Internet Radio Threatened By New Fees

Newsweek
Internet Radio Threatened By New Fees
New copyright fees threaten to push Internet radio stations out of business—but they won't go without a fight.
By Brian Braiker

April 30, 2007 - As you read these words on your monitor, there is a decent chance that you’re also streaming a little online radio. After all, with an estimated listenership of approximately 50 million Americans per month, Internet radio has become a go-to destination for a fuller spectrum of music, an alternative to FM’s mind-numbing monotony. And if you are one of those listeners, mark May 15 on your calendar: it might well be the day that the music dies.

Last month the trio of Library of Congress judges that oversees copyright law’s statutory licenses decided that May 15 will be the date royalty fees owed by Web radio operators will be recalibrated. The Copyright Royalty Board changed rates from a percentage of revenue to a per-song, per-listener fee—effectively hiking the rates between 300 and 1,200 percent, according to a lawyer representing a group of Webcasters. "If this rate does not change, it will wipe out the vast majority of Web radio," Tim Westergren, founder of the music discovery service Pandora, tells NEWSWEEK. "If this stays, we’re done. Back to the stone age again." (Royalty Board Chief Justice James Sledge declined to comment on the case, which lawyers say they intend to appeal.)

The fee hike will only affect Internet radio, not terrestrial AM and FM, because of a strange wrinkle in copyright law: broadcast stations pay royalties only for the composition as a piece of intellectual property—these are the fees that go to songwriters through ASCAP, BMI and SESAC. But in 1995 the Recording Industry Association of America (RIAA) lobbied Congress to pass a law that would require an additional performance fee specifically on digital music. So Internet radio stations pay both the composition fee plus an additional royalty for the performance of the song—the actual act of streaming it online. This fee goes to record companies and artists through SoundExchange, an independent body set up by the RIAA to collect and distribute digital royalties. This is the fee that the Royalty Board has proposed raising. That there is a different fee structure for Internet and terrestrial radio strikes both Webcasters and SoundExchange boardmembers as inherently unfair—though for different reasons. Webcasters don’t want to have to pay more than their FM counterparts, while SoundExchange executive director Jon Simson would like to see terrestrial radio start paying the additional royalty. "The discrepancy doesn’t make sense," he says. "Terrestrial broadcasters should be paying performers."

Webcasters—a group that includes scrappy, do-it-yourself amateur DJs alongside deep-pocket corporations like AOL and Yahoo! Music—have gone into full counterstrike mode. The SaveNetRadio Coalition of listeners, artists, independent labels and Webcasters helped spearhead a letter-writing campaign that inundated Capitol Hill with 400,000 signatures demanding that a fairer royalty scheme be implemented. Last week that effort bore fruit: U.S. Reps. Jay Inslee, Democrat of Washington, and Donald Manzullo, Republican of Illinois, filed the Internet Radio Equality Act, which would overturn the Royalty Board’s decision. The bill would also establish an interim rate of 7.5 percent of revenue (which is what satellite radio pays) while copyright holders and Webcasters hammer out a new rate that "will allow distribution channels to crop up that would otherwise be strangled in the crib," says Inslee.

Perhaps unsurprisingly, SoundExchange’s Simson isn’t happy with the proposed legislation. "The bill is completely out of line and uncalled for," he says. "We have no interest in seeing Internet radio go away because they pay us significant royalties." Simson, and by extension the recording industry, doesn’t seem to be focused on the long tail of basement jocks and noncommercial radio sites streaming indie gems. Rather, SoundExchange claims in a statement that "the bill would ... result in a windfall of $50 million to mega-corporate Webcasters like Clear Channel and Microsoft at the expense of recording artists."

But Ian Rogers of Yahoo! Music (the Internet radio leader with 23 percent of the market’s listeners, according to Hitwise), says that "SoundExchange is just not dealing with the facts. Internet radio in its entirety is less than a $50 million industry. The amount of money I can make selling ads on my radio product is less than I will pay in royalties." Ironically, it's the smaller online DJs who really get stuck with a bill they can’t pay under a per-song, per-listener fee. The small Webcasters play lots of songs but don’t bring in as much advertising revenue as the corporate streamers—if they bring in any money at all. Rusty Hodge of Soma FM says he paid $20,000 in royalties under the old rate last year. With the Royalty Board’s decision, Hodge estimates his fees for 2007 will be $600,000 and closer to $1 million next year.

Nonprofit stations like National Public Radio affiliates pay a flat fee up until a certain number of listeners is reached, after which they have to pay the commercial rate—meaning some public radio stations may see their fees spike 10-fold. "There are some stations considering pulling the plug entirely," says NPR spokesperson Andi Sporkin. "We're the ‘No Justin Timberlake Zone.’ You're getting all these genres that aren't getting regular commercial airplay and though this decision certainly hurts the stations, it hurts listeners more."

But what about the musicians? David Byrne, the former Talking Heads frontman, offers a unique perspective as both a big-time artist and as a small-time host of his own not-for-profit online radio station. He says his station costs him about $2,000 a month in fees and estimates that once the Royalty Board decision goes into effect, his costs will jump 20 percent the first year. "I lose money on this," he tells NEWSWEEK. He also dismisses the notion that he’s giving away tunes to the detriment of performers—an argument advanced by SoundExchange and the Recording Artists' Coalition, a lobby group founded by Don Henley and Sheryl Crow. "My experience was that, yes, when a song is played a lot on the radio it generates some royalties. But what it really generates is that people know your work." Which, says Byrne, translates into album sales.

With May 15 looming large in the minds of Webcasters, Kurt Hanson of the Radio and Internet Newsletter is organizing a "Day of Silence." Tentatively scheduled for May 8, hundreds of radio sites large and small plan to take a day off from Webcasting to drum up support for their cause. Soma FM's Rusty Hodge will likely be one of them. "We’re the small guys, the pioneers," he says. Unfortunately for Hodge and his listeners, he may become a pioneer of a different kind this month: among the first to go quiet.