Telecommunications: The Proposed Performance Rights Act Would Result in Additional Costs for Broadcast Radio Stations and Additional Revenue for Record Companies, Musicians, and Performers
Published: 2010-08-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: The recording and broadcast radio industries touch the lives of most  Americans, creating and delivering music to people in their homes, cars,  and workplaces. As such, these industries provide a popular form of  entertainment and contribute to the everyday American experience. In  addition to their influence on American culture, the recording and  broadcast radio industries contributed over $25 billion to the U.S.  economy in 2008. These industries provide jobs for a range of skilled  workers, including songwriters, producers, engineers and technicians, and  radio announcers, among others. Recording studios and radio stations  allow musicians and performers to share their talents with listeners across  the nation, in addition to creating employment opportunities.
Congress is considering legislation that would expand copyright  protection for sound recordings. In particular, the proposed Performance  Rights Act would eliminate an exemption that currently allows analog,  nonsubscription AM and FM radio stations (broadcast radio stations) to  broadcast a sound recording without acquiring permission from and  paying a royalty to the copyright holder, performers, and musicians. The  proposed act would amend the statutory license for nonsubscription  transmission services to include broadcast radio stations. Under the  amendments to the statutory license, a radio station would pay a royalty  based on its revenue and its status as a commercial or noncommercial  station (see table 1). The proposed act would also exempt some uses of  music, such as music in broadcasts of religious services and the incidental  use of music by nonmusic stations, while providing a per program license  option for radio stations that make limited use of sound recordings, such  as broadcasting sound recordings on an infrequent basis.
Under the proposed act, revenues from the proposed statutory royalty  would be divided among recipients as follows: 50 percent would be paid to  the copyright holder, 45 percent would be paid to the featured performer  or musician, 2.5 percent would be paid to background musicians, and 2.5  percent would be paid to background performers and vocalists. A  designated third party would collect and distribute royalties directly to the  featured performer or musician. Other provisions of the proposed act  provide that existing royalties paid to publishers, songwriters, and  composers are to be unaffected by the proposed royalty. Broadcast radio  stations would not be required to begin paying the royalty immediately. If  a radio station has annual revenues below $5 million annually, it would  begin paying a royalty 3 years after the proposed act becomes law; if the  radio station has revenues above $5 million annually, it would begin  paying a royalty after 1 year.
You requested that we determine the potential effects of the proposed act.  On February 26, 2010, we issued a preliminary report on these issues. In  this final report, we reviewed (1) the benefits the broadcast radio and  recording industries receive from their current relationship with each  other, (2) the potential effects of the proposed act on the broadcast radio  industry, and (3) the potential effects of the proposed act on the recording  industry.
To meet the objectives of this report, we analyzed data on broadcast radio  station revenues, airplay on broadcast radio stations, and total number of  physical and digital albums sold. We analyzed data on broadcast radio  stations’ annual revenues from 2008 and with a regression model, used the  reported annual revenues for radio stations to estimate revenues for  stations without reported revenues. We also classified commercial  broadcast radio stations as either music or nonmusic based on the  station’s format categories or the station’s primary, secondary, and tertiary  formats. Based on the revenues and music or nonmusic classification of all  radio stations, we regressed revenues on variables thought to influence  revenues, such as population coverage and format, to identify the  difference in annual revenues of music and nonmusic radio stations. We  also identified the total amount of airplay for specific sound recordings in  the top 10 designated market areas (DMA) and sales of the associated  digital singles in the same markets. Using this information, we calculated  the sales per spin for digital singles. We identified newly released albums  from the first 2 weeks of February 2010, and compared the album sales  and spins for each. We also regressed the percentage change in album  sales on the percentage change in airplay, the percentage change in prior  sales, and cumulative airplay and sales for 8 weeks during February to  April 2010, for albums at the top of five different sales categories to  determine any effect airplay could have on album sales. We calculated the  number of commercial stations that would be required to pay a royalty at  each of the royalty levels. Using the number of stations and each station’s  revenues, we estimated the potential total cost of royalties under three  different royalty rates set as a percentage of radio station revenues for  stations with revenues of $1.25 million and above; we used royalty rates  considered in previous rate-setting decisions—2.35, 7.25, and 13 percent.  We also calculated the total royalties to be paid by broadcast radio  stations paying a flat annual rate or fee. Using the 2.35 percent royalty  rates and the resulting estimated total cost to the radio industry, we  calculated the potential annual royalties for featured musicians and  performers based on airplay on radio stations in the top 10 DMAs. We also  calculated the total annual royalty for all sound recordings receiving  airplay in the top 10 DMAs. We assessed the reliability of the data used in  this report and determined the databases were sufficiently reliable for our  purposes. We also reviewed relevant reports and analyses about the  broadcast radio and recording industries and interviewed stakeholders  from both industries, as well as officials from government agencies. From  the recording industry, we met with the four largest record companies, as  well as independent record companies and trade associations that  represent the industry, such as the Recording Industry Association of  America. We also interviewed performing rights organizations that  distribute existing royalties. We interviewed recording industry experts  and individuals that work in the industry such as managers, accountants,  lawyers, and unions that represent musicians and performers, as well as  musicians and performers themselves. From the broadcast radio industry,  we met with station owners and operators, broadcast industry experts,  and officials from trade associations that represent the industry, such as  the National Association of Broadcasters. Furthermore, we interviewed  officials from the Federal Communications Commission’s (FCC) Media  Bureau to understand FCC’s involvement in broadcast radio, and the U.S.  Copyright Office of the Library of Congress to understand its role in  copyright matters.
We conducted this performance audit from June 2009 through August 2010  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. A more detailed description of  our scope and methodology is contained in appendix I of this report.
subsections: section_title: Background
subsections: section_title: Copyrights and the Music Industry
paragraphs: A copyright is an intellectual property interest in an original work of  authorship fixed in any tangible medium of expression, including books,  movies, photographs, and music, from which the work can be perceived,  reproduced, or otherwise communicated either directly or with the aid of  a machine or device. The Copyright and Patents’ clause of the U.S.  Constitution authorizes Congress to “promote the progress of science and  useful arts, by securing for limited times to authors and inventors the  exclusive right to their respective writings and discoveries.” In the music  industry, copyrights confer on their owners certain exclusive rights, such  as the right to authorize or control the reproduction, distribution, and  public performance of a piece of music. The reproduction and distribution  of recorded music includes the sale of copies in a variety of formats, such  as compact discs (CD), vinyl records, and digital downloads. The public  performance of music may include broadcast radio transmissions or  digital transmission, such as transmissions on AM or FM radio or satellite  radio.
Copyright law applies to recorded music in two ways: the musical work  and the sound recording of that work. The musical work refers to the  notes and lyrics of a song, and the copyright holder is often the publisher,  songwriter, or composer. The performance of the lyrics and melody in a  fixed recording, such as the recording on a CD or vinyl record, are  protected as the sound recording. Record companies are often the owners  of the copyright to the sound recording. Typically, separate individuals or  entities hold the copyrights for the musical work and sound recording of a  piece of music, although one individual or entity can hold both copyrights.  For example, the song, “I Will Always Love You,” was part of the  soundtrack for the movie, The Bodyguard, in 1992. The copyright holder of  the musical work is the songwriter, Dolly Parton, who owns both the  words and music. However, the copyright holder of the sound recording,  as performed by Whitney Houston, is the record company, Sony Music, to  whom the soundtrack is registered.
