Potential Royalty Deal Draws Fears on Cellphone FM Chips

The music and radio industries are closely reviewing the deal, with an eye toward formalizing it. The cellphone radio part of the pact is drawing concern from CEA and CTIA. Executives of the associations said the groups would oppose a mandate for analog FM chips or HD Radio chips for digital broadcasts. “It’s a bit absurd,” CEA President Gary Shapiro said. It’s “as if a century ago the horse and buggy makers got Congress to require that every car be led by a horse,” he said. CTIA “would be very opposed to any requirement for wireless devices to include an FM chip,” Vice President Jot Carpenter said.

That sets up the CE and wireless industries for a fight against music labels and broadcasters if a performance royalty deal includes a request to Congress to pass legislation requiring radio chips on cellphones, as radio stations want. Stripping that from a deal would kill it, an NAB spokesman said. “If there were to be a proposed deal, it would be a deal-breaker if the radio-enabled chips provision were not included in the legislation,” he said. “Without that provision and without RIAA’s support for that provision, NAB would not go forward with support for a new performance royalty.” Members of the music industry continue to examine the terms to see if a deal would be palatable, said spokesmen for MusicFirst and RIAA. There likely will be discussion of the wireless issue that’s on the table, a MusicFirst representative said. “I would anticipate there will be discussion involving the carriers and the folks at their trade associations.”

The terms of a possible pact between NAB and MusicFirst, whose members include RIAA, include a requirement to put radio chips on all mobile phones, http://xrl.us/bhvw5h. Broadcasters have long sought the inclusion in cellphones of chips to get all FM broadcasts, and they say that would directly send emergency alert warnings to wireless consumers even when cell towers lose power. The WARN Act doesn’t have such a requirement, and an FCC advisory committee on wireless alerts decided not to pursue the strategy advocated by broadcasters, noted Carpenter.

"If consumers want radios -- which very few apparently do, since it’s not been a popular feature when offered -- then they'll ask for them,” Shapiro said. “It’s basically been a dying industry of radio broadcasters” trying to settle on performance royalties “as a way of getting the music industry off their back for a Congress,” he added. Cellphone models that receive radio broadcasts are “certainly not among the top sellers,” Carpenter said. “The market has evolved in a different way than I think the broadcasters would like it to, to an Internet-based delivery mechanism,” and carriers shouldn’t change “our business model to accommodate their challenge."

CEA and CTIA said they wouldn’t oppose a deal under which the music industry would encourage wireless carriers and cellphone makers to activate more FM chips in phones and put them in models that lack them. “I think it’s the mandate that bothers CTIA’s members,” Carpenter said. “Competition for space on the circuit board on the device is fierce. I don’t think that the broadcasters or public policy makers ought to be dictating the form and function of these devices to that degree.” The CE industry has “a good history with radio,” but “we don’t appreciate when the government steps in and tells us what features to put on our products,” Shapiro said. “I'm fairly confident that Congress would not go along with it.” Any such legislation won’t happen this year and, with the GOP expected to add seats in the midterm elections, “Republicans aren’t going to require radios in telephones” in the next Congress, he said.

It’s “a questionable assumption” that demand is lacking for wireless devices with radio chips, the NAB spokesman said. “We think it would be something that public policy makers would support in terms of having the immediacy of the local lifeline service that radio stations would provide.” About 35 percent of U.S. cellphones have analog FM chips, most of which haven’t been activated by carriers, said CEO Jeff Smulyan of Emmis Communications, which owns 25 radio stations. “It’s something that costs almost nothing, and when people have it they like it,” he said. “I have been sort of dancing around with CTIA and some of the wireless companies” for several years on the issue. The cellular industry would benefit if more chips were installed and activated, because that would reduce use of wireless spectrum for streaming music, since FM chips instead use radio spectrum, and would generate revenue from sales of music tagged by wireless consumers and then purchased using the phone, he said.

"The chips in cellphones are more important to our industry than anything anyone could imagine,” Smulyan said. “I've been amazed at the number of people who have said, ‘If we can really get this done for 1 percent, this really makes sense.'” That’s the average performance royalty fee which broadcasters would pay. It would cost the industry $100 million annually, versus an estimated $2 billion if the Performance Rights Act (HR-848) passes, wrote Chairman Peter Smyth of Greater Media, which owns 23 stations, http://xrl.us/bhnnce. “Even without the value of the FM chip, this is important,” said Smulyan. “With the FM chip, it makes it a no-brainer."

Lawyer Francisco Montero hasn’t heard from any radio clients opposed to the potential deal, though some have been puzzled over the NAB’s about-face in negotiating over a royalty it long opposed, he said. “The feedback I've gotten is, `Explain this to me,’ not so much `No, I refuse to do this’ or ‘I think it’s bad idea,'” said Montero, of Fletcher Heald. “It’s admittedly a thorny settlement, because you have to bring in these third parties,” he said of the wireless industry.

It’s always best if rivals can reach a deal before legislation is enacted, though NPR is working with members of Congress to exempt noncommercial radio from performance royalties, Vice President Mike Riksen said. “We're not convinced that this performance right should become applicable to public radio,” he said. “The House and the Senate legislation today has begun to carve out a special place for public radio and not-for-profit radio. That clearly is an action that we are grateful for and needs to be built on if this compromise is to move forward.”