07.23.07 | 2:00 AM
New music royalty rates for webcasters went into effect last Monday, but the charges continue to be fiercely contested.
The good news is that net radio stations are still on the air and negotiations are ongoing. The bad news is that there’s no guarantee of a lasting agreement that will ensure artists and labels get paid without bankrupting thousands of broadcasters.
At stake is the future of net radio — a market that may seem like a niche sideline today but one that could explode with the emergence of ubiquitous broadband over Wi-Fi and next-generation wireless networks. Decisions made now could have an enormous impact on how we consume music in the coming years and decades. Suffice to say it’s in no one’s interest to kill net radio.
Label representative SoundExchange appears to hold all of the cards. The Copyright Royalty Board approved its proposed rates wholesale, and a federal appeals court refused to stay the fees pending a resolution of the case — a possible sign the court is leaning toward upholding the scheme, given the havoc involved in applying fees and then revoking them later.
But SoundExchange can’t press its advantage too hard or Congress could intervene under pressure from the estimated 50 million to 70 million Americans who listen to internet radio each month (numbers source: Arbitron/Bridge Ratings).
To advance the debate, here’s a proposal for webcasting royalty rates that attempts to synthesize the interests of labels, webcasters and listeners.
All commercial webcasters should pay a percentage of revenue
Under the current Copyright Royalty Board, or CRB, scheme, webcasters are the only radio broadcasters required to pay a per-song-per-listener royalty rate. Satellite and cable radio stations and jukeboxes pay 7.5 percent of their revenue in performance royalties (a bill has been introduced in Congress that would charge the same rate for webcasters). In the United States, terrestrial radio stations pay no performance royalties at all.
Radio has traditionally dodged hefty royalty rates because it has been treated as a marketing arm of the industry. Terrestrial radio is a highly programmed medium, so it can easily be co-opted into the labels’ hit-making strategies. It’s so powerful that labels would happily pay to have their songs played, rather than the other way around, if it weren’t illegal to do so.
Not so for net radio, which in principle could offer as many stations as there are listeners. It is highly customizable, and fans can exert so much control over playlists that it is not deemed effective as a marketing shovel. In addition, net radio listeners can make exact digital copies off the web, which is not possible with traditional radio, although in practice there are far easier ways to obtain the songs.
So it is proposed to punish net radio with unique and exorbitantly high royalties.
In fact, net radio does offer labels a powerful marketing vehicle. It’s a fantastic try-before-you-buy platform that could dramatically increase listener satisfaction and music sales. The data alone from these services is invaluable. Yet none of that is recognized in the current scheme.
I propose a compromise based not on per-stream rates but rather on a percentage of revenue, as follows:
Small and noncommercial webcasters (gross revenue up to $250,000): 10 percent of gross revenue or $500 per year (total, not per channel), whichever is greater
Medium webcasters (gross revenue of $250,000 to $500,000): 12 percent of gross revenue
Large webcasters: (gross revenue above $500,000): 14 percent of gross revenueThe above rates deny SoundExchange its per-song-per-listener performance royalties, but in return give it a much higher percentage of webcasters’ gross revenue than the 7.5 percent they would pay if the Internet Radio Equality Act were to pass.
No DRM — staggered metadata instead
SoundExchange’s executive director Jon Simson said his organization would cap minimum per-station fees if webcasters worked to make their webcasts unrecordable — one assumes through the use of some sort of digital rights management technology. However, software such as Total Recorder and Audio Hi-Jack, which grab audio on its way to the soundcard, render such DRM methods ineffective in the absence of a Secure Audio Path, or SAP, between software and soundcard.
Although time-shifting content is legal, webcaster representative the Digital Media Association, or DIMA, agrees with SoundExchange that it’s in both organizations’ best interests to stop people from stream-ripping (saving webcast songs as individual files). However, neither webcasters nor listeners would welcome mandatory DRM (or SAP) for webcasts.
Rusty Hodge, founder of SomaFM, came up with an ingenious solution: presenting song metadata in a way that keeps stream-ripping programs from automatically splitting songs into separate files. Hodge wrote: “There are technical protection methods to thwart automated splitting of stream-ripped tracks, which are easy to implement in Icecast/Shoutcast-type streams. You just don’t send metadata, or send it at irregular intervals, or intersperse variations of the track name (e.g. alternate between artist and track name).”
This solution would obviate the need for DRM on webcasts while defeating automated stream-ripping programs. If someone wants to go through the trouble of manually editing a show file into individual songs and titling them with the correct song information rather than downloading the song from a P2P network or purchasing it outright, more power to them. It’s counterproductive to force all listeners to jump through DRM hoops in order to prevent a small percentage of them from using internet radio as a clumsy, tedious music downloading technique.
Lower rate for customized streams SoundExchange says it needs to collect a minimum of $500 per station per year in order to pay for the administration costs associated with processing a single station’s playlist. However, webcasters claim that rate would result in industry fees totaling nearly $1 billion — 50 times the actual royalties webcasters would owe, which they estimate at a mere $20 million. In addition, some popular webcasters today stream a customized station for each user; the minimum per-station fees would prevent them from doing so.
SoundExchange has proposed capping the minimum fees at $50,000 for larger webcasters, effectively charging for a maximum of 100 stations. The minimum fees would kick in only if the per-stream charges fell below that amount.
If SoundExchange needs these minimum per-station rates to offset administration costs, as it claims, then a common-sense solution should address simplifying administration, rather than pricing personalized stations out of existence (or using them as a negotiation tool to try to enforce DRM). Webcasters who offer multiple streams should be required to combine their playlist reporting into one unified list for royalty payment purposes, but should also be required to itemize what each of its channels played. SoundExchange could periodically audit certain webcasters to ensure correct totals.
Minimize doubt about the future At least one webcaster has complained that it’s hard to lure investors and partner with companies since webcasters themselves have no idea whether their businesses will still be able to operate in 2010 when the rates expire. To stave off this uncertainty while still acknowledging that webcasting is a growing and changing medium, the CRB, when it hears arguments from webcasters and SoundExchange again in 2010, should be limited to a 0.25-percent-per-year maximum rate of change in setting webcasting royalty rates going forward. (Another method of limiting future increases could work too; the point is that webcasters need to know the rug isn’t going to be pulled out from under them a mere three years after these rates are set).
SoundExchange opt-out database
As things stand now, SoundExchange collects royalties for every song played on internet radio, whether the artist and/or label has registered to collect those royalties or not. If no one collects the royalties after three years, SoundExchange adds that money back into the general revenue pool.
An artist or label (whichever owns the sound recording rights to a song) can deal directly with webcasters outside the SoundExchange system, setting up whatever arrangement they want — including no royalty payment for playing the songs. As long as the artist or label notifies SoundExchange about the situation, the webcaster neither has to report playing the song nor pay SoundExchange to have done so.
Rather than forcing artists and labels to notify individual webcasters that it’s OK to play their music without reporting or paying for it, SoundExchange, as the main point of contact between webcasters and artists/labels, should distribute its own opt-out database to webcasters. If SoundExchange is going to collect royalties without being asked to, it should make it easy to opt out of that system on a song-by-song basis.
Keep paying both artists and labels
As long as the relevant artists and labels have registered with SoundExchange, it currently pays 45 percent of disbursed royalties to featured artists, 5 percent to non-featured artists