Copyright holders may use a license to grant third parties legal permission  to use musical works and sound recordings. A license provides legal  permission for the use of copyrighted material by a group or an individual  other than the copyright holder. Permission for the use of the material  typically requires the payment of a royalty and compliance with other  conditions of the license. As shown in table 2, third parties, such as AM  and FM broadcast radio, satellite radio, and Internet radio, must obtain a  license for the public performance of a copyrighted musical work.  However, under current law, copyright protection does not apply and,  therefore, a license is not required to play sound recordings over  broadcast radio.
Royalties for the public performance of musical works and sound  recordings are collected and distributed by performing rights  organizations (PRO) and Sound Exchange, respectively. PROs such as The  American Society of Composers, Authors, and Publishers (ASCAP),  Broadcast Music, Inc. (BMI), and SESAC, negotiate licenses and distribute  royalties for the public performance of musical works. These PROs  represent songwriters, publishers, and other copyright holders of musical  works. Sound Exchange, which was originally established by the  Recording Industry Association of America (RIAA), is now an independent  nonprofit organization that negotiates and administers licenses and  royalties for the public performance of the sound recording for digital  transmissions, such as satellite radio. Sound Exchange represents record  companies, featured musicians and performers, and other copyright  holders of sound recordings.
Various individuals and groups from the recording industry are involved  with the creation of music and receive revenues from royalties and sales.  The featured musicians and performers are the bands and artists whose  work is heard on broadcast radio and whose sound recordings are  available for purchase. Session or background musicians and performers  are the individuals who primarily work in recording studios and perform  the music heard on a recording or provide background vocals to a  recording. In addition, songwriters, composers, and publishers are  involved with writing the words and melody of a song. These individuals  and groups share in the revenues generated through royalties paid by  broadcast radio and digital music services, and from record sales. Figure  1 shows how recording industry revenues are distributed among the  various entities involved in the creation of a recording.
section_title: Current Economic Environment of the Recording and Broadcast Radio Industries
paragraphs: According to RIAA, since the late 1990s, the recording industry has  experienced declining album sales. As shown in figure 2, revenue from the  sale of physical albums, such as CDs and cassettes, has declined by  approximately 60 percent from 1999 to 2008. Several factors related to the  development of digital technology have contributed to this decline. First,  consumers increasingly purchase singles instead of albums. The sale of  digitally downloaded music, which represented approximately 30 percent  of sales in 2008, has partially offset the decline in physical sales; however,  the revenue generated from digital sales has not fully offset the revenue  lost due to the decline in physical album sales because most digital  downloads are single songs, which often sell for 99 cents, and not albums,  which often sell for $10 or more. Second, stakeholders with whom we  spoke said that illegal downloading, and the ability to acquire music on- demand, without paying for a copy to be retained, has led to a culture  where younger listeners may expect to obtain music at no or minimal cost.  Third, technologies, such as the Internet, enable listeners to hear music  on-demand without buying it; this technology has shifted listeners’  behavior to music “access” and away from the purchasing behavior that  historically supported the recording industry. According to the Copyright  Office, these factors appear to represent permanent changes, and not  temporary changes caused by current economic conditions.
As of November 2009, the broadcast radio industry in the United States  consists of 14,441 licensed broadcast radio stations in operation. Of all  licensed stations in operation, nearly 70 percent of stations have music  formats, and almost 20 percent have nonmusic formats such as news, talk,  or sports; 77 percent of stations are commercial and 23 percent are  noncommercial (see table 3).
Since 2006, the broadcast radio industry has experienced declining  advertising revenue. As shown in figure 3, from 2003 through 2009, radio  industry annual revenues have declined 24 percent from their peak of  $18.1 billion. For commercial broadcast radio stations, advertising  represents the primary source of revenue, and stakeholders indicated two  factors that have contributed to the decline in the radio industry’s  advertising revenue: the current decline in the economy and the  fragmentation of consumers across a greater number of media platforms,  such as the Internet and mobile devices.
section_title: 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
paragraphs: 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.  Advertising is the primary source of revenue for commercial radio  stations, and the average annual revenues of music stations are $225,000  higher than the average annual revenues of nonmusic stations. The  recording industry may benefit by receiving broadcast radio airplay, which  can promote music sales. Industry stakeholders believe that radio airplay  can promote sales, and past and current business practices support this  conclusion. However, we found the relationship between radio airplay and  sales to be unclear.
subsections: section_title: The Broadcast Radio Industry Benefits from the Use of Sound Recordings, Which Generates Advertising Revenue
paragraphs: Broadcast radio stations use content to attract listeners and generate  revenue from advertisers that seek to reach listeners. As mentioned  earlier, advertising is the primary source of revenue for commercial  broadcast radio stations, and sound recordings are a form of content that  can attract listeners. Radio stations use content to attract as many  listeners as possible and an audience whose demographics will appeal to  advertisers, as this will help stations maximize revenues. The rates that a  station obtains for advertising time depend on the station’s ability to  attract listeners in the advertiser’s target demographic segment, the length  of the advertisement spot, and the size of the market, with stations in  larger markets typically receiving higher rates than those in smaller  markets. For example, a station that attracts a large market share of adult  female listeners will be more desirable to advertisers selling a product  targeted to adult females.
Broadcast radio stations generate more revenue from music than other  types of content, notably in markets with a large audience. At an aggregate  level, we found that approximately 70 percent of commercial radio  stations broadcast music, itself an indication of the popularity of music  radio, and that these stations generated approximately 80 percent of all  commercial broadcast radio revenues. Thus, at an aggregate level, radio  stations that broadcast music generate more revenues than stations using  other forms of content. We also estimated revenues at the station level.  Controlling for factors that influence a station’s revenues, such as strength  of the station’s signal, we found that, on average, stations with a music  format generated approximately $225,000 more in annual revenues than  nonmusic stations. However, this difference can vary based on the size of  the population that the station serves. 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.
Broadcast radio industry stakeholders acknowledged that they benefit  from using music as content, but said that they already provide  remuneration by purchasing musical work licenses. As previously  indicated, music has two types of copyright protections, the musical work  and the sound recording. Broadcast radio stations purchase a license for  the use of the musical work, which allows radio stations to legally  broadcast music. The cost for individual radio stations to purchase a  musical work license varies, but we estimate the industry pays  approximately 3 percent of its annual revenues to purchase musical work  licenses.
