Pandora vs. FM: A case of picking winners and losers

by on October 11, 2012 · 5 comments

A few weeks I wrote an [intentionally provocative post]( comparing copyright to Solyndra. My argument was that just as Congress has a knowledge problem and a public choice problem picking the right technologies to subsidize, so does it have these problems when it comes to picking winners and losers when it comes to setting out the contours of copyright.

I’m grateful for all the [wonderful feedback]( I got on that post, and I agree with those who pointed out that a problem with my analogy was that unlike subsidies to Solyndra, copyright doesn’t pick particular politically connected individuals or companies to privilege. I think it’s much more accurate to say that Congress can use copyright to privilege certain classes of well-organized industries or companies.

A case in point that shows how Congress picks winners and losers is being [debated right now]( the framework that governs digital music broadcasting royalties for satellite radio and internet radio stations like Pandora. Today you pay a different royalty rate for playing a sound recording (like the lasted LMFAO opus) depending on what kind of radio station you are. Satellite radio stations pay 6 to 8 percent of their gross revenues each year in royalties. Pandora, however, pays around 50 percent, and it will likely be more next year. Meanwhile, traditional AM and FM radio stations pay nothing, zip, zero, zilch.

I won’t get into the public choice problems that may have led to this situation, but the fact is that one legacy industry is not just being subsidized with free access to an essential input (sound recordings), but it is also protected. That protection comes at the expense of a new and innovative industry–internet radio–that is being charged punishing rates for the same essential input.

My colleague Matt Mitchell recently published an excellent paper entitled [The Pathology of Privilege: The Economic Consequences of Government Favoritism]( that catalogs the different ways government has favored particular industries. He also shows how this behavior “misdirects resources, impedes genuine economic progress, breeds corruption, and undermines the legitimacy of both the government and the private sector.” The uneven playing field in the digital music space fits right in with the type of privilege he discussed.

Conservatives and libertarians who are wary of such government extensions of privilege should keep their eye on copyright as the source of many such imbalances.

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