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Web Radio: Time to Sign Off?

Higher-than-expected royalty rates will force U.S. webcasters to close up shop

3 min read

On 20 June, James Billington, head of the U.S. Library of Congress, surprised the music world when he settled on a copyright royalty rate for streaming music on the Web. The rate, at a modest 70 millicents (US $0.0007) per song per listener, can add up quickly. Many Web radio stations would have to pay out more in royalties each year than they could make in advertising.

By the next day, one leading Web radio station, SomaFM (San Francisco), shut down, and many more are expected to follow by September, when the rate goes into effect.

The collapse of Internet radio will be especially unfortunate. The biggest stations now have large—and growing—audiences for music that in many cases just can't be found over the airwaves. For example, many major U.S. cities don't have a single commercial classical music station such as the Internet's Beethoven.com.

The first bad news for Web radio came in February with a ruling from a copyright arbitration royalty panel (CARP). The panel was set up by the U.S. Copyright Office to satisfy a 1998 law, the Digital Millennium Copyright Act. Its report, which called for even more ruinous rates, was set aside on 21 May by Billington, who as overseer of the U.S. Copyright Office has the ultimate authority for setting statutory copyright rates.

The arbitration panel had recommended two rates: $ 0.0014 per song per listener for Web-original programming, and half that for webcasting a broadcast station's programming. Billington, in his 20 June ruling, rejected the distinction and set everyone's rate to the lower amount. Still, that turns out to be calamitous for stations with little revenue, which is almost all of them.

Successful Web-only stations like Beethoven.com, WOLF FM (”the hottest mix of ’70s and ’80s music”) and SomaFM (adult alternative music) have, at any given moment, at least 1000 simultaneous listeners, with more than 500 000 song-listeners monthly. At 70 millicents apiece, that comes to more than $140 000 per year. By comparison, WOLF FM, for example, took in $11 000 in advertising in all of 2001.

How do over-the-air radio stations thrive with such high copyright royalties? They don't. That is, they thrive, but they don't pay the same royalties as the webcasters must now pay. In the United States, broadcasters pay royalties only to the writers of songs. It is royalties to the record companies that webcasters must now pay, in addition to the songwriter royalties they've been paying all along.

Most observers expected the new sound recording royalty to be based on income (as is the songwriter royalty), coming in between 3 and 5 percent of a Web station's advertising revenues. That would have allowed the webcasting businesses to grow, says Steve Wolf, owner-operator of WOLF FM. ”It took 14 years for traditional radio to be profitable,” he says. ”If they had to pay large royalties like this in the 1920s and ’30s, would they have ever even gotten off the ground?”

A lonely marketplace

Billington, in his June ruling, points out that he was constrained by a provision of the 1998 law. New royalties, it says, must ”represent the rates that would have been negotiated in the marketplace between a willing buyer and a willing seller.” Such an analysis looks to actual transactions. Unfortunately, there have been very few to date. In fact, the CARP used only one, an agreement between the Recording Industry Association of America, representing major record companies, and Internet portal Yahoo (Sunnyvale, Calif.).

Whitney Broussard, a New York City entertainment lawyer, notes that the interests of large Internet services like Yahoo or AOL Time Warner aren't the same as those of small webcasters. ”Companies like AOL were worried that they'd have to pay a percent of all their advertising revenue, much of which isn't related to webcasting,” he says. ”They prefer a per-unit charge.”

Broussard and others fault the willing-buyer-and-seller standard itself. ”Most CARP panels use a ’fair market value' basis,” he told IEEE Spectrum. In such an evaluation, similar or comparable payments can be considered, notably those in Europe, where broadcast radio stations already pay both types of royalties. There, the sound recording fee is typically less than the songwriter fee. In contrast, in the United States the sound recording royalty is now 30 times the songwriter royalty.

Europe was also on the mind of Mary McCann, vice president of radio at iM Networks Inc. (Mountain View, Calif.), a maker of software for tuning to Internet music stations. ”Even if U.S. stations go dark, there will still be plenty of Internet radio,” she says. ”It just won't be produced in the U.S.”

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