Broadcast radio stations also benefit from and provide compensation for  nonmusic content, such as syndicated programming. The mechanism that  broadcast radio stations use to provide compensation for nonmusic  content differs from that of music content. Broadcast radio industry  stakeholders with whom we spoke said that the cost of syndicated  programs, such as those hosted by Rush Limbaugh and Alan Colmes, are  typically negotiated with each station by the programmer. The negotiated  price depends on the station’s audience size, among other factors.  According to one broadcast industry stakeholder, radio stations with  smaller audiences generally pay lower licensing fees. Industry  stakeholders also told us that in addition to the licensing fee, some  syndicated programs require stations to provide advertising time during  the program with the programmer receiving revenues from the advertising.  Because these contracts are private and stations do not report revenues  for specific programs, we are unable to determine the relative costs and  benefits stations derive from syndicated programs.
section_title: The Recording Industry May Benefit from Airplay That Can Promote Album Sales, but the Extent of the Benefit is Unclear
paragraphs: 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. A 2010 Arbitron study, as well  as stakeholders from both the recording and radio industries, indicates  that broadcast radio is the most common means by which listeners  discover new sound recordings. Broadcast radio stations facilitate this  discovery process by announcing artists’ new albums before or after  broadcasting sound recordings. Also, repeated airplay increases exposure  and raises awareness of sound recordings. Stakeholders told us that as  listeners’ awareness increases, record companies and musicians benefit  from corresponding increases in album sales. Furthermore, record  companies’ past and current business practices imply that the recording  industry benefits from broadcast radio airplay. The historical record of  illegal payola activity shows that the recording industry has been willing to  compensate the broadcast radio industry for airplay. In addition, record  companies employ staff dedicated to the promotion of music to radio  stations.
To assess the relationship between broadcast radio airplay and music  sales, we conducted several empirical analyses, and found the relationship  to be unclear.
Airplay and sales of digital singles. We found no consistent pattern  between the cumulative broadcast radio airplay and the cumulative  number of digital single sales. We tracked the spins and sales of 12 songs  selected based on age and genre, among other factors, in the 10 largest  DMAs for the first quarter of 2010 (see table 5). The songs consisted of  sound recordings by different artists, across different genres, and of  different ages. We compared each song’s spin count against the digital  sales of the single. Although the current songs in our sample consistently  received more airplay than catalog (i.e., older) songs of the same genre, we  found that the digital single sales per spin vary widely. For example, a  recently released Latin song was played on broadcast radio over 4,600  times but sold less than 1 digital single per spin. In contrast, an R&B/Hip  Hop song released more than 9 years ago received fewer than 1,100 spins  but sold almost 13 digital singles per spin.
Airplay and initial album release. We found the relationship between  national sales of a newly released album and national airplay of all songs  on the album to be unclear. We examined a sample of six albums released  between February 1 and February 14, 2010 (for a full description of all  albums sampled, see appendix III). We found that album sales peaked  shortly after the album’s release then decreased, irrespective of artist. For  example, as shown in figure 4 below, Sade’s “Soldier of Love” album sold  more than nine times as many copies in the week it was released as were  sold 1 month later.
The relationship between (1) the broadcast radio airplay preceding and  immediately following the album release and (2) these album sales is  unclear. While the sound recordings from each album received airplay  prior to the albums’ releases, we are unable to quantify how much, if any,  of the initial spike in album sales was attributable to broadcast radio  airplay. Further, in the weeks following the release of the album, national  radio airplay varied widely and did not follow the same pattern as national  album sales. In the example above, the broadcast radio airplay of Sade’s  album remained relatively constant preceding and immediately following  the release of the album although the album sales did not follow the same  pattern. Another album, H.I.M’s “Screamworks”, had sales decrease 72  percent the week after sales peaked, while airplay in the weeks following  fluctuated and even increased.
Changes in airplay and sales. We found the relationship between  changes in national airplay and changes in national album sales to be  unclear. We gathered airplay and sales data on the top songs receiving  airplay from five categories of music—Current Album, Current Country,  R&B, Latin, and New Artists. Using these data, we first examined the  correlation between album sales and airplay. We found the sales of albums  to be slightly correlated with past airplay only for country albums;  however, these correlations do not imply that airplay contributed to album  sales. Second, we conducted an econometric analysis where we regressed  the percentage change in weekly sales on the percentage change in the  present and prior week’s airplay, the percentage change in the prior  week’s sales, the total airplay received by an album since its release, and  the total physical and digital sales since its release. (See appendix IV for  full information on the econometric analysis.) We performed this analysis  using data from an 8 week period from February to April, 2010. We found  that the percentage change in weekly airplay during the present and prior  week generally did not have an impact on the percentage change in weekly  sales. In particular, the estimates of the effect of the percentage change in  the prior week’s airplay on the percentage change in sales were mixed  (some positive and some negative) and not statistically significant, and the  estimates of the effect of the percentage change in the present week’s  airplay were positive but not statically significant. We also examined  whether cumulative airplay since the album’s release had any effect on  sales and found it did not generally have a significant effect.
Other outlets. Musicians and performers whose music is featured on  television or other outlets may have increased sales as a result of that  promotion. For example, the week that The Who performed during the  2010 Super Bowl halftime show, digital single sales of four featured songs  increased between 223 percent and 329 percent; digital single sales  increased for all four songs the week following the Super Bowl as well. As  shown in figure 5 below, digital single sales of “Baba O’Riley” increased  from fewer than 5,000 sales in the week before the Super Bowl to nearly  25,000 in the week following the event. Broadcast radio airplay for the four  songs only increased 4.5 percent during the week of the performance and  decreased during the week when sales peaked. In addition to television,  according to one stakeholder, dance club DJs are also important for  promoting music. A Grammy winning hip-hop performer stated that for his  most recent music, club DJs promoted his sales more than broadcast  radio.
While industry stakeholders and practices indicate that the recording  industry receives some promotional benefit from broadcast radio airplay,  we are unable to quantify this benefit, in part because of the complex and  changing nature of the relationship between the recording and broadcast  radio industries. Broadcast radio remains the most common place to  discover new music. However, this reliance is decreasing and younger  audiences now rely primarily on the Internet to learn about new music.  Thus, the Internet and other platforms, such as television, are contributing  to the promotion of sound recordings. However, due to the complexities of  the industries, it is not clear to what degree, if any, these other  promotional outlets impact sales in conjunction with one another, in  conjunction with broadcast radio airplay, or independently. Furthermore,  the recording industry faces changes that make piracy much easier and  more frequent, which stakeholders indicate contributes to decreasing  sales. According to the Copyright Office, piracy reduces revenues that may  have been generated by the promotional benefit of broadcast radio or one  of the other platforms.
section_title: The Proposed Performance Rights Act Would Result in Additional Costs for Most Broadcast Radio Stations
paragraphs: 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. Because of a lack of data, the  impact of the proposed act on minority, female, and religious stations and  the ability of various outlets (such as broadcast radio, satellite radio, and  webcasters) to pay royalties is unclear.
subsections: section_title: Broadcast Radio Stations Would Pay Different Royalties, but Radio Stations with Revenues of $1.25 Million or More Would Pay the Most
paragraphs: 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. As previously mentioned, as of  November 2009, there were 14,441 licensed broadcast radio stations in  operation, of which 10,076 are commercial and noncommercial radio  stations that would pay a royalty under the proposed act because they  have some music content (see table 6); the remaining 4,365 stations would  not pay a royalty.
