Tuesday September 18th, 2012 informationliberation.com
The Copyright Act Explicitly Says Disruptive Innovation Should Be Blocked (Techdirt)
A few weeks back, we wrote about a proposal by Rep. Jerry Nadler, which we referred to as the RIAA Bailout Act of 2012 because it sought to change the nature of satellite radio royalties to put them on par with the absolutely ridiculous and unsustainable royalty levels for internet radio. In case you don't know, there are basically three very different tiers for the royalties that need to be paid to musicians (separate from songwriters) for broadcasting the tracks on which those musicians played. If it's played on the radio, the stations have to pay nothing to the musicians, as Congress long ago decided that radio play was the equivalent of advertising (a viewpoint that is pretty accurate, given the decades of payola that have shown that radio play is so valuable that labels will pay stations and djs to get their songs played). Then there are the satellite radio guys (basically Sirius XM at this point). They pay a rate that they already think is too high and pass those rates directly on to consumers. In preparation for a new rate-making process, they're already seeking out legal ways to get away from having to pay statutory rates.

But what the satellite guys have to pay completely pales in comparison to what internet streaming companies like Pandora have to pay. There, the rates are so crazy that it's become clear that Pandora has little likelihood of ever being profitable unless something drastically changes. Matt Schruers, over at Project DisCo, has an absolutely fascinating look back at why these rates are so bad, and it comes down to this simple, but positively scary point:

When the Copyright Act of 1976 was passed, it was so taken over by regulatory capture by a few key industries, that they explicitly put into the Copyright Act that it should be used to stop disruptive innovation from challenging legacy businesses. I've read the Copyright Act many times, but have to admit that I'd never quite noticed this line from 17 USC 801(b)(1)(D), which explicitly states that the role of the Copyright Royalty Judges on the Copyright Royalty Board that sets the rates for internet radio are there:
To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.
Yeah. Their job is to set rates that basically kill off disruptive innovation in favor of "prevailing industry practices." As Schruers notes, this goes against absolutely everything we understand about the importance of disruptive innovation in driving forward the economy:
That’s right: employees of the U.S. Government who dictate price inputs for entire industries are statutorily charged to resist change. While the CRT / CARP / CRB has always had other statutory guidance as well, for example, maximizing availability of works, affording copyright owners a “fair return” and users a “fair income under existing economic conditions”, Congress enshrined this explicit rule that no one be permitted to upset the existing players’ apple cart. There is no pretext here, no cynical appeal to some higher objective that justifies minimizing disruption of the prevailing industry — change is inherently bad. The statute gives no consideration of whether a better business model might come along, and in fact affirmatively discourages any — not only because the statute aims to minimize any “disruptive impact”, but also because this license was limited solely to “pre-existing” services by the Digital Millennium Copyright Act in 1998. New arrivals were out of luck.
How the hell did something so explicitly corrupt and so clearly a form of crony capitalism get directly into the Copyright Act? Take a wild guess:
So how did this “minimize disruption” language wind up in the Copyright Act of 1976, given that it so clearly violated the First Rule of Defending the Status Quo? The “minimize disruption” requirement is a vestige of a copyright legislative process that stretched over many years, starting in the 1960s, at a time when fewer people appreciated copyright and fewer still understood the contours of the legal system that created those rights. Much of the initial drafting of the ‘76 Act was by the Copyright Office, which chaired a series of meetings with prominent industry copyright lawyers throughout the 1960s.

Counsel for publishers, the recording industry, broadcasters, were well represented in these discussions. The future, as the saying goes, had no lobbyist. It is not surprising, therefore, that the multi-factor test that determines the rates paid by services like satellite radio under the Copyright Act’s statutory licenses would reflect the perspectives of the existing parties to the arrangement. The standard from the ‘76 Act remains today (although at the time, the statute was focused on regulating “coin-operated phonorecord players”.)
And... believe it or not, that's not even the end of the story! That part of the Copyright Act is the part that impacts the satellite guys. But the streaming internet folks? For them it's even worse, as the statute takes things even further to create even more incentives to further kill off these new innovations -- by basically saying that a "proper" license is one with which a "willing seller" is happy. In other words, it sets the statutory rates almost entirely based on the interests of... the existing, entrenched players.

And that's why Pandora may never be profitable if nothing changes. Because we've actually built into copyright law that disruptive innovation is bad and should be minimized at the interests of the legacy players.