A House of Representatives Judiciary subcommittee today held a hearing on issues involving the use of copyright sound recordings and the compensation paid to copyright owners and recording artists by various radio platforms. While the focus of the hearing was the recently-introduced Internet Radio Fairness Act -- which concerns royalties webcasters pay -- subcommittee members and some witnesses spent at least as much time talking about broadcast radio's long-time exemption from paying royalties on sound recordings.

(The written testimony of the six hearing witnesses (see today's early story) is available on the Judiciary Committee's website here (the witnesses' names link to pdf files). Follow-up questions from subcommittee members and discussion followed the witnesses' testimonials.)

The Internet Radio Fairness Act (IRFA), among other measures, would require Copyright Royalty Judges, when determining royalties for web radio, to use the same legal standard (known as 801(b)) they use for satellite radio and cable radio royalties. Under current law, CRB judges are instructed to try to set royalties at a "fair market value," using a legal standard known as "willing buyer willing seller."

Many committee members, most notably Rep. John Conyers (D-MI) and Rep. Howard Berman (D-CA), seemed unwilling to consider the terms of the IRFA while broadcasters enjoyed an exemption from paying labels and performers for music. Witnesses Michael Huppe (SoundExchange president) and renowned producer  Jimmy Jam themselves willingly encouraged this line of discussion.

Conyers hoped the discussion would be a "catalyst for formulating" an AM/FM obligation. The outgoing Berman went as far as calling testimony from Hubbard Radio President/CEO Bruce Reese (who also represented the National Association of Broadcasters) "disingenuous" -- for asking for "fairness" for webcast royalties yet not acknowledging an "obligation" to pay labels and performers for over-the-air play.

Venrock investment partner David Pakman (pictured above) testified to the difficult economic climate for standalone webcasters. "We've resisted investing" in digital music "solely because of the state of music licensing," he said, calling it "perilous" and "overburdensome." He said his firm is "skeptical of the profitability of a standalone digital music service," being unable to point to a single profitable standalone Internet radio service. This point returned later, when Rep. Jason Chaffetz (R-UT, who introduced the bill in the House) somewhat heatedly challenged witness Huppe to try to name another successful webcaster.

In regards to IRFA, witness Dr. Jeffrey Eisenach (an economist and principal of Navigant Economics, pictured left) attacked the 801(b) standard as "harmful" to the public since it doens't "maximize the resources" of the marketplace. He testified that 801(b)'s objective to minimize disruption "guarantees webcasters a profit," and that he could find no valid basis in his research for forcing content creators to "subsidize digital music." His solution for Pandora's profitability is simply "to sell more ads."

Pakman, however, challenged the "open market" ideal of the "willing buyer willing seller" standard, in that "we don't have a market." He described the reality of three major record labels as "concentrated" sellers, while Pandora exists largely as one standalone buyer. "Rightsholders should encourage healthy competitive market -- which demands an ecosystem of hundreds or even thousands of licensees."

Joseph Kennedy, Pandora CEO, was pressed -- by both Rep. Sensenbrenner (R-WI) and Rep. Jerrold Nadler (D-NY, who is drafting legislation in opposition to the IRFA, called the Interim FIRST Act) -- as to why Congress has been repeatedly called by webcasters to settle the royalty issue, when it should be handled by the marketplace. Kennedy stressed his company's willingness to live with the deals it willingly entered for past and current rate terms. "But there's unfinished business here," he added. In regards to the upcoming rate-setting for the next term, Kennedy said, "the process is still broken."