Webcasters Sing the Internet Radio Blues�Again

The effort to reform the royalty rate-setting process for streaming music over the Internet, it appears, has failed. The issue is back in the courts and Congress, which is where it all began three years ago.

The legal maneuvering has also left the music industry and webcasters right back where they were the last time the rates were negotiated in 2004: in a finger-pointing, fire-up-the-rhetoric, line-up-the-lawyers fight to the short knives.

Webcasters claim July 15, when the new rates are set to take effect, will be the very death of Web radio. The music industry, however, says its time for big webcasters to pay their fair share.

The dispute stems from a March ruling of the Copyright Royalty Board (CRB) setting royalty rates through 2010. Ironically, the CRB was created by Congress to avoid the acrimonious disputes of the past.

However, the first test of the reform effort appears to have all the earmarks of past battles.

“The big webcasters are painting a highly distorted picture in an effort to maintain extremely low rates and high profit margins,” SoundExchange, the music industry’s royalty-collection arm, claimed in an April 30 statement. The group contends Internet radio is no longer a nascent industry in need of nurturing through subsidized, below-market rates.

But Jake Ward of the SaveNetRadio coalition painted his own picture of a world of small webcasters threatened by an overreaching and greedy music industry. The new rates, he said, “will quite simply bankrupt most webcasters and destroy Internet radio.”

Or, perhaps, July 15 will be the day webcasters finally pay a fair market rate for using copyrighted material to build successful businesses.

Music labels and performing artists are doing the subsidizing. The 1998 Digital Millennium Copyright Right Act (DMCA) mandates a performance fee for copyrighted music streamed over the Internet. The fee is split evenly between the music label and the artist, providing a new source of revenue for musicians. Last year, SoundExchange collected approximately $18 million in online royalties.

With or without a rate increase those royalties will surely grow. According to Bridge Ratings, the number of Internet radio listeners jumped 26 percent last year with an average monthly listening audience of 72 million, up from 45 million in 2005. Bridge estimates that audience will double by 2010 and grow to nearly 200 million monthly listeners by 2020.

“The CRB executed its charge fairly and objectively without preference to any interested parties and fulfilled the intent of Congress to issue appropriate market-based rates for webcasters,” Michael Huppe, SoundExchange’s general counsel, said in a statement. “In return, webcasters receive the benefit of using millions of commercially released sound recordings that are the basis of their businesses.”

Under pressure from Congress, SoundExchange has already offered small webcasters — those with fewer than $1.25 million in revenue — the same rates they have paid since 2002: royalty fees of 10 percent of all gross revenue up to $250,000 and 12 percent for all gross revenue above that amount.

Without intervention from the courts or Congress, though, large webcasters still must face the music. The new royalty fees call for $.0008 per song streamed for 2006, $.0011 for 2007, $.0014 for 2008, $.0018 for 2009 and $.0019 for 2010. Most webcasters now pay a rate of $.0012 per stream. Huppe said the rate for 2010 reflects an 8 percent annualized increase in rates since 1998.

“Under these new rates, there is no Internet radio,” said N. Mark Lam, the CEO of Live365, a webcasting aggregator that claims to be the world’s largest Internet radio network. “We have trouble making money under the old rates. Nobody is making money in this business.”

Tim Westergren, the founder of Pandora, which claims 6.9 million listeners since its launch in November 2005, said his operation could, though very painfully, pay the new rates, “but that’s not true for most webcasters.” Although royalty payments are not made public, Westergren said Pandora was the second- or third-largest Internet royalty contributor last year.

Both Lam and Westergren favor royalty rates based on a percentage of revenue instead of the CRB flat fee. “That way a business can grow. The percentage just needs to be at a reasonable level,” Westergren said.

They also hardily endorse legislation introduced in April by Reps. Jay Inslee (D-Wash.) and Don Manzullo (R-Ill.). The Internet Radio Equality Act (IREA) would vacate the CRB decision and apply a 7.5 percent revenue rate through 2010. In a little more than a month, more than 100 lawmakers have signed on as co-sponsors.

“This titanic rate increase is simply untenable for many Internet radio broadcasters,” Inslee said when he introduced the legislation. “There has to be a business model that allows creative webcasters to thrive, and the existing rule removes all the oxygen from this space.” Similar legislation has been introduced in the Senate.

Not surprisingly, SoundExchange opposes the legislation.

“The true beneficiaries are the mega-multiplex services like AOL, Yahoo, Microsoft and Clear Channel, which will benefit from rates substantially lower than those set by the Librarian of Congress in 2002,” John Simson, executive director of SoundExchange, said in a statement after the bill was introduced.

If Congress does intervene in the royalty rate dispute, it certainly wouldn’t be the first time. After all, it was lawmakers’ reform efforts in 2004 that prompted the current brouhaha.

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