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. Royalty rates for commercial stations with revenues of $1.25  million or more would be negotiated or set by the copyright royalty judges  after the enactment of the proposed act; therefore, we are unable to  determine this rate. In previous decisions, the copyright royalty judges  based the royalty for satellite and cable radio on annual revenues because  no method exists to determine the size of the listening audience at any  point in time; the same problem exists with broadcast radio. Therefore, if  stations with revenues of $1.25 million or more pay a royalty rate based on  a percentage of their annual revenue, each percentage point increase in  the rate would cost the industry an additional $101 million in total  royalties annually. We also calculated the potential annual payments using  various rates considered in a previous Copyright Royalty Judges  decision—2.35, 7.25, and 13 percent (see table 7). Total annual costs to  the industry could range from $258 million to $1.3 billion based on these  rates. Flat fee payments by commercial stations with annual revenue less  than $1.25 million would generate approximately $19 million. Payments  by noncommercial stations could range from $950,000 to $1.9 million, but  due to the lack of data on the revenue of noncommercial stations, we  could not determine the number of stations paying each noncommercial  statutory license royalty and the overall royalty payments.
If the rate is structured as a percentage of annual revenues, broadcast  radio stations with annual revenues of $1.25 million or more would pay the  majority of royalties, but payments for these radio stations would vary  widely. For example, if these stations pay a rate equal to 2.35 percent of  their annual revenue, their payments would account for more than 90  percent of all royalty payments and total over $237 million. However, as  previously mentioned, these radio stations only represent 25 percent of all  stations paying a royalty. Within this group of stations, the payments  would vary significantly; some of these stations would pay less than  $30,000 while other stations would pay over $1.5 million.
section_title: Stakeholders Identified Several Potential Effects Arising from the Proposed Performance Rights Act
paragraphs: In addition to making royalty payments, the proposed act would result in  additional costs for broadcast radio stations in the form of reporting  requirements. Radio stations that broadcast music would have to track  and report each sound recording. While some radio stations have  automated systems for this, representatives of commercial and  noncommercial stations said that others cannot afford this technology or  the additional staff to track and report sound recordings.
Due to the burdens associated with the royalty and reporting  requirements, stakeholders from the broadcast industry identified the  following potential effects:    Discontinued operation. Some stakeholders reported that broadcast radio  station operators currently struggling to earn a profit may go out of  business entirely. Experts with whom we spoke agreed that some marginal  stations—those radio stations already facing financial difficulties—would  likely discontinue operations. Although radio station licensees  encountering financial difficulties can sell their stations, according to FCC,  this may not be a feasible alternative for many. Due to the financial state  of the broadcast industry, the values and sale prices of radio stations have  declined, as has the availability of financing for the purchase of stations,  making the option to sell less attractive to licensees. Alternatively, if a  station returns its license to the commission, FCC officials said the  process of selecting a licensee may be lengthy, possibly resulting in a  temporary loss of service to the community. However, FCC officials also  told us that the commission continues to receive a high volume of  applications for licenses.
Staff reductions. Broadcast radio stations might reduce staff, which  represents the largest cost for many radio stations. While some radio  stations have already reduced staff as a result of the declines in revenues,  stakeholders indicated that other stations may be forced to lay off  additional staff.
Changing to nonmusic formats. 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. However, the feasibility of switching from a music format to a  nonmusic format would also be determined by market factors. For  example, if there are many talk radio stations in a market, a station may  not switch to talk radio because the market cannot support another  station of that format. While switching to nonmusic formats may occur,  among stations retaining a music format, a royalty should not cause  stations to change the genre of music it plays or the variety of music  because stations already make these decisions based on rating data and  market research. Furthermore, the proposed royalty does not vary based  on the genre or music played by a radio station.
section_title: The Proposed Act’s Impact on Minority and Female Broadcast Radio Station Owners and Broadcast Radio Stations Ability to Pay Is Unclear
paragraphs: Minority, Female, and Religious Stations. Because of a lack of  comprehensive data and several weaknesses that limit the usefulness of  the data on the ownership of broadcast radio stations, we cannot  determine the impact of the proposed act on minority, female, and  religious broadcast radio station owners. FCC collects ownership  information from radio station licensees; however, it lacks comprehensive  data on the ethnicity, gender, and race of all radio station owners and it  does not collect information necessary to identify religious owners. We  previously reported on the weaknesses in the usefulness of FCC’s Form  323, which is the commission’s mechanism for collecting information on  gender, race, and ethnicity of broadcasters. FCC has updated its Form  323 based on our recommendation, and intends to require all broadcast  radio station owners to complete the revised form by July 2010.
While we lack comprehensive data on the ethnicity, gender, and race of all  radio station owners, we examined, on a limited basis, the impact that  minority ownership and minority-targeted programming has on radio  station revenues.
We conducted a regression analysis of radio station revenues that  controlled for stations’ membership in the National Association of Black  Owned Broadcasters (NABOB). In particular, we regressed radio stations’  revenues on variables thought to influence revenues, including  membership in NABOB. We found that NABOB-member stations’ revenues  were no different than the revenues of all other stations. Thus, for this  select group of stations, minority ownership does not appear to affect the  stations’ revenues.
We also conducted a regression analysis of radio station revenues that  controlled for radio stations that target minority audiences. Again, we  regressed radio stations’ revenues on variables thought to influence  revenues, including formats that target minority audiences. We found that  some radio stations with formats that target minority audiences—stations  with ethnic and Spanish formats—have lower revenues compared with  other stations. However, other stations that target minority audiences— stations with gospel formats—do not have revenues that differ  significantly from other stations, and stations with urban formats have  higher revenues compared to other stations. These results illustrate that in  some instances, radio stations targeting minority audiences may have  lower revenues than other stations but this is not consistent across all  these types of stations.
Ability of Various Outlets to Pay a Royalty. We are also unable to  compare the ability of broadcast, satellite, and webcast radio stations to  pay a royalty because of limited data. To assess the ability of these  outlets to pay a royalty, we need revenue and cost data for these outlets,  which are generally unavailable. The broadcast radio, satellite radio, and  webcast industries generally have different sources of revenue and cost  structures, which affect their ability to pay a royalty. For example, satellite  radio derives its revenue through consumer subscriptions and some  advertising, but must invest in satellite technology to provide service to its  customers. Webcasters, on the other hand, derive revenue from both  advertising and subscriptions and pay for bandwidth to distribute  streaming content. As previously mentioned, commercial broadcast radio  stations rely primarily on advertising for revenue, and broadcast radio  stations’ costs include building or renting a tower for broadcasting. Other  costs are similar across platforms, including personnel, facilities, and  licensing for musical works. However, as previously mentioned,  webcasters and satellite radio have the additional cost of the license for  the sound recording, which the Copyright Royalty Judges established  during rate-setting proceedings.
section_title: The Proposed Performance Rights Act Would Result in Additional Revenue for Copyright Holders, Musicians, and Performers
paragraphs: 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. This new revenue could come from two sources: royalties paid  by broadcast radio in the United States and royalties paid by broadcast  radio in foreign countries.
