[A2k] Wall Street Journal: Royalty-Rate Hike Alarms Web Broadcasters

[Thiru Balasubramaniam]

Royalty-Rate Hike Alarms Web Broadcasters
Small Radio StationsFear
Increase Will Force Them
To Abandon the Internet
By SARAH MCBRIDE
March 7, 2007; Page B1

Internet radio broadcasters face the alarming prospect of paying much
higher royalties to song performers, a burden that could silence some
online stations.

The Copyright Royalty Board, an obscure federal agency charged by
Congress in late 2004 with setting sound-recording royalty rates for
online radio stations, has carried out its mandate -- with the result
that some broadcasters could be on the hook for millions of dollars
more than they had planned.

The rates set by the board, effective retroactively to 2006, start at
.08 cents per song, per listener. While that might not sound like much,
it rises every year and adds up fast. And that's in addition to the
sizeable royalties Internet radio companies pay to the songwriters and
composers of the underlying works. "With these rates, there's no
Pandora," asserts Tim Westergren, co-founder of Pandora.com, an online
radio service with about six million registered users.

The schedule is likely to take up a big part of the agenda at a
congressional hearing on the future of radio scheduled for today.
RealNetworks Inc., a Web company, is among those testifying. While the
hearings aren't expected to affect the new rates, the industry can
appeal the decision at the District of Columbia Circuit Court of
Appeals.

But it's the small broadcasters that are hit especially hard. Until
now, Congress has kept the stations' royalty costs artificially low to
encourage a nascent industry. Previously, those smaller groups could
pay 12% of revenue to a music group called SoundExchange, which
collects royalties for digital spins of a song and doles them out to
song performers and record labels. Because the smaller stations paid a
percentage of revenue, they never faced a situation where their royalty
bills exceeded their operating revenue, as many will now.

At the same time, music labels facing faltering revenue have been eager
to make sure that everyone pays for their music. The board's new rates
appear to be close to those sought by SoundExchange, an offshoot of the
Recording Industry Association of America that now operates
independently. But the Internet radio broadcasters say the rates hit
one of the few bright spots in the moribund music business and thus end
up shooting the labels in the foot. "People buy a lot more music
because of what they hear online," says Mr. Westergren of Pandora.

"Internet radio is one of the best things happening to the record
industry," agrees Kurt Hanson, owner of the online radio company,
Accuradio. The entrepreneur calculated that under the old rules
Accuradio's sound-recording royalty payments last year would be about
$50,000. But under the new schedule, Mr. Hanson figures that his bill
now amounts to about $600,000 -- more than all of last year's revenue
from his radio Web site.

The rates also hit public radio stations like those affiliated with
National Public Radio, which has been charging hard into online music.
The public-radio stations were previously allowed to pay a flat fee
under a separate negotiation with the music industry association. Now
the stations will be subject to the new rates, after a small number of
exempted hours of streamed music.

"NPR is consulting with the public-radio community to determine what
steps must be taken to reverse this decision and its dire consequences
on public service media," says spokeswoman Andi Sporkin.

Internet radio counts over 50 million listeners in the U.S., many of
them tuned in to tiny, niche-oriented online broadcasters. That's well
in excess of the 14 million or so subscribers satellite radio can
claim. Satellite radio pays sound-recording royalties under a different
schedule that was separately negotiated with the music industry; it too
is up for renegotiation.

The schedule highlights an inequality that has rankled many online
entrepreneurs for years. Regular radio stations don't pay royalties to
performers for their over-the-airwaves broadcasts, although they do pay
royalties to composers and songwriters. "It's flat out unfair," says
Jonathan Potter, executive director of the Washington-based Digital
Media Association, which represents online music companies such as AOL.
His organization is weighing its options, which include appealing the
new schedule within 15 days. Judge James Sledge, who oversaw the
proceedings at the Copyright Royalty Board, says the schedule "is our
best determination" given the boundaries established by Congress.

Write to Sarah McBride at sarah.mcbride@wsj.com1

http://online.wsj.com/article/SB117322905572428972.html


---------------------------------
Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
voice +41.22.791.6727
fax +41.22.723.2988
mobile +41 76 508 0997
thiru@keionline.org