How Endangered Is Internet Radio?

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As with satellite or broadcast radio, listeners "tune in" radiostations on the Internet to hear music their favorite DJs haveselected for them. But new regulations which threaten the mediumhave spurred controversy. A recent decision issued by the Copyright RoyaltyBoard would have online broadcasters pay what many of themconsider to be prohibitive royalties for streaming copyrightedmusic online.

The CRB is a new and little-known agency of the Library ofCongress Copyright Office, consisting of three "copyright royaltyjudges" appointed by the Librarian of Congress. The board wascreated by the 2004 Copyright Royalty and Distribution ReformAct and appointed only last year. The CRB is charged withsetting the royalty payment structure for music and soundrecordings in order to:

maximize the availability of creative works to thepublic . . . afford the copyright owner a fair return for his orher creative work and the copyright user a fair income underexisting economic conditions;... reflect the relative roles of thecopyright owner and the copyright user in the product madeavailable to the public with respect to relative creativecontribution, technological contribution, capital investment, cost,risk, and contribution to the opening of new markets for creativeexpression and media for their communication;... minimize anydisruptive impact on the structure of the industries involved andon generally prevailing industry practices.

The March 2 decision set per-song, per-listenerroyalties on every song streamed over the web-retroactive to thebeginning of 2006. The first round of payments was to be due on May15. After webcasters filed with the board for a rehearing, theboard was compelled to push the deadline back to July 15-eventhough the appeal was ultimately denied. Nevertheless, the reprievehas given webcasters more time to get their legislative ducks in arow as the battle moves to Congress.

The fee structure set up in the board's ruling would havewebcasters pay royalties (beyond a $500 minimum) on a "per playrate" basis-i.e., per listener per song. The ruling set the perplay rate at $.0008 for 2006, $.0011 for 2007, $.0014 for 2008,$.0018 for 2009, and $.0019 for 2010. The rate structure was basedon that proposed by SoundExchange, a digital music fee collectionbody created by the Recording Industry Associatoin of America.

Until now, webcasters paid SoundExchange 10 percent of all revenuecollected for the right to play copyrighted music. That rate wasestablished in 2002 by the predecessor of the CRB, the CopyrightArbitration Royalty Panel. CARP itself had been set to establish a"per-play rate" in 2002. But after CARP published its proposed rule in the Federal Register, Congressstepped in before it could go into effect. The Small WebcasterSettlement Act of 2002 pre-empted the CARP decision and tasked CARPwith rewriting the rule to allow small commercial webcasters to payon the basis of revenue or expenses, or both, including a minimumfee. Thus, the law precluded the "pay-per rate" system. CARP wentahead and set that rate at 10 percent of revenue. (Webcasters hadadvocated a 3 percent of revenue rate in the original rulemakingprocess.)

The process has now come full circle, with webcasters againprotesting the new CRB royalty rules in Congress. SaveNetRadio, anorganization representing the interests of webcasters, has arguedthat the rates are prohibitive for small webcasters, violating therequirements to maximize the availability of creative works to thepublic and afford copyright users (webcasters) a fair income.

The Internet Radio Equality Act, introduced by Rep.Jay Inslee (D-WA) seeks to overturn the CRB's ruling. The billwould instead set rates for commercial music webcasting at either7.5 percent of revenues or 0.33 cents per listener hour. It alsoexpands the Copyright Act's Section 118 musical work license tononcommercial webcasters, enabling them to pay a flat annual feefor use of copyrighted material, initially capped at 150 percent ofthe previous rate. The measure would also mandate that the CRBconsider an FCC-produced report on the effect Internet royaltyrates would have on localism, programming, diversity, competition,and barriers to entry.

RIAA's SoundExchange has reacted with fury to the introductionof the Internet Radio Equality Act (and to a similar measure introduced in the Senate by RonWyden (D-OR) and Sam Brownback (R-KS), an ally of Christianbroadcasters and webcasters). A blistering press release issued bySoundExchange accused SaveNetRadio of working for the interests oflarge webcasters such as Yahoo and Microsoft, adding, "they aretrying to recruit small webcasters and even some artists to frontfor them." Yet the concerns of small webcasters are genuine.Atlantic SoundFactory, a music webcaster funded by donations from its averageof 500 listeners a day, calculated that its royalty rates would skyrocket from$120 per month in 2006 to $6500 (500 percent of total revenue) permonth in 2007, up to $11,000 a month in 2010.

Consistent with this odd law, SoundExchange has been designated by the Copyright Office has the soleroyalty-collection agency for all digitally transmitted copyrightedsong recordings. Even labels and artists who want nothing to dowith RIAA have their royalties collected "for" them, whether thecopyright owners claim the money from SoundExchange or not.Webcasters and artists are not free to make their own contractualarrangements.

Thus, several independent artists reject RIAA's contention thatthis royalty hike will help. Earlier this month at JazzFest in NewOrleans as an airplane pulling a "Save Net Radio" banner circledabove, musicians such as Kermit Ruffins and ReBirth Brass Bandwrote Congress to say, "As working musicianswho depend on Internet radio to reach our fans and to make newones, we are extremely concerned that the recent decision by the[CRB] will close the door to what has become an essential part ofour work. Internet radio is one of the precious few outlets we haveto reach Jazz audiences and build new ones."

Independent musicians understand that radio play, whetherbroadcast, satellite, or online, is not a primary revenue streambut rather a form of free advertising for the media where they domake their money - through live performances and album sales. Overthe past five years, the Internet radio regime constructed byCongress in 2002 has served well the constitutional raison d'etrefor copyright-"to promote the progress of ... useful arts." The CRBwould radically restructure that market by imposing royalty rateswhich are sure to shut down many stations and throw up largebarriers to entry for new ones, reducing outlets for new musicalacts. Large record labels may argue that they (and their artists)deserve the anticipated transfer of wealth from a handful ofInternet giants, but this must be considered in light of the lossthat would occur under this regulatory restructuring of the onlineradio market.