U.S. royalties. Several factors will influence the amount of royalty  payments a copyright holder, musician, or performer receives. First, the  royalty payment will depend on the individual’s or organization’s role in  the creation of the sound recording. As mentioned previously, 50 percent  of the revenue will be paid to the copyright holder, typically the record  company; 45 percent will be paid to the featured musicians and  performers; and the remaining 5 percent will be shared by the background  musicians and performers. Second, the royalty payment will depend on the  total amount of royalties paid by the broadcast radio industry. 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. Finally the royalty payment will depend  on the amount of airplay a sound recording receives. A sound recording  that matches a genre with many broadcast radio stations, such as adult  contemporary, may receive more airplay and, therefore, more royalties,  compared to a sound recording that matches a genre with only a few radio  stations, such as jazz. While these factors would affect the royalty earned  by those in the record industry, the race or gender of the musician or  performer would not be a factor affecting any earnings.
We conducted an analysis to estimate the total annual royalties each  sound recording would earn and determined that most sound recordings  would earn less than $100 from airplay in the top 10 markets. To estimate  these annual royalties, we used actual spins received during the first  quarter of 2010 on 199 commercial broadcast radio stations in the top 10  DMAs; these commercial radio stations generate approximately 21 percent  of the revenues for commercial radio stations with a music format  nationwide. We then identified which of these radio stations would pay a  flat fee and which would pay an undetermined rate. For those paying an  undetermined rate, we calculated a royalty at 2.35 percent of the station’s  annual revenues. As figure 6 shows, we found that 79 percent of sound  recordings would receive a royalty of less than $1,000 annually. While  approximately 21 percent of sound recordings would earn over $1,000, the  sound recording with the most spins, “Bad Romance”, by Lady Gaga,  would earn over $446,000.
Using the data on royalties per sound recording, we also determined the  total royalties featured musicians or performers could earn based on  estimated airplay in 2010 in the top 10 DMAs. Many musicians and  performers are the featured musicians for multiple sound recordings and,  as table 8 shows, when combining their share of royalties for each of these  sound recordings, we found that 56 percent would receive a royalty of less  than $100 annually. Further, less than 6 percent of performers would  receive over $10,000 or more annually in royalties for all sound recordings.  The musician with the most royalties, Lady Gaga, generated almost  $300,000 in annual royalties for 13 sound recordings that received over  46,000 total spins. While copyright holders are often a record company, we  were unable to determine the aggregate share of royalties for each  copyright holder as we could not group sound recordings with their  copyright holder. We did determine that the four major record companies  are affiliated with most sound recordings receiving royalties, but we were  unable to determine if they hold the copyright for these sound recordings.
We were also unable to identify background musicians and performers on  these sound recordings to estimate their share of the royalty revenue.
International royalties. Another possibility, if the proposed act were to  pass, is that the recording industry may begin to receive royalties from  broadcast radio in foreign countries. Currently, musicians and performers  from foreign countries may receive a performance royalty when their  music is broadcast over radio in other countries. Musicians and  performers from the United States whose music is broadcast on foreign  radio outlets typically do not receive these performance royalties because  the United States does not have a reciprocal performance royalty. If  passed, the proposed act could signal a change in U.S. policy, allowing  U.S. musicians and performers to begin receiving royalties from foreign  countries. However, existing trade agreements and foreign laws would  influence these international royalties and it is unclear when U.S.  musicians and performers would begin receiving these royalties. While it is  also unclear how much musicians and performers would receive from  international royalties, in 2007, the U.S. Copyright Office testified that the  recording industry estimated the loss of about $70 million, and two  stakeholders with whom we spoke indicated that the loss could exceed  $100 million.
Stakeholders and experts have differing views on whether the total  revenue from U.S. and international royalties would affect the creation of  music. As a $9 billion industry, the royalty payments to the recording  industry previously estimated—$258 million to $1.3 billion—would  represent a significant inflow of revenues. Stakeholders and the U.S.  Copyright Office both indicated that this revenue could contribute to  additional investments in music and help keep record companies  operating. While some experts and stakeholders indicated the proposed  act would primarily benefit established musicians and performers and  would not impact new musicians, others indicated that it may be harder  for new musicians to receive radio airplay. Others indicated this would  lead to record companies working harder to promote their musicians to  broadcast radio stations leading to more royalties for musicians signed to  a record company. While views on the proposed act and its effects  diverged, most stakeholders in the industry agreed that older artists who  no longer benefit from performing live concerts would greatly benefit from  any royalty. Further, stakeholders and background musicians and  performers with whom we spoke also noted the importance of the  royalties for them.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to FCC and the U.S. Copyright Office of  the Library of Congress. FCC and the Copyright Office provided technical  comments that we incorporated as appropriate. FCC’s and the Copyright  Office’s written comments appear in appendices V and VI, respectively.
In its letter, FCC noted that it has a substantial interest in any proposed  legislation that might have an adverse impact on radio stations. FCC also  suggested that we more clearly explain the nature and scope of the  commission’s collection of ownership information from broadcast  licensees, stating that it collects information on ethnicity, gender, and  race. However, we found that FCC does not collect comprehensive  information on the ethnicity, gender, and race of all radio station owners  sufficient for our analysis. Therefore, we did not revise the report based  on this suggestion.
In its letter, the Copyright Office addressed certain methodological  approaches and findings in our draft report. First, the Copyright Office  suggested changes and additions to our analysis of digital singles sales and  radio station revenues. In particular, the Copyright Office suggested  discounting digital single sales attributable to music services other than  radio, analyzing sales by age groups, and removing radio stations’  revenues attributable to certain nonmusic programming and services.  Because we do not have transaction-level data necessary to identify how a  digital single was purchased, who made the purchase, or why he or she  purchased the digital single, we could not perform such analyses, but  believe this would not have a material effect on our findings. Regarding  radio station revenues, our work did not substantiate that removing radio  stations’ revenues not associated with music programming would  significantly affect our results because advertising associated with a  station’s programming generates most of its revenue. Second, the  Copyright Office also noted that tracking and reporting of sound  recordings may not be a significant burden for radio stations because  many stations might be exempt from this requirement and many other  radio stations already track and report sound recordings. We assumed that  most stations would have to track and report each sound recording played  because other platforms that currently pay a royalty for the use of sound  recordings track and report this information. Further, we do not believe  that this assumption significantly affects our findings because most of the  costs arising from the proposed act will be associated with the royalty  payment and not the tracking and reporting of sound recordings. In  addition, the Copyright Office noted that several analysts have reported  that the broadcast radio industry’s revenues are increasing and that the  royalty we estimated only represents a small fraction of the industry’s total  revenues. We chose to include reported revenues, rather than rely on  analysts’ forecasts, to ensure the reliability of our information. Finally, the  Copyright Office noted that our finding that some performers would  receive significantly higher royalties than other performers was not a  surprise and represents that some performers are played on broadcast  radio more than others and should, therefore, receive more royalties. The  Copyright Office also noted that the small amount of royalty that many  performers would receive should not discount the importance of the  additional income for those performers and the recognition of the  property right in the sound recording.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Chairman, FCC;  Register of Copyrights, Library of Congress; and interested congressional  committees. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you have any questions about this report, please contact me at (202) 512- 2834 or goldsteinm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to address the following questions: (1) What are the  benefits the broadcast radio and recording industries receive from their  current relationship with each other? (2) What are the potential effects of  the proposed Performance Rights Act on the broadcast radio industry? (3)  What are the potential effects of the proposed Performance Rights Act on  the recording industry?
