Web radio sites go silent in protest

New licensing fees could doom Internet radio, but webcasters are fighting back with a 'Day of Silence.' Business 2.0's Chris Taylor investigates.

By Chris Taylor, Business 2.0 Magazine senior editor

(Business 2.0 Magazine) -- If, like me, you're a fan of Internet radio sites such as Pandora or Live365, you'll have to find something else to listen to Tuesday. Dozens of online broadcasters have stopped playing music, in protest of a new levy the government and the music labels are about to impose.

An overly dramatic gesture? A petulant response to a little extra taxation? Perhaps -- until you discover that the new fee appears to add up to more than the annual revenue of all Internet radio sites put together. That ludicrously high bill could well cripple this promising young industry in its crib.

To recap, this brouhaha started at a little-noticed hearing in March before a panel of three retired Washington judges. Under the Digital Millennium Copyright Act, this panel must meet every five years to determine how much webcasters -- everyone from Yahoo (Charts, Fortune 500) all the way down to small stations like KCRW -- must pay the record industry in royalties for playing their artists' songs.

This year the panel determined that these fees would go up by roughly 30 percent both this this year and next. But that's not what's causing the ruckus.

Tucked into the record industry's request for a fee hike was a suggestion, offered without explanation, that webcasters should cough up a minimum $500 "administrative fee" for every channel they broadcast online.

Attorneys for the webcasters thought this was such a patently ludicrous idea that they didn't even bother to respond to it. After all, "channels" don't mean the same thing online as they do in the old broadcast world.

I can go to Pandora right now and set up a dozen or so channels in a minute, each one based on a favorite artist or song. Since it is Pandora's algorithms that determine which similar songs are played on each channel, rather than any station programmer, the possibilities are practically limitless. Last year, for example, RealNetworks' Rhapsody service streamed more than 400,000 channels.

The webcasters' lack of response was a huge mistake. The three-judge panel accepted the administrative fee without question, backdated it to January 2006, and have since flatly refused to return to the subject. The fee goes into effect July 15.

Internet radio stations frantically crunched the numbers: it appears that Yahoo, Pandora, and RealNetworks will have to spend $1.15 billion per year on the administrative fee alone. Meanwhile, SoundExchange, an intermediary group set up by the record labels that collected $20 million in royalties last year, will soon be able to afford plenty of administration.

"To demand more than 100% of profits [for Internet radio operations] is insanity," says Tim Quirk, RealNetworks' vice president of programming. "It's worse than our worst-case scenario." The revenue that RealNetworks derives from Internet radio would not cover the fees.

Quirk still doesn't quite believe the recording industry intends to charge the administrative fee. He says they're likely using it as a bargaining chip in exchange for an eventual arrangement that will guarantee more air time for their favored artists.

SoundExchange's official response: the vast majority of their royalty payments come from the deep-pocketed giants like RealNetworks (Charts), Yahoo, and AOL; and that webcasters simply want to weasel out of their obligations to artists in order to protect their profits. (To drive this point home last month, SoundExchange offered slightly lower royalty rates for small web broadcasters).

The webcasters have filed for an emergency stay of the ruling with the U.S. Court of Appeals, and a bipartisan bill with 120 sponsors is wending through Congress. The bill would bring Internet radio royalty fees in line with those for the satellite radio industry, which pays the music industry just 7% of its total revenue.

Some congressional offices are reporting that this is the topic on which they receive the second-largest amount of mail from constituents, after the Iraq war. Still, hearings on the bill won't get started until later this summer.

So is Tuesday's day of silence a mere protest, or the sound of things to come in Internet radio? Stay tuned.

Chris Taylor, a senior editor at Business 2.0, blogs about what's next in business on Future Boy. Top of page

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Most stock quote data provided by BATS. Market indices 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.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.