Internet radio gets a reprieve

NEW YORK (CNNMoney.com) -- Black Sunday has come and gone, and Internet radio has managed to live and play for another day.

July 15 had been the deadline for a new set of royalty fees to kick in that would have raised rates for some Web-based stations by 300 percent or more. Many stations said they could no longer operate under the new fee structure, and some smaller broadcasters already have shut down.

But months of brinkmanship between Internet radio operators and recording industry representatives ended late last week with little more than a whimper as most stations kept running while negotiations progress toward a workable compromise. SoundExchange, the umbrella organization that collects royalty fees for the recording industry, agreed to continue negotiations on the new rates with hopes of reaching a deal that will please everyone.

Industry analysts believe the dispute, thought by some to be a potential deathknell for Web broadcasting, or streaming as it is often referred, is cooling off toward a mutually beneficial conclusion. They contend the true endgame could be an effort to target only the largest broadcasters while allowing mom-and-pop operators to continue under the previous and less onerous royalty structure.

"It's an interesting situation because SoundExchange has an obligation to maximize the royalties it collects and pays," said Cydney A. Tune, an entertainment and intellectual property lawyer with Pillsbury, Winthrop, Shaw and Pittman in San Francisco. "But it has to be careful because this is a new venue and new space. If you drive these players out of business, you're not going to be collecting any royalties."

Tune said negotiations are the most likely way to end the impasse, as legislation and litigation both look to be ineffective solutions.

SoundExchange spokesman Richard Addes confirmed the agency is in negotiations both with smaller operators and officials at the Corporation for Public Broadcasting, which has an offer on the table it hopes is accepted as payment for National Public Radio stations and other nonprofit online broadcasters.

He said the proposal on the table with smaller broadcasters - those with less than $1.2 million in annual revenues - would bring back the fees to the level prior to the March decision that raised them.

However, large commercial webcasters like Time Warner (Charts, Fortune 500)-owned AOL and Yahoo! (Charts, Fortune 500) are unlikely to get a break. A spokesman for Time Warner, also the parent company of CNNMoney.com, said the company was disappointed in a federal judge's refusal last week to stay the royalty increase but unsure of what impact it will have.

"We are talking to small webcasters and representatives of public radio to see if we can reach some kind of acceptable compromise, but everybody else is going to be bound" by the new rates, SoundExchange's Addes said.

Addes was quick to brush off any talk of a moratorium on paying the new fees, as was reported in some areas over the past several days. He did note, though, that many operators were weighing their options in the face of the negotiations, and SoundExchange is not aggressively pursuing payment from operators that hadn't submitted their royalty checks.

Internet radio operates under a complicated fee structure that, prior to the new rates, charged terrestrial stations .07 cents per song and Web-only stations .14 cents. The new fees raised the rates to .08 cents retroactive to 2006 and escalating to .19 cents by 2010. More siginficantly, the new rates applied a $500 per station monthly minimum that would sharply escalate after a certain number of plays had been reached.

But with a cap proposed for the minimum and movement on the new fee structure for smaller stations, progress has been made.

"We're not turning off," said Tim Westergren, CEO of Pandora.com, one of the leading Internet stations. "Obviously we're very eagerly entering a new phase of negotiations. We think something important has happened."

Westergren said it was his impression that SoundExchange would not go after royalty payments until after negotiations are completed, but Addes noted that the company has no legal authority to wave off the royalty fees.

Tune said operators who don't pay the royalty fees now proceed at their own peril. Should negotiations break down, those in arrears could be charged substantial late fees.

The breakthrough between Internet radio and SoundExchange happened Thursday during a session set up by U.S. Rep. Edward J. Markey, a Democrat from Massachusetts. Markey, according to those at the meeting, encouraged the two sides to settle the disagreement between themselves or Congress would intervene.

That was enough to push both sides closer to a settlement. But Andi Sporkin, vice president for communications at National Public Radio, which would have been hit hard by the fee increases, said more work needs to be done.

"NPR and CPB are confident that public radio stations can continue their music streaming operations for the next three months as good faith discussions are ongoing about the structure and amount of the ultimate fee," she said. "At this time, public radio stations will continue music webcasting without changes to their current operations."

Trouble began in March when the Copyright Royalty Board, a government agency created to oversee royalty rules, instituted the new fee structure. Changing the $500 monthly minimum was seen as a critical issue in bringing the two sides to the bargaining table.

SoundExchange had previously put forth a proposal on per-channel $500 monthly minimums that Internet broadcasters said would cripple their industry. SoundExchange has proposed capping the minimums at $50,000.

Since many Web radio operators have dozens if not hundreds of channels, they contend such fees would prove difficult to shoulder.

SoundExchange has agreed to cap the minimum per channel as long as operators agreed to provide detailed disclosure of what songs they play and refrain from a practice known as "streamripping," or turning Internet radio performances into permanent audio libraries. Record companies have become increasingly concerned about digital rights management as Internet broadcasting becomes more prevalent.