To assess the benefits the broadcast radio industry receives from its  current relationship with the recording industry, we analyzed data from  2008 on broadcast radio revenues. Using the BIA Media Access Pro  database, we determined the annual revenues of all commercial broadcast  radio stations. Before conducting our analysis, we addressed certain  features and limitations of the data to enhance the precision of our results.  We identified commercial and noncommercial stations, their primary and  secondary formats for each station, as well as “dark” stations not currently  broadcasting. We classified commercial broadcast radio stations as either  music or nonmusic based on the station’s format category, except for  stations with religion or Spanish as their format categories. For stations  with these format categories, we looked at the primary, secondary, and  tertiary formats, a more granular level of analysis. If any of these three  formats were a music content, then we considered the station a music  station; otherwise, we identified the radio station as a nonmusic station.  We did this in order to compare revenue for music versus nonmusic  stations and to eventually determine the royalty rate each station would  pay. Next, we imputed station revenue for sister stations that did not  report revenue information. We accomplished this by identifying the  sister stations that reported revenue and allocating the total reported  revenue between that station and its nonreporting sister station. We also  imputed the total revenues for nonreporting stations that were not sister  stations, which accounted for approximately 40 percent of the stations. In  order to do this, we ran a regression using the primary license coverage  population, format category, license class, and whether it was an Arbitron  market, as the explanatory variables. Based on this regression, we were  able to develop predicted revenues for the nonreporting stations and  scaled this to $4 billion, the unaccounted-for total revenues of the  broadcast radio industry. Using the revenue data, we estimated the  marginal effect of a station being a music or  nonmusic station.
To assess the benefits the recording industry receives from its current  relationship with the broadcast radio industry, we conducted three  analyses using information obtained from AC Nielsen’s SoundScan,  Broadcast Data Systems (BDS), and Insight databases. First, using the  SoundScan and BDS databases, we identified the quantity of digital singles  of sound recordings sold for 12 sound recordings during the first quarter  of 2010, and reported the total sales per spin. Before conducting our  analysis, we addressed certain limitations of the data. We identified genres  of music based on Nielsen’s “Core Genre” definitions. We identified the  age of the music based on the date the sound recording was added to the  SoundScan database. We compared the digital single sales to how often  the sound recordings were played on broadcast radio and identified the  sales per spin. To calculate digital single sales, we combined the sales of  the three best-selling versions of each song. We did this because some  songs have multiple versions. We limited this analysis to data in the top ten  designated market areas (DMA). For our second analysis, we randomly  selected six albums released between February 1 and February 14, 2010,  and compared the national broadcast radio airplay received by the album  to the national sales of those albums during a 15-week period. For our  final analysis, we developed correlations and a regression model to  analyze the relationship between weekly airplay and sales of sound  recordings. We looked at the top songs receiving airplay in five categories  of music, “Current Album,” “Current Country,” “Latin Overall,” “R&B  Current-Overall,” and “New Artists.” We also looked at the sales of the  albums associated with the top songs in these categories. We conducted a  correlation analysis of the album sales and airplay to identify any  relationship between airplay and sales. To further analyze any relationship  between changes in airplay and sales, we developed a regression model.  We regressesed weekly change in sales on present and past weekly  changes in airplay, on past weekly changes in sales, on total airplay  received by an album since its release, and on its total physical and digital  sales since its release. We performed this analysis for each of the five  categories of albums during an 8-week period determining any impact on  changes in airplay during the initial weeks had against changes in sales  during the final week. We also tested to see if cumulative airplay since the  album’s release had any effect on sales for any of the 5 weeks. See  appendix IV for additional information on these analyses.
To assess potential effects of the proposed act on the broadcast radio  industry, we used the revenue analysis described above and the previous  analysis that classified broadcast radio stations as either music or  nonmusic to calculate estimated costs for both commercial and  noncommercial radio stations. Using these data, we calculated the number  of commercial stations that would be required to pay each of the royalty  levels. To illustrate potential royalty payments for commercial stations  with annual revenues of $1.25 million or more, we calculated potential  royalty payments using rates of 2.35, 7.25, and 13 percent of annual  revenues, which are rates previously considered by copyright royalty  judges in statutory rate setting proceedings for satellite digital audio radio  services (SDARS). To determine the potential royalty payments for  stations with revenues below $1.25 million that would be required to pay  an annual flat royalty, we multiplied the number of stations in each rate  category by the respective rate and summed these figures to arrive at a  partial estimation of the cost to these broadcast radio stations. We  calculated potential royalty payments for noncommercial stations by  multiplying equal numbers of noncommercial stations by each of the  respective rates for noncommercial stations described in H.R. 848;  however, a lack of data on noncommercial stations’ revenues prevents us  from determining the exact number of noncommercial stations paying  each rate. To determine if revenue generated by minority-owned stations  and stations that serve minority audiences differ from other broadcast  radio stations’ revenue, we first identified stations in each of these  categories. We identified black-owned stations by their owners’  membership in the National Association of Black Owned Broadcasters  (NABOB). We classified the Ethnic, Spanish, Urban, and Gospel formats as  targeting minority audiences based on data reported by Arbitron and other  sources’ reporting on audience demographics. We then compared revenue  for these music stations to revenue for nonmusic stations.
To assess the potential effects of the proposed act on the recording  industry, we conducted two analyses based on airplay during the first  quarter of 2010 on 199 broadcast radio stations in the top 10 DMAs. We  used the BDS database to identify all sound recordings that were played  on these stations in the first quarter of 2010 and the total number of spins  each sound recording received across all these sample stations. We then  identified the number of spins on each broadcast radio station and the  radio station’s 2008 revenues we had previously estimated. Based on the  broadcast radio station’s 2008 revenues, we identified whether the radio  station would pay a flat fee or had revenues above $1.25 million. If the  station had revenues above $1.25 million, we estimated a royalty of 2.35  percent of total revenues. Based on each station’s estimated royalties, we  divided the royalty amongst all sound recordings receiving airplay during  2010 based on the number of spins a sound recording received. This  methodology mimics how Sound Exchange, the entity responsible for  distributing digital performance royalties, distributes performance  royalties for airplay over satellite radio. For our second analysis, we  estimated the total royalty a featured musician or performer would receive  from all sound recordings for which that individual or band are the  featured musicians or performers. As in the previous analysis, we used  airplay on all broadcast radio stations in the top 10 DMAs from first  quarter of 2010. We totaled all estimated royalties from the previous  analysis by featured musician or performer.
