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. 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. 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. 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.