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Internet Radio Saved by Royalty Resolution

Internet radio stations are likely to be breathing a collective sigh of relief now that royalty issues have been resolved after two years of debate.

Webcasters, artists and record labels finally came to an agreement on royalty compensation, that, while not ideal for online radio stations, will at least ensure their survival.

Prior to the deal, the existence of companies such as Pandora had been jeopardized by a change in rates charged by music owners for streaming Internet radio. A number of online firms -- as well as terrestrial radio stations who streamed their music online -- claimed the fees, enacted in 2007, were unfair and cost-prohibitive. Now, it seems, after years of sparring and legal threats, both sides have reached a middle ground.

"This is it -- the deal is done, and it's funny because after so long, it takes a while for it to sink in," Pandora founder Tim Westergren told InternetNews.com. "But we are relieved, happy and super excited about the resolution because it means we now have long-term security, and really it would not have happened without the huge level of support we got from our listeners who showed up in Washington."

The key part of the resolution involves some compromise by both parties involved. SoundExchange, the firm set up by the major record labels to collect and distribute digital royalties, agreed to a 40- to 50-percent reduction in the per-song-per-listener rate. Pandora, on the other hand, will pay either a 25-percent share of its U.S. revenue or the new per-song-per-listener rate -- whichever is higher.

To help mitigate the new costs associated under the deal, Pandora is also implementing a fee for power users of its free music streaming. Listeners who use Pandora's free version for more than 40 hours a week will be charged $0.99 for unlimited use for the remainder of the month. The company said the affected users total about 10 percent of its user community.

"I think it's a great example of compromise and democracy in action," Westergren said. "Artists, labels, members of Congress, everyone around the table, collaborated to put together a workable deal. Nobody walked away saying, 'I won. This is a slam-dunk,' but I think it's a good example of compromise in a space that has not been a bastion of that for a long while."

The announcement will be binding on all copyright owners and performers and will be available to other eligible commercial Webcasters once the agreed-upon rates and terms are published in the Federal Register by the U.S. Copyright Office.

The deal was reached under the authority of the Webcaster Settlement Act of 2009 and applies to all commercially released sound recordings Webcast by these entities under the statutory licenses provided by Sections 112 and 114 of the Copyright Act.

"More than two years in the making, this is an agreement we're proud of because it shows that both sides can address the business concerns of the Webcasters while giving artists and copyright holders the potential to share in the revenue growth of Webcasters," John Simson, executive director of SoundExchange, said in a statement. "Time will tell if revenue sharing is the right move for both the recording community and Webcasters, but we're willing to take the risk in the hope that artists, rights holders and Webcasters can all benefit."

As for the future of Pandora, Westergren said while the company is relieved to be on solid footing, its core strategy won't change that much.

"Our whole approach was to build the business as quickly as possible, and if things didn't work out, we'd just hit the wall going 100-miles-an-hour," he said. "But at least now the burden has been lifted, and it will be huge because partners and advertisers will be more willing to sign on because they know we'll be here."

And, despite the uncertainty hanging over the company for the past two years, Pandora has been doing better than ever financially -- in large part due to the booming smartphone sector, Westergren said.

"We're having a great year, we're doubling our revenue over last year, and the single biggest development for us in the past year was the arrival of mobile," he said. "We add between 60,000 and 70,000 new listeners a day, and over half are coming from the combination of the iPhone, BlackBerry and Palm Pre."

Pandora was one of the few applications on the Palm Pre when it launched June 6.

But not all the issues regarding royalty issues and how they pertain to Internet radio have yet to be resolved on Capitol Hill, though. There's a new effort in Congress aimed at fixing the broader issue of how artist are compensated across all forms of radio.

Westergren said the current system is unfair to both Webcasters such as Pandora, which he said pay higher royalties than other forms of radio, and to artists, who get no money when music is played on AM/FM radio.

He added that a new bill, the Performance Rights Act (H.R. 848) would employ "a level playing field, a truly fair system."

The bill, introduced early this year by Rep. John Conyers (D-Mich.), would enact a flatter fee structure for terrestrial and online radio stations and has been recommended for a House vote.

Meanwhile, the Pandora chief said that while media attention is focusing on the fact that Webcasters aren't going to have to shutter their businesses, independent artists also stand to gain from this week's deal.

"Typically, the Internet stations play much more independent music -- 70 percent of the music we play is from independent labels," he said. "These artists aren't getting a lot of air play on traditional radio, so they need Webcasters to thrive. It's absolutely vital to their future."