To address all objectives, we spoke with relevant stakeholders from both  the broadcast radio and recording industry, as well as government  agencies. To identify relevant stakeholders from the recording industry,  we constructed a judgmental sample that consisted of the four largest U.S.  record companies, as well as independent record companies that varied  with respect to the number of artists signed to each company, the genres  of music produced, and the geographic location of each company. We also  interviewed trade associations that represent the industry, such as the  Recording Industry Association of America. We also interviewed  performing rights organizations that distribute royalties for the musical  work licensees and the digital performance of sound recording licensees.  We interviewed industry experts and individuals that work in the industry,  such as managers, accountants, lawyers, and union groups who represent  musicians and performers, as well as musicians and performers. We also  constructed a judgmental sample of stakeholders from the broadcast radio  industry, including station owners and operators that varied with respect  to station revenue, market size, geographic location, and genre. We  interviewed broadcast industry experts and trade associations that  represent the industry, such as the National Association of Broadcasters.  Furthermore, we interviewed officials from the Federal Communications  Commission’s (FCC) Media Bureau to understand FCC’s involvement in  broadcast radio, including licensing, regulation, and oversight; to gain  information about available data on broadcast station ownership; and to  identify broadcast industry and other stakeholders to execute the  engagement. We obtained relevant legislation and federal regulations that  established FCC’s rules for broadcast radio and obtained FCC reports on  broadcast license requirements and ownership. We also interviewed  officials from the Library of Congress’ Copyright Office to understand its  role in copyright matters, to gather information on laws relevant to the  proposed act, to discuss Congress’ previous legislative activities involving  music and copyrights, to review relevant copyright history, to identify  stakeholders to execute the engagement, and to understand how the  proposed act could affect the Library of Congress. We also spoke with a  copyright royalty judge to understand the rate-making process. We  gathered information on other industries that pay performance rights for  the use of sound recordings, including digital and satellite radio and  television, as well as information on how royalties are assessed and  distributed in these industries. We reviewed independent and industry  analyses of the value of sound recordings to radio and the value radio  provides to sound recordings. We also reviewed previous congressional  considerations of a performance royalty for broadcast radio in the United  States and gathered information about the existence of performance  royalties in countries outside the United States. We assessed the reliability  of both the Nielsen and BIA data by (1) performing electronic testing of  required data elements; (2) reviewing existing information about the data  and the system that produced them; and (3) interviewing officials from  both companies about measures taken to ensure the reliability of  information. On the basis of our review, we determined that the data were  sufficiently reliable for the purposes of our report.
We conducted this performance audit from June 2009 through August 2010  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Analysis of the Effect on the Broadcast Radio Industry of the Senate Version of the Performance Rights Act
paragraphs: 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. While each version has similar  thresholds and royalty levels for radio stations with annual revenues under  $1.25 million, the Senate version has one additional threshold. In  particular, the Senate version proposes a $100 annual flat rate, or flat fee,  for commercial and noncommercial broadcast radio stations with  revenues less than $50,000 (see table 9), while the House version does not  include this threshold and royalty. The two versions also include other  differing provisions, but those differences do not affect the royalty  payments.
The total royalties paid by the broadcast radio industry under S. 379 is  unknown at this time. In table 10, we report the number of radio stations  that would pay the different levels of royalties under the Senate version.  Seventy-five percent of stations that would pay a royalty would pay an  annual flat fee, ranging from $100 per year to $5,000 per year under the  Senate version. Twenty-five percent of stations, those with revenue of  $1.25 million or more, would pay a royalty based on a negotiated rate or a  rate set by the copyright royalty judges. 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. In  addition, due to the lack of data on the revenues of noncommercial  stations, we can not determine the number of stations paying each  noncommercial statutory license royalty.
To provide estimates of the total costs to the broadcast radio industry  under S. 379, we assumed that stations with revenues of $1.25 million or  more would pay a royalty structured as a percentage of a station’s annual  revenue. If stations with annual revenues of $1.25 million or more pay a  royalty rate based on a percentage of their annual revenue, each  percentage point increase in the rate would result in an additional $101  million in total royalty payments. We also calculated the potential annual  payments using various rates considered in previous Copyright Royalty  Board decisions—2.35, 7.25, and 13 percent (see table 11). Total annual  costs for the industry could range from $257 million to $1.3 billion based  on these rates. Annual flat fee payments by commercial stations with  annual revenue less than $1.25 million would generate approximately $19  million and payments by noncommercial stations could range from  $190,000 to $1.9 million.
section_title: Appendix III: Airplay and Sales for Albums Released During 2 Week Period in February, 2010
paragraphs: In our sample of six randomly selected albums released between February  1 and February 14, 2010, sales spiked immediately upon each album’s  release and then decreased following the initial week of sales. For  example, as shown in figure 8, Lil’ Wayne’s “Rebirth” album sold more  than five times as many copies in the week it was released as were sold 1  month later. We found that album sales decreased substantially after their  peak, irrespective of how many times the album’s songs were played on  broadcast radio (i.e., how many “spins” all songs from the album  received). For example, sales of Sade’s “Soldier of Love” album decreased  by 62 percent during its second week of sales; however, broadcast radio  airplay actually increased by 2 percent the same week. In the weeks  following release, radio airplay varied widely from album to album, but did  not follow the same trends as album sales, as shown in figures 7-12.
section_title: Appendix IV: Correlation and Regression Analyses of Airplay and Sales
paragraphs: This appendix describes the model we developed to analyze the  relationship between airplay and sales of individual albums. Specifically,  we discuss (1) the background and past economic literature, (2) our  analytical framework, (3) the data we used in the analysis, (4) the  estimation methodology and results, and (5) alternative regression  specifications.
subsections: section_title: Background and Past Literature
paragraphs: The generally accepted hypothesis in the music industry is that radio  airplay promotes music sales. Stakeholders from both the recording and  broadcast radio industries agree that broadcast radio airplay can promote  music sales. In fact, broadcast radio can be an important means by which  many listeners discover new sound recordings; a 2010 study conducted by  Arbitron found that 39 percent of survey respondents aged 12 years and  older reported that they turned to radio first to learn about new music.  Repeated airplay and the announcement of artists’ new albums before or  after broadcasting sound recordings has been argued to increase album  sales for the musicians. Further, the historical record of illegal payola  activity shows that the recording industry has been willing to compensate  the broadcast radio industry for airplay. In addition, record companies  employ staff dedicated to the promotion of music to radio stations.
The relationship between aggregate airplay and aggregate sales has been  empirically analyzed in the past, and one author found that radio airplay  substitutes for sales and, therefore, has a negative impact on sales while a  second author found a positive relationship between airplay and sales.
Liebowitz empirically investigated the impact of radio airplay on sales of  sound recordings for a sample of American cities between 1998 and 2003.  He acknowledges that radio airplay has the potential to promote sales in  that songs receiving high airplay and new songs that listeners get an  opportunity to experience can increase demand. However, he also argues  that the time spent listening to radio becomes a substitute for time spend  listening to albums. He estimated a regression model with record sales per  capita as the dependent variable. He regressed this variable on the average  time spent listening to music radio and other demographic variables such  as income, Internet usage, age, and education which can influence record  sales. He estimated his model using the first differences approach to  control for underlying differences in populations and cities that are time  invariant. He finds that radio airplay has a negative impact on sales of  compact discs. Since the time spent listening to radio could represent time  taken away from other activities, he also tests the impact of time spent  listening to talk radio versus time spent listening to music radio on sales to  see whether radio airplay actually substitutes for sales rather than just  time spent listening. His results confirm his hypothesis that music radio is  a direct substitute for sound recordings.
