Will new royalty rates kill online radio?

Small Net radio stations fear they will go out of business

Will a recently approved increase in music royalty fees for Internet radio operators kill online radio?

The answer is yes, according to operators of Internet radio stations who are railing against a March 2 decision to increase music royalty fees for Web radio operators.

But that's not the case, said a spokesman for SoundExchange, the group set up by the Recording Industry Association of America (RIAA) to collect those royalties for performers and record companies.

Under a ruling (PDF format) by the Copyright Royalty Board of the Library of Congress, royalty rates will be changed from a percentage of revenue to a per-song, per-listener fee. The entities affected include pure play Internet radio stations, digital music stations like Pandora.com and traditional broadcast stations that also stream their programs.

"In our case, we've been operating for the last five years under what's called the small commercial webcaster royalty rate, which is something that Congress sort of forced SoundExchange to offer small webcasters so they didn't go bankrupt five years ago," said Kurt Hanson, who runs Chicago-based AccuRadio.com and also publishes the Radio and Internet Newsletter. "That rate the sound recordings royalty is about 12% of revenues. Broadcast radio pays a composer royalty and has never had to pay the sound recordings royalty," Hanson said.

Under that royalty agreement, which has been in place since 2002, the rates paid to performers were between 6% and 12% of a station's revenue.

But the revenue percentage deal negotiated between the RIAA and Internet radio stations in 2002 expired, and after unsuccessful negotiations between the two entities, Congress created the Copyright Royalty Board to come up with new royalty fees.

The new rates charge $.0008 per song per listener for 2006 (the royalty board's ruling is retroactive to 2006); $.0011 in 2007; $.0014 for 2008; $.0018 for 2009; and $.0019 for 2010. For multichannel operators like Pandora.com, a service that helps users find music on the Web, the fee is a flat $500 per radio channel for a particular number of listening hours per month.

Hanson said that under the previous royalty rate, his radio station paid $48,000. Under this decision, AccuRadio's royalty obligation for 2006 would be $600,000, he said.

"So we're bankrupt," he said.

Hanson said Web radio operators are considering their options, which could include an appeal of the board's ruling.

For multichannel operators like Pandora.com, the situation is much worse, Hanson said. With Pandora.com, a user enters the name of an artist or a song, and the service makes a radio station that plays songs that share musical characteristics associated with the artist or song provided. From there, the user can fine-tune the station to his taste by giving Pandora feedback on the songs it plays. A user can make up to 100 unique stations.

Hanson said that under the new rate structure, Pandora would have to pay more than $3.5 billion because of the $500 minimum per channel. He said Pandora's 6 million users could set up as many as 100 of their own music channels.

Hanson said the new ruling would put the online radio industry out of business.

But SoundExchange spokesman Willem Dicke said Web radio operators have cried wolf before. He said they've been saying they would be going out of business since 2002. Meanwhile, he said, advertising revenues for Web radio operators have increased significantly over the past several years, from approximately $50 million in 2003 to $500 million last year.

"We see this as a fair and balanced decision," he said.

Pandora founder Tim Westergren, however, strongly disagreed.

"It's an utterly ridiculous ruling that renders any form of Internet radio non-economic," Westergren wrote in his blog on the Pandora Web site. "This is a terribly ill-conceived attempt to crush a powerful and positive grassroots movement that is sweeping across the music world. The record labels' struggles have nothing to do with online radio and killing it will further hurt their business, not help it."

In a statement e-mailed to Computerworld, Pandora CEO Joe Kennedy added, "The rates are disastrous. I'm not aware of any Internet radio service that believes they can sustain a business at the rates set by this decision. The only reason the services are not shutting down today is the belief that rationality will ultimately prevail here, either through appeal or congressional intervention. If these rates are left standing, satellite and broadcast may be all that are left. Broadcasters pay no sound recording royalties at all and, at the new rates, Internet radio would have to pay four to five (times) the rate that the satellite companies pay."

Broadcast radio station KCRW in Santa Monica, Calif., a nonprofit, tax-exempt organization and an affiliate of National Public Radio, also is affected by the rate change because it streams its programs online. For nonprofits like KCRW, the board set a $500 annual flat fee per radio channel for a certain number of listening hours per month.

"According to our calculations, we would owe $188,000 in royalty fees alone for 2007, and we would owe $138,000 in royalties in 2006," said KCRW spokesman Anil Dewan. "One of the questions is will we have to put the programs behind a gateway that is available to members only? But that runs antithetical to who we are as public broadcasters, and it's not where we want to go."

Copyright © 2007 IDG Communications, Inc.

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