Broadcast Radio Benefits from the Use of Sound Recordings to Generate Advertising Revenue and the Recording Industry May Benefit from Airplay that Can Promote Sales

The broadcast radio industry benefits from its relationship with the  recording industry by using sound recordings to attract listeners which, in  turn, generates advertising revenue for commercial radio stations. Industry stakeholders believe that radio airplay  can promote sales, and past and current business practices support this  conclusion. As shown in table 4, a music station  with a coverage population of approximately 313,000 or more individuals  (representing the top quartile of stations based on coverage population),  will generate, on average, approximately $826,000 more in annual  revenues than a nonmusic station, while a music radio station with a  coverage population of approximately 26,000 individuals or less  (representing the smallest quartile of stations based on coverage  population), will earn on average approximately $206,000 more in annual  revenues than a nonmusic station. The Recording Industry May Benefit from Airplay That Can Promote Album Sales, but the Extent of the Benefit is Unclear

Stakeholders from both the recording and broadcast radio industries agree  that broadcast radio airplay can promote music sales, and past and current  industry practices support this conclusion. To assess the relationship between broadcast radio airplay and music  sales, we conducted several empirical analyses, and found the relationship  to be unclear. Other outlets. The Proposed Performance Rights Act Would Result in Additional Costs for Most Broadcast Radio Stations

The proposed act would result in both financial costs, in the form of  royalty payments for the use of sound recordings, and administrative  costs, in the form of potential reporting requirements. Although the total  cost to the broadcast radio industry is unknown, if the 25 percent of radio  stations with revenues at or above $1.25 million pay a royalty equal to 2.35  percent of their annual revenue, their payments would account for more  than 90 percent of all royalty payments. According to broadcast industry  stakeholders, these financial and administrative costs may lead some  stations to make adjustments, such as discontinuing operations, reducing  staff, or changing to nonmusic formats. Broadcast Radio Stations Would Pay Different Royalties, but Radio Stations with Revenues of $1.25 Million or More Would Pay the Most

Under the proposed act, the statutory royalty paid by broadcast radio  stations would vary according to the station’s gross annual revenues and  status as commercial or noncommercial. The total royalties paid by the broadcast radio industry would vary, but  radio stations with revenues greater than $1.25 million would pay the  majority of the total royalty if the rate is set as a percentage of annual  revenues. According to broadcast radio  stakeholders, broadcast radio stations might switch from a music format  to a nonmusic format, such as talk or news, to avoid the additional costs of  a royalty. The Proposed Performance Rights Act Would Result in Additional Revenue for Copyright Holders, Musicians, and Performers

The proposed act would result in additional revenue for the recording  industry. However, we estimated that most featured performers and  musicians would receive less than $100 per year from airplay in the top 10  markets. As we  mentioned earlier, for stations with revenue of $1.25 million or more, the  royalty rate will be determined through negotiation or by the copyright  royalty judges; therefore, total royalties paid by the broadcast radio  industry are unknown at this time. Further, less than 6 percent of performers would  receive over $10,000 or more annually in royalties for all sound recordings. Copyright Office both indicated that this revenue could contribute to  additional investments in music and help keep record companies  operating. Agency Comments and Our Evaluation

We provided a draft of this report to FCC and the U.S. In its letter, FCC noted that it has a substantial interest in any proposed  legislation that might have an adverse impact on radio stations. In its letter, the Copyright Office addressed certain methodological  approaches and findings in our draft report. Appendix II: Analysis of the Effect on the Broadcast Radio Industry of the Senate Version of the Performance Rights Act

The Senate version of the proposed Performance Rights Act would  expand the public performance right of sound recordings for copyright  holders in a manner similar to the House version; however, some  differences exist between the two versions. Because these royalties will be  negotiated or determined subsequent to passage of the proposed act, we  cannot determine the total cost to the radio industry at this time. Copyright Office of the Library of Congress

The following are GAO’s comments on the U.S. 2.
Why GAO Did This Study

The recording and broadcast radio industries touch the lives of most Americans through the development and distribution of music. Congress is considering legislation, the proposed Performance Rights Act (H.R. 848), that would expand copyright protection for the public performance of sound recordings. The proposed act would require AM/FM radio stations that broadcast music to pay a royalty, and this royalty would be distributed to the copyright holder, performers, and musicians. This report addresses (1) the benefits received by the recording and broadcast radio industries from their current relationship, (2) the possible effects of the proposed act on the broadcast radio industry, and (3) the possible effects of the proposed act on the recording industry. To address these objectives, GAO analyzed data on music sales, broadcast radio airplay, and broadcast radio stations' revenues; calculated potential royalty payments; and interviewed stakeholders from both industries as well as experts and government officials. The Federal Communications Commission (FCC) and the U.S. Copyright Office of the Library of Congress reviewed a draft of this report. FCC noted that it has an interest in legislation that might have an adverse impact on radio stations. The Copyright Office addressed certain methodological approaches and findings in our draft report.

What GAO Found

Broadcast radio benefits from the use of sound recordings to generate advertising revenue and the recording industry may benefit from radio airplay that can promote sales. Radio stations use sound recordings to attract listeners and generate revenue from advertisers. GAO found that, on average, radio stations with a music format generate $225,000 more in annual revenues than nonmusic stations, such as talk or sports stations. Stations serving large populations receive more revenue from music content compared to stations serving a small population. Most industry stakeholders believe that radio airplay promotes sales for the recording industry, and past and current business practices support this conclusion. However, GAO found the relationship between airplay and music sales to be unclear. The presence of other promotional outlets, such as the Internet and special events, and growth of music piracy create a more nuanced environment wherein the relationship between airplay and music sales is less clear than in the past. The proposed act would result in additional costs for the broadcast radio industry. Under the proposed act, the royalty paid by a radio station would vary according to the station's gross annual revenues and status as commercial or noncommercial. Because the royalty paid by some radio stations would be negotiated or determined subsequent to passage of the proposed act, the total cost to the broadcast radio industry, including the costs to minority and female radio station owners, cannot be determined at this time. If broadcast radio stations with revenues of $1.25 million or more pay a royalty based on a percentage of station revenues, every 1 percentage point would cost the broadcast radio industry $101 million per year. For example, a 2.35 percent rate paid by these stations would entail total annual costs to the radio industry of over $258 million. GAO also estimated that with a 2.35 percent rate, the 25 percent of stations with revenues of $1.25 million or more would pay over 90 percent of the total royalties. According to broadcast industry stakeholders, these costs could lead some stations to reduce staff, switch to a nonmusic format, or discontinue operations. The proposed act would result in additional revenue for recording industry stakeholders. Several factors would influence the revenues a stakeholder receives, including the total royalty payments, the stakeholder's role (copyright holder, performer, or musician), and the amount of airplay the stakeholder's music receives. Since the total royalty payments cannot be determined at this time, the additional revenue for recording industry stakeholders is also unknown. However, assuming a 2.35 percent royalty rate, GAO estimated that 56 percent of performers would receive $100 or less per year, and fewer than 6 percent of performers would receive $10,000 or more per year in royalties from airplay in the top 10 markets; music radio stations in these markets generate about 21 percent of industry revenues. Some experts and the Copyright Office believe that the additional revenue would promote investment in music and greater employment, although this opinion is not universally held.