How Endangered Is Internet Radio?

May 18, 2007 • TechKnowledge No. 102
By James Plummer

As with satellite or broadcast radio, listeners “tune in” radio stations on the Internet to hear music their favorite DJs have selected for them. But new regulations which threaten the medium have spurred controversy. A recent decision issued by the Copyright Royalty Board would have online broadcasters pay what many of them consider to be prohibitive royalties for streaming copyrighted music online.

The CRB is a new and little‐​known agency of the Library of Congress Copyright Office, consisting of three “copyright royalty judges” appointed by the Librarian of Congress. The board was created by the 2004 Copyright Royalty and Distribution Reform Act and appointed only last year. The CRB is charged with setting the royalty payment structure for music and sound recordings in order to:

maximize the availability of creative works to the public … afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions;… reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication;… minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

The March 2 decision set per‐​song, per‐​listener royalties on every song streamed over the web‐​retroactive to the beginning of 2006. The first round of payments was to be due on May 15. After webcasters filed with the board for a rehearing, the board was compelled to push the deadline back to July 15‐​even though the appeal was ultimately denied. Nevertheless, the reprieve has given webcasters more time to get their legislative ducks in a row as the battle moves to Congress.

The fee structure set up in the board’s ruling would have webcasters pay royalties (beyond a $500 minimum) on a “per play rate” basis-i.e., per listener per song. The ruling set the per play rate at $.0008 for 2006, $.0011 for 2007, $.0014 for 2008, $.0018 for 2009, and $.0019 for 2010. The rate structure was based on that proposed by SoundExchange, a digital music fee collection body created by the Recording Industry Associatoin of America.

Until now, webcasters paid SoundExchange 10 percent of all revenue collected for the right to play copyrighted music. That rate was established in 2002 by the predecessor of the CRB, the Copyright Arbitration 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, Congress stepped in before it could go into effect. The Small Webcaster Settlement Act of 2002 pre‐​empted the CARP decision and tasked CARP with rewriting the rule to allow small commercial webcasters to pay on the basis of revenue or expenses, or both, including a minimum fee. Thus, the law precluded the “pay‐​per rate” system. CARP went ahead and set that rate at 10 percent of revenue. (Webcasters had advocated a 3 percent of revenue rate in the original rulemaking process.)

The process has now come full circle, with webcasters again protesting the new CRB royalty rules in Congress. SaveNetRadio, an organization representing the interests of webcasters, has argued that the rates are prohibitive for small webcasters, violating the requirements to maximize the availability of creative works to the public 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 bill would instead set rates for commercial music webcasting at either 7.5 percent of revenues or 0.33 cents per listener hour. It also expands the Copyright Act’s Section 118 musical work license to noncommercial webcasters, enabling them to pay a flat annual fee for use of copyrighted material, initially capped at 150 percent of the previous rate. The measure would also mandate that the CRB consider an FCC‐​produced report on the effect Internet royalty rates would have on localism, programming, diversity, competition, and barriers to entry.

RIAA’s SoundExchange has reacted with fury to the introduction of the Internet Radio Equality Act (and to a similar measure introduced in the Senate by Ron Wyden (D-OR) and Sam Brownback (R-KS), an ally of Christian broadcasters and webcasters). A blistering press release issued by SoundExchange accused SaveNetRadio of working for the interests of large webcasters such as Yahoo and Microsoft, adding, “they are trying to recruit small webcasters and even some artists to front for them.” Yet the concerns of small webcasters are genuine. Atlantic Sound Factory, a music webcaster funded by donations from its average of 500 listeners a day, calculated that its royalty rates would skyrocket from $120 per month in 2006 to $6500 (500 percent of total revenue) per month 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 sole royalty‐​collection agency for all digitally transmitted copyrighted song recordings. Even labels and artists who want nothing to do with RIAA have their royalties collected “for” them, whether the copyright owners claim the money from SoundExchange or not. Webcasters and artists are not free to make their own contractual arrangements.

Thus, several independent artists reject RIAA’s contention that this royalty hike will help. Earlier this month at JazzFest in New Orleans as an airplane pulling a “Save Net Radio” banner circled above, musicians such as Kermit Ruffins and ReBirth Brass Band wrote Congress to say, “As working musicians who depend on Internet radio to reach our fans and to make new ones, we are extremely concerned that the recent decision by the [CRB] will close the door to what has become an essential part of our work. Internet radio is one of the precious few outlets we have to reach Jazz audiences and build new ones.”

Independent musicians understand that radio play, whether broadcast, satellite, or online, is not a primary revenue stream but rather a form of free advertising for the media where they do make their money — through live performances and album sales. Over the past five years, the Internet radio regime constructed by Congress in 2002 has served well the constitutional raison d’etre for copyright-“to promote the progress of … useful arts.” The CRB would radically restructure that market by imposing royalty rates which are sure to shut down many stations and throw up large barriers to entry for new ones, reducing outlets for new musical acts. Large record labels may argue that they (and their artists) deserve the anticipated transfer of wealth from a handful of Internet giants, but this must be considered in light of the loss that would occur under this regulatory restructuring of the online radio market.

About the Author
James Plummer is the research assistant for Telecommunications and Information Policy Studies at the Cato Institute. To subscribe, or see a list of all previous TechKnowledge articles, visit www​.cato​.org/​t​e​c​h​/​t​k​-​i​n​d​e​x​.html.