answer: why is it so many CDs can now be sold at $9.99, when for years they would be released at $15.99 or more? Can't have anything to do with the fact that iTunes and others offer full CDs at that price? And of course it doesn't mean they've gouged the consumer for years with inflated prices for material? I'm sure it doesn't.

Steven Pearlstein: I'm sure competition from download services has had a downward pressure on CD prices, which, if you believe the attorneys general of 43 states, the recording industry conspired to fix for years. What's more problematic is the lack of robust price competition within the CD category, which is symtomatic of cartel-like behavior. But you have to understand that all of these guys price like monopolists, because for any given "album", the copyright gives them a monopoly. So like any good monopolist, they price at a point which gives them the best tradeoff between price and volume. Is it better to charge $1,000 and sell 1,000 CDs or is it better to price it at $9.99 and sell a million. That sort of thing. Of course, if they were doing that, the CD's would have much more variety of pricing than you see now, suggesting that there is some effort to coordinate and simplify pricing.

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Alexandria, VA: I've heard a lot about the disparity between how royalties are determined for satellite radio and internet radio. What should Congress do to address this problem? Or is it even a problem?

Steven Pearlstein: Whatever royalties are due to artists, songwriters, labels, musicians ought to be the same no matter the technology that is used to distribute them. That said, it was not irrational to ahve a different royalty rate for a radio station that plays a record vs. a download service that makes a record available to a consumer to use as many times as he or she likes. The problem in the age of digital radio, however, is that it is hard to draw the line there. So maybe a single, blended royalty rate is the way to go, which carries with it the assumption that some people will turn the "broadcast" version into a downloaded version.

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Albuquerque, NM: I am a huge fan of XM and currently have a 'Myfi' unit that I can use to record up to 5 hours of XM programs. Since I got it, I've been wishing they offered a model that worked more like 'Tivo'. I gladly pay for loads of great content, but need the ability to record it and listen to it at my convenience. Obviously, I was extremely unhappy to hear about this lawsuit. What's the difference between 50 hours of recording satellite radio and 50 hours of recording satellite TV?

Steven Pearlstein: Its hard to see a difference, really. Personal use is personal use. In the old days, I could have patched my radio into my reel to reel tape recorder, recorded an entire show, and then physically spliced out the stuff I didn't want. Now, of course, you can do it digitally, with the push of some buttons. But I suspect the principle is the same. And the principle was that I could do it then, so why should I not be allowed to do it now, under the same fair use doctrine? If we need to adjust the royalty regime to reflect the new technology, let's do that -- but in a way that doesn't necessarily guarantee the industry the kind of ridiculous incomes (for artists and executives) and monopoly profits they have come to expect. And one way to hold down those incomes and rents is to tinker with the copyright law and shorten the time in which they can milk their government-issued monopoly (copyright).

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Gaithersburg: I agree with you that the rhea - excuse me, the RIAA - continues to bite at the hand that feeds it. I can also tell you that I have bought more music since I started subscribing to XM and actually being able to tell who the artist is from the screen. How can our government continue to sponsor a mafia-like organization performing what amounts to extortion? And I'll note, MLB acts very similarly (Peter Angelos the ambulance chaser). How many other organizations are out there that our government allows/encourages to be robber barons?

Steven Pearlstein: Interesting analogy -- and a valid one, I might add. The answer to your last question is that you see these kinds of outcomes in industries that have been granted monopolies or antitrust exemptions. Major league baseball has one. But so does the recording industry, in several of the copyright laws that provide for industry-wide bargaining (i.e. collusion among competitives to negotiate prices together). That should always be a red flag, because the industry usually figures out how to leverage the exemption to the detriment of consumers.

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Washington, D.C.: What are the realistic prospects for the PERFORM ACT? The RIAA realizes that they have no legal argument and are now attempting to change the law, and I just hope XM and Sirius have enough clout on the Hill to prevent a fraud being perpetrated on the American public by the RIAA. I think this litigation is ridiculous. XM already pays more royalties to the RIAA than anyone, and as you mentioned, terrestrial radio pays none. The RIAA should realize that sat radio is the future and that it is good for artists and ultimately for the industry as a whole. XM helps listeners discover new music that they then purchase. XM is not a threat to musicians who have a wonderful new avenue to present their music, but it is a threat to the music labels who have grown accustomed to driving tastes by essentially declaring what will be popular.

You are correct that the case law falls in XM's favor here. However, the court has also declared that groups like the NAB and RIAA can be as anticompetitive as they want so long as it is done through regulatory/legislative channels. Noerr-Pennington doctrine is really unfortunate for paradigm shifting upstarts like XM.

