Internet radio to fight royalty ruling

Regulatory board's decision to increase fees has some worried about the future of Web-based radio, but this week broadcasters begin to battle back.

By Jeff Cox, CNNMoney.com contributing writer

NEW YORK (CNNMoney.com) -- Roger LaMay sees his radio station as a sunny alternative island standing out amid a gray ocean of mainstream pop music.

As general manager of WXPN-FM at the University of Pennsylvania, LaMay's station offers an eclectic array of folk, jazz, blues and alt-rock via its Web-based radio broadcasts to consumers around the globe that they might not get otherwise.

But LaMay's little island got hit last week by what some see as a regulatory tidal wave.

After nearly two years of legal wrangling, the Copyright Royalty Board (CRB), an oversight body created by Congress to settle royalty disputes in the music business, issued a new, higher fee structure for Web music broadcasts on March 5 that Web radio executives see as crippling.

By LaMay's estimates, WXPN could be paying about $1 million a year in royalties under the CRB's ruling. For small publicly funded stations and Web radio startups alike, that could mean the end of streaming, he said.

"We're a nonprofit so we're willing to lose a little money or break even. We're also firm believers in the thinking that musicians should get paid for what they do," LaMay said. "But this decision is telling people, 'Don't do this. Don't go into this business. Don't give these artists airplay'."

This week, Web radio will begin fighting back against the new royalty fees. On Friday, National Public Radio officials will file a petition for reconsideration with the CRB. If that fails, NPR has vowed to bring whatever legal challenges necessary to overturn the decision.

NPR spokeswoman Andi Sporkin called the ruling a "stunning, damaging decision for public radio" that would cost stations 20 to 30 times what they are paying now in royalties.

Web-based broadcasters dig in their heels

Tim Westergren founder of Pandora, one of the leading Internet radio outfits, said he too will challenge the CRB decision in the courts and Congress. His site allows listeners to create their own "stations" by entering what type of music or artists they want to hear. The CRB ruling could jeopardize Pandora's existence, Westergren said.

"We're definitely going to be a part of this (challenge) collectively," he said. "For us this is the difference between existing and not existing, so we're going to do everything we can possibly can."

Smallwebcaster.org, an online community of Internet broadcasters, also has mobilized a lobbying effort to get Congress to overturn the CRB fee structure.

Web broadcasters want the Web radio royalty fees returned to their original structure which was established in 2002. At that time, the Copyright Arbitration Royalty Panel set fees at 0.07 cents per performance for AM or FM signals that simultaneously aired online, and 0.14 cents per performance for Internet-only broadcasts. Those fees were made retroactive to 1998.

Under the new guidelines, rates for commercial stations will be set retroactively for 2006 at 0.08 cents per performance, climbing to 0.19 cents by 2010. For public broadcasters the CRB set fees at a flat $500 a month, but only for a set level of listening hours per month, which LaMay said his station exceeds by nearly four times. Part of the 2002 ruling allowed small stations to pay 10 to 12 percent of their revenue, rather than a per-song fee.

Once a public station surpasses its allocation of listening hours, it must pay commercial royalty fees. LaMay says that would cost about $1 million in royalty fees by the time the CRB rates hit their peak.

The fees are charged per performance, or each time a song is streamed to an individual, a measure that opponents say fails to accurately gauge Internet listenership.

The CRB ruling came following testimony that began in May 2005 from record company executives, major music-streaming outlets like AOL, which (like CNNMoney.com) is a division of Time Warner (Charts), Yahoo (Charts)! and MSN, as well as mom-and-pop operators.

Among those who testified before the CRB on behalf of streamers was Adam Jaffe, dean of arts and sciences at Brandeis University. Jaffe faulted the underlying logic behind the decision, which likened listening to a song on an Internet radio stream more closely to buying a CD than to hearing a song on the radio, where stations pay royalty fees only to composers and publishers, but not to artists and record labels.

"The question is what is the appropriate standard for what should be paid," Jaffe said. "The RIAA (Recording Industry Association of America) and the record companies basically want to make the argument that this Web-based streaming is like selling CDs or downloads of MP3 files and they should be compensated at the same rate. I think that's the wrong way to look at it."

For the music industry, though, the clamor from streamers is much like what happened when webcasting rates first took effect in 2002.

The same old song?

"The webcasters then were saying that they were going out of business, and I think instead what you've seen over the last five years has been an explosion of webcasters who have come online. You've seen a tremendous jump in both listenership and also in revenue," said Willem Dicke, spokesman for SoundExchange, a performance rights organizations that collects royalty payments for entertainers and provided testimony during the CRB hearings.

"So no, I don't think that this is any kind of a death knell for the webcasting industry at all."

Dicke said Web radio revenues has increased 10-fold over the past four years.

With the new CRB ruling, SoundExchange would profit substantially. An analysis by BetaNews, a site that follows Internet media trends, showed that SoundExchange would collect $2.3 billion annually in royalties in 2008. Another analysis, from the Radio and Internet Newsletter (RAIN), suggests that the new rates could cost stations 100 percent or more of the revenue that Internet stations generate from streaming.

Large Internet-only providers like AOL and Pandora would each pay SoundExchange upwards of $20 million a year in royalty fees, RAIN estimated.

LaMay said the financial crunch the fees would place on small stations would have a chilling effect on music not normally heard on mainstream radio.

"We play artists (on the Internet) that we're not even playing a lot on our own air," he said. "These are artists that are getting exposure they wouldn't otherwise get."

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.