New royalty rates harm Internet radio

Internet radio listeners may find themselves with a shortage of options if digital royalty rates established by the Copyright Royalty Board stand up to Congressional intervention and an expected appeal from Webcasters today. The new rates feature a format change that, according to calculations

by Webcasters, will make it nearly impossible to offer a financially sustainable broadcast over the Internet.

Under the old structure, Webcasters paid a royalty fee equivalent to 10 percent of their revenue up to $250,000 and 12 percent after that, although most stations fell short of that threshold. With the new progressive system, most commercial Webcasters will pay 0.0008 cents per performance for 2006, the retroactive beginning of the new system. The current royalty rate is 0.0011 cents and will increase to 0.0014 cents for 2008, 0.0018 cents for 2009, and 0.0019 cents for 2010, after which rates will have to be renegotiated. A performance is defined as one song heard by one listener. The cost of streaming one song to 10,000 listeners would be 11 cents. At a normal rate of 16 songs per hour, the Webcaster will owe $1,267.20 in royalties at the end of a 30-day month.

“It’s prohibitively high if you do the math,” said Don Hicks of the Missouri Broadcasters Association, a lobby group representing broadcasters in Missouri, many of whom currently operate Internet radio broadcasts, or streams. “These are out of whack with reality. The net impact is that a lot of stations won’t be streaming.”

KBXR in Columbia might be one of those.

“We’re paying to put it on the Web and providing it as a service to the community,” said Wes Bond of KBXR. “There’s concern about burdening us to the point where we won’t Webcast anymore.”

In addition to handling the daily morning show, KPLA radio host Chris Kellogg has been involved with the station’s Web site and Webcast since its launch in 1995, when he says it was one of the top 10 streams on the Internet. Kellogg receives a good deal of feedback on the Webcast, which has led to his conclusion that the majority of listeners are office workers who don’t have access to a radio. “It’s all part of the total package we offer,” he said.

The new rates were adopted from a proposal by SoundExchange, a nonprofit royalty collection company established by the Recording Industry Association of America in 2000. The Copyright Royalty Board, which acts as an arbitration panel when parties can’t agree on royalty rates, held 18 months of hearings involving Webcasters and copyright holders to set rates “that would have been negotiated in a hypothetical marketplace” between “a willing buyer and a willing seller” at the direction of Congress. The judges noted, however, “it is difficult to understand how a license negotiated under the constraints of a compulsory license, where the licensor has no choice but to license, could truly reflect ‘fair market value.’”

“In setting these rates, the board had a lot of data from both sides,” said Willem Dicke, communications director for SoundExchange. According to a press release issued after the decision, the company said it believes “artists have earned the right to be fairly compensated for the performance of their work by Webcasters who benefit from their talents.” Dicke added, “We’re big fans of Internet radio, and we don’t want to see it go away.”

Hicks disagrees.

“Most of these Webcasts are being strangled in their cribs. They have not had a chance to follow a maturation line,” he said.

Hicks believes the record labels that SoundExchange represents are attempting to stifle Internet radio because its low-profit-margin, high-volume business model doesn’t fit with the high-profit-margin, low-volume business model that he believes makes record sales profitable.

“I’d love to sell a CD that cost me $1.50 to produce for $20,” Hicks said. “But they would be much better advised to try and get inside this, develop a new business model and steer it rather than block it. You just can’t stand between emerging technology and the public. The record companies need to understand that this is like standing in front of a freight train, waving your arms and yelling stop.”

A royalty fee similar to that in place now was adopted after the last arbitration hearing in 2002. The Copyright Arbitration Royalty Panel, the predecessor to the CRB, adopted a per-performance fee of 0.0007 cents, which was approved by the Librarian of Congress. The rate was then overturned in favor of the percentage of revenue system after Congress passed the Small Webcaster Settlement Act in a midnight session.

Statements in the U.S. House of Representatives indicate Congress may be preparing to step in on behalf of Webcasters again. At a telecommunications hearing March 7, Rep. Edward Markey, D-Mass., chairman of the House Subcommittee on Telecommunications and the Internet, spoke against the newly adopted fees.

“This represents a body blow to many nascent Internet radio broadcasters,” Markey said. “This decision runs the risk of hurting not only fledgling entrepreneurs but also the online radio services of public broadcasters and smaller, commercial stations.”

Radio Paradise is one of these stations. Founded by Bill and Rebecca Goldsmith in 2000, the Webcast reaches 12,000 to 15,000 peak hour listeners

from the second floor of the couple’s Paradise, Calif., home.

“Our royalty rates are increasing from 10 percent of our gross income to over 100 percent,” Bill Goldsmith said. “This is not even remotely affordable.”

He is counting on the appeal or government intervention to renegotiate the rates.

“We are proceeding under the assumption they are not going to stand,” he said.

If they do, however, the Goldsmiths will have to find a way to cope with the cost or shut down their stream.

“This would be a huge loss for the artists, listeners, and people like myself who love radio.”