Steven Pearlstein: Ah. A lawyer joins the discussion! Very well put, counselor-- and informative too. The Federal Trade Commission has done some good work in identifying the problem of industries/companies that use the regulatory process to restrain competition, and we could obviously add the legislative process to that. So what you get is a vicious cycle in which industries use their monopoly profits to buy lawyers and regulators and legislators to further strengthen their monopoly and enhance their monopoly profits, some of which are once again recycled back into the legal and legislative process. It happens in little and big ways all the time.

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Alexandria, VA: I agree that 70 years after the death of the artist is an absurd copyright length (Didn't Disney lobby for that?) What do you think is a sane time period?

Steven Pearlstein: 20 years sounds about right to me, but I have to admit I haven't studied it much.

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Muscle Shoals, AL: From one James Taylor fan to another, atta boy. What's your prediction about how this will turn out?

Steven Pearlstein: It will probably turn out alright, because the industry won't get the relief it wants from the courts or the Congress. What will result, however, is a settlement in which satellite radio will pay somewhat more than they are now in royalties, but less than a full download service (again, it will probably be an add-oon on the price of the machine). But the cost will be passed on to consumers, as it almost always is. The thing to watch is the negotiation between the National Association of Broadcasters and the RIAA over what royalties they will pay, and terms they will accept, for their new digital radio service, which raises exactly the same issues. And I suspect the satellite radio firms will eventually insist (rightly) on similar terms.

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Springfield, VA: Great column today. Am I missing something, or is this just the latest chapter in the story of the entertainment industry trying to block technology -- the cassette recorder, the VCR, etc. -- that they claim will do great harm, but in hindsight, doesn't?

Steven Pearlstein: No, you got that exactly right. Same story.

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Washington DC: I generally agree with your proposed solutions (more competition), but how far are you willing to go? For example, do you support the French actions to open up the iPod - breaking the proprietary link between the product and the iTunes service?

Steven Pearlstein: No, I don't. What I support is allowing other firms with other business models to come along and compete with iPod in a way that offers lower price or more convenience, and see what happens. But this is exactly where government micromanagement winds up stifling competition rather than promoting it, which is the aim. If, at some point, iPod gains a monopoly hold on the business that makes it impossible for others to compete, then the government should use its antitrust authority to step in and force them to open up the system. But we are way early in this process in terms of downloaded music to get into that, in my opinion.

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Arlington, Va.: If the Inno really does substitute for a download service, why -shouldn't- the recording labels get compensated? From the laundry list of complaints in your article, it sounds like you don't really believe in the whole idea that the owners of copyrights deserve any money.

Steven Pearlstein: As I said earlier, maybe royalties ought to be raised and extended for anyone who distributes digital quality copies of music. But then let those royalties be negotiated like everything else, rather than regulated by the government. The music labels need distribution, and the distributors need the music content, so why not let buyers and sellers negotiate a reasonable price, as they do in every other corner of the market economy. Compulsory licensing, industry-wide bargaining, antitrust exemptions, different copyright/royalty regimes for different distributino technologies -- those are where the problems begin.

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Washington, DC: I am a Licensing Examiner for the US Copyright Office, and since this is an issue that affects me directly, I am very interested in the conversation.

I won't be able to speak as a representative of the Office, but I'd be happy to participate in any way that I can.

Steven Pearlstein: Well, what to you think so far?

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Washington, DC: Hello! I just got one of these devices, and as an early-adopter of the iPod, I am now a complete convert to XM (though I still hang onto my iPod for certain occasions). My only gripe is its non-Mac compatibility.

In any event, it is not possible to download the songs onto a computer, and subsequently burn them onto a CD and distribute them widely. It is just for personal use, right? So then, what's the problem?

Steven Pearlstein: The "problem" is that you are able to collect a number of tunes in your device and use very much like a download divice for your personal use, at a lower price than if you were to do to a download service. But I'm sure if government got out of the way, the parties could negotiate royalty regimes that reflected what consumers want, what they are willing to pay, and the quality and convenience of the service.

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Alexandria, VA - For the record...: Back in the day of the original Napster, I bought virtually zero new albums.

Once Itunes was released I bought maybe one or two CDs a month from new and established artists.

Once I installed the XM in my car, it was up to one or two new CDs a week, mostly from newer artists I had never heard of. But I hear a good song, look on the receiver and when I get home it takes me 3 minutes to buy and burn my own CD.

So shove it RIAA.

Steven Pearlstein: Which is why more movie tickets have been sold AFTER movies started running on television, not less.

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Washington, DC: Cookeville, TN has essentially proposed a Compulsory License. It would be larger in scope than the Section 111 cable television license, but it would not be unmanageable.