Dertouzos, in a study sponsored by National Association of Broadcasters,  conducted an empirical study to quantify the relationship between radio  airplay and the sale of albums and digital tracks from 2004 to 2006 in the  99 largest designated market areas in the United States. In his model, he  expressed logarithms of total sales as a function of music exposure,  measured by the number of listeners multiplied by the number of “spins”  or plays, of a sound recording and various other local market factors, and  demographic and economic characteristics. He found the estimated  impact of radio exposure to be positive and significant for all functional  specifications that he used, implying that airplay leads to higher sales of  albums.
section_title: Analytical Framework
paragraphs: Our analytical framework differs from the previous research in that we  tested to see if there is any relationship between sales and airplay for  individual albums. As discussed above, the previous research attempts to  measure the positive promotional effect or negative substitution effect of  radio airplay on record sales and relied on aggregate airplay and sales  data. In our analysis, we relied on the airplay and sales of individual  albums of different music genres at the top of the charts. The lack of  evidence of any relationship between airplay and sales in our analysis  would not imply that a positive or a negative impact does not exist for any  sound recording, but rather that it does not universally exist for each and  every sound recording. For example, one may expect radio’s promotional  effect to be much less for a song released 2 or 3 years ago or for some very  popular current artists. In our analysis, it may be the case that for the  particular albums we analyzed, which are already at the top of the charts  and, therefore, enjoy a certain level of popularity, additional airplay does  not affect their sales.
section_title: Data Source
paragraphs: To conduct our analysis, we acquired data from The Nielsen Company. In  particular, we used airplay and sales data on the top songs receiving  airplay for five categories of music—Current Album, Current Country,  R&B, Latin, and New Artists. These categories are based on chart criteria  in Nielsen’s SoundScan database, which tracks album sales, and are based  around Album genres. We used data from six weekly reports from March  7, 2010, to April 11, 2010. Each report contained data for 3 weeks and  contained information on the following elements:    Physical and digital sales for the albums listed.
Airplay data for the albums, where airplay for each song on an album is  counted and the airplay for all the songs is aggregated to determine the  total airplay for the album.
The cumulative sales and airplay since the albums’ release dates.
section_title: Estimation Methodology and Results
paragraphs: To examine the relationship between airplay and sales, we first conducted  a correlation analysis. We simply looked at the degree of correlation  between past, as well as present, values of airplay and sales across  different categories of albums. A simple lack of correlation between  airplay and sales would imply that the variables are not related to each  other and, therefore, one variable does not affect another. However, high  correlation between two variables and even between a variable and the  lagged value of the variable expected to affect it, does not always imply a  causal effect. For example, airplay and sales may be correlated simply  because a popular song receives both high airplay as well as sales and one  series may lag another without any apparent reason. Therefore, we next  analyzed the degree of correlation between weekly changes in sales with  both present and past weekly changes in airplay. Using our correlation  analyses, we found the following:    Sales and airplay are not correlated for any of the categories except  Current Country. The degree of correlation between sales and airplay,  among both present and lagged values of the variables, is about 60 percent  for Current Country albums and less than 30 percent for all other  categories of albums.
The percentage change in sales and airplay are not correlated for any  category except Latin. For albums in the Latin category, percentage  changes in airplay in the past week are correlated with current percentage  change in sales at around 60 percent.
We also examined the relationship between airplay and sales using a  regression model. We estimated a model in first differences in which we  regressed the change in sales from week 2 to week 3 on a  contemporaneous change in airplay (that is, from week 2 to week 3), on  lagged changes in both sales and airplay (that is, from week 1 to week 2),  total airplay received by an album since its release, and total physical and  digital sales since release. We included the total airplay variable to see the  effect of cumulative airplay on sales and total physical and digital sales  variables to proxy for the quality of a particular album. Our regression  equation is specified below:  Change-in-sales = β + β*change in spins + β*change in spinst-1 + β*change in salest-1 + β*to-date-spins + β*to-date-sales + β*to-date digital-sales + ε  where t is the week and t-1 is the prior week.
We found that the change in airplay in the current and prior week did not  have any effect on change in sales in the current week, except in the case  of Latin albums where the relationship is positive and significant (see table  12).
section_title: Alternative Regression Specifications
paragraphs: We tested several other specifications of the model and our results did not  change. We ran a set of regressions with all categories of albums stacked  together and another that included dummy variables for the different  categories of albums and their interaction with other variables. We then  performed regressions with the percentage of change in sales from week 4  to week 5 on the percentage of change in airplay from week 4 to week 5 as  well as lagged weekly changes in both sales and airplay in the preceding  month. We did this for two different models: separately for each category  of album and a combined dataset with album category specific fixed  effects and with dummy variables for formats and their interaction with  other variables as additional regressors. Neither of these resulted in any  notable findings different from the ones above. Lastly, we regressed sales  in each of the 5 weeks on cumulative airplay, and digital and physical  sales. We did not find cumulative airplay to have a significant and positive  effect on sales.
section_title: Appendix V: Comments from the Federal Communications Commission
paragraphs: The following are GAO’s comments on the Federal Communications  Commission letter dated July 21, 2010.
subsections: section_title: GAO’s Comments
paragraphs: GAO, Media Ownership: Economic Factors Influence the Number of Media Outlets in  Local Markets, While Ownership by Minorities and Women Appears Limited and Is  Difficult to Assess, GAO-08-383 (Washington, D.C.: Mar. 12, 2008).
section_title: Appendix VI: Comments from the U.S. Copyright Office of the Library of Congress
paragraphs: The following are GAO’s comments on the U.S. Copyright Office of the  Library of Congress letter dated July 21, 2010.
subsections: section_title: GAO’s Comments
paragraphs: 1.  We agree that some sales of digital singles may arise because  consumers hear a single on a digital music service or a platform other  than broadcast radio. However, to discount digital single sales that are  specifically and directly attributable to other music services as the  Copyright Office suggests would require transaction-level data that  would identify whether the consumer reached an online retailer via a  link from a digital music service or other platform. We do not have  these data. Further, even if the consumer reached the online retailer  via a link from a digital music service or other platform, the consumer  might have originally heard the single on broadcast radio and,  therefore, removal in this instance would be inappropriate. As we note  in the report, it is not clear to what degree, if any, the various  promotional outlets impact sales individually or in conjunction with  one another. 2.  To analyze sales of sound recordings by age groups would require  transaction-level data that would identify the age of the consumer. We  do not have these data. 3.  We agree that the Copyright Royalty Judges will set the reporting  requirements. However, we assumed that most stations will have to  track and report each sound recording played because other platforms  that currently pay a royalty for the use of sound recordings track and  report this information. 4.  Our data source included total gross revenues, including perhaps some  revenues attributable to nonmusic programming and service, for radio  stations and we, therefore, performed our analysis using this measure.  We do not believe that removing radio stations’ revenues not  associated with music programming would significantly affect our  results because advertising associated with a station’s programming  generates most of its revenue.
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Mike Clements, Assistant  Director; Amy Abramowitz; Namita Bhatia-Sabharwal; Christine Hanson;  Alison Hoenk; Eric Hudson; Bert Japikse; Susan Offutt; Jonathon  Oldmixon; and Andrew Stavisky made key contributions to the report.