And a technological solution would certainly be possible, we are creating a paperless filing system for cable as we speak.

I suspect, however, that the copyright owners would not be interested in the slightest in such an arrangement, and since Congress seems to be largely beholden to their interests, the likihood of Cookeville's scheme being enacted are slim.

Clever idea, though!

Steven Pearlstein: Wasn't it.

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Montgomery, AL: Hank Williams has been dead for 50 years, and (barring another extension) his songs won't enter the public domain for another 20 years.

That's just crazy.

Steven Pearlstein: Although I don't think you'd get his children to agree to that, assuming he had children.

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Lubbock, TX: Don't you think iPod has a monopoly already? Steve Jobs won't allow interoperability with other services. It's not fair than I can't download tunes from Rhapsody and put it on my Ipod. You, of all people, Steve, should admit this is unfair.

Steven Pearlstein: I don't really know whether it is fair or not. A lot that happens in a free market isn't fair. But I don't think Jobs has a monopoly. He's got a big first mover advantage, but the technology is so young, and the market is now so small and growing so fast, that it is unlikely he's gonna be able to maintain that kind of market share. But, as I say, if he does, then its time for a Microsoft like suit against a company that takes anti-competitive steps to maintain and protect a legally-acquired monopoly.

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Fairfax, VA: Thank you for today's piece. I am with you on music tastes with James Taylor high on my favorite list. The result is that I, of course, have purchased vinyl records, cassettes, and now CDs. Some how I was in school during 8 tracks and missed having to buy those. I have had the good fortune of having my daughters treat me to an iPod. How many times and in how many different formats would RIAA have me buy the same song and look upon me as a thief if I don't?

Steven Pearlstein: A new format every decade is about what the industry has in mind. But maybe the digital revolution will end all that once and for all.....Okay, don't count on it.

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Washington, DC: As I understand it - The Inno actually allows you to search for and choose individual songs to download, which seems to me to be very different from the TiVo-like operation you describe. Once you can listen to an individual song any time you want - shouldn't you have to pay for that?

Steven Pearlstein: Well, although I'm not expert in such matters, can't I go onto my Tivo machine, or my similar service with DirecTV, and pick and chose among the shows that were recorded, keeping the ones I want to view repeatedly and deleting others without ever watching them?

In the case of the Inno, yes, you can create a personalized music library. But you can't determine in advance which songs you'll get (in fact, the law specifically forbids satellite radio from doing that, at the insistance of the RIAA). There is a limit to the storage. And you can't transfer to your main music collection on your CD. So it is not exactly the same, no.

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Silver Spring, MD: I have XM and I can record the songs, but I just don't understand how recording the songs and programs on XM, without being able to transfer them or share them with others, violates copyright law. The method of recording from XM is clearly for personal use and is not even as flexible as say recording onto a tape or disk, because you can not make copies of what you record. Plus, it is not "clean" recording like an MP3 player...you push the record button, and it only stops when you push stop...meaning the beginning and end of a song can be cut off depending on how quickly you push record or stop. To have to pay for that type of thing, seems ridiculous.

Steven Pearlstein: That's the argument...

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Oakton, VA: Excellent column today- right on target. You mentioned at the end that the "better strategy" is to make patent lengths more reasonable and to deregulate the industry. What exactly do you mean by deregulation in this case- some sort of action that would break up the oligopoly in the recording industry? Don't services like iTunes and other internet channels work in part towards this goal of greater competition by providing direct distribution from the artist to the consumer?

Steven Pearlstein: There are all these different laws governing music royalties of broadcasters and satellite/Internet that essentially dictate the terms of the relationship between copyright holder and distributors. They may have had a rationale at one point -- in fact, I assume they did. But its now time to get rid of most of those and let buyers and sellers negotiate as they will -- one by one, not collectively, as an industry.

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Clarification of download capabilities: I really don't think the Inno is "very much like a downloading device." One thing you didn't mention is that while you can record any content you want, XM has made a specific point in the litigation that you cannot choose individual songs that you want to download. Also, any information stored on the device must stay on the device and if the subscription is terminated the device is wiped clean.

Steven Pearlstein: Thank you. Would that be you, Chance.

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Washington, DC: Great column.

I wonder though, if unlike the film industry, these technological advancements may actually prove to significantly weaken the recording industry. In the film industry, in order to make a commercially viable movie, studio backing is a necessity (even if it's a small art house studio) because the cost of making a film is so extraordinarily high. But since music is so much less expensive to create and so much more easily digitized and dispersed, the importance of the labels in the process really is limited.

I too am tempted to say that this is like filmmakers opposing VCRs, but I think the analogy doesn't entirely hold. That said, I don't think it's a bad thing. The need for label representation is a huge barrier to entry for artists, and doing away with the convention would be a-okay with me.

Steven Pearlstein: There was disintemediation talk a few years back suggesting that artists could sell their wares directly to consumers. Some of that is happening, but I suspect the threat of it is beginning to squeeze the margins of the recording industry, and will continue to do so. The most popular artists can probably market themselves without the help of an intermediary (or at least an intermediary that overcharges for its services). And the small, obscure artists will have no choice but to do so, since the labels won't deal with them. So that will leave the labels with the middle ground, which may not be particularly satisfying to them, unless they learn to charge more reasonable prices to artists who could, theoretically, do it on their own, or unless they learn to find ways to profitably represent more obscure artists with smaller markets. What we have here, folks, is yet another mass distribution industry bumping up against the reality of market segmentation. And let's say it will be a learning process.

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Hank Williams, Jr.: Perhaps you've heard of me?

Or my son Hank III or daughter Heather? Both recording artists...

Steven Pearlstein: Either that is you, or this is a joke. Either way, I remind you that I DON'T know much about popular music, although I do enjoy a bit of country and bluegrass most weekends on my local public radio station here.

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Burke, VA: Steve, if XM and Sirius ending up paying a bit more to settle, what does that do to their long-term ability to survive as an industry? Both are still far from turning a profit. Could this drive them under?

Steven Pearlstein: No, they wouldn't negotiate for a fee that creates an unsustainable business model.

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Columbia, MD: I think that the RIAA still believes this is 1976, not 2006. However, as much as the RIAA cries and complains about copyrights, these are the same people who were dishing out money to radio stations to push-poll record sales. To be frank, I don't exactly believe the RIAA's claims that the sky is falling, when new markets (i.e. satellite radio) have done more to help their flagging industry than their weak campaign against piracy or torts. It's all about boosting profit margin, on the backs of consumers, and they know it.

Steven Pearlstein: Yes, unfortunately, increasing profits at the expense of your customers is actually an unspoken part of most businesses. That's capitalism, so let's not get moralistic about it. The problem comes when industries use the power of government to win such advantages that they can't win in the marketplace. RIAA is VERY good at doing that.

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Washinton, D.C. : Hi Steven,

I work at the RIAA, so I can't say we loved your column. I won't offer a line by line rebuttal but I did want to make one thing clear: we too think that satellite radio is a great thing. Both the music industry and XM and Sirius are partners. We agree with what many people have said in this chat.

The concern here is when a business tries to offer an iTunes or Rhapsody-like business model but not play by the same set of rules as those companies.

The music community been killed by piracy for the last 5 years (thousands of layoffs and enormous drops in sales), and here we have this nascent, exciting legal online marketplace that is offering real hope for the future. When businesses try to encroach upon that marketplace without playing by the same set of rules as others are, that's when we take issue.

Steven Pearlstein: There's nothing wrong with anything you said there, except your assumption that there is some clear bright line between a radio broadcast that can be taped, the Inno device, and a music download. Its all along a continuum of convenience and control, with a pure radio broadcast having the least convenience and control and a download service giving consumers the most. Should there be different rates for the different services along that continuum? Absolutely. So go and negotiate them in a free and open market. But please don't suggest that XM, which is paying the royalties it thinks it is required to pay under the 1992 law, a pirate. If you really wanted to have the law clarified on this point, considering the unforseen changes in technology since 1992, you could have asked for an advisory opinion from the Copyright Office, or the FCC, or even asked for a declaratory judgment from the same court you visited in order to sue XM for what could be hundreds of millions of dollars. Your tactics are thuggish and abusive.

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Would that be you chance?: Nope, but he know who he is as I am also a disgruntled XM investor who is frustrated by this situation not just as a consumer but as an investor. I really enjoy your coverage of XM as it is well researched and very accurate. Most of the treatment of XM in the press is poorly researched internet articles that are flat out wrong half the time. I guess that's true with all media though, if you know about something and read about it in the paper most of it is typically wrong. Cheers for being the exception here.

Steven Pearlstein: Thanks.

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"Assuming he had kids?": Dude, does the name Hank Williams, Jr., mean nothing to you?! Have you not watched Monday Night Football for the past decade?

Steven Pearlstein: Actually, dude, I can safely say I have not watched Monday Night Football ever. But maybe now that my colleague Tony Kornheiser is providing the commentary, I'll tune in just for the humor.

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Steven Pearlstein: That's it for today, folks. Good discussion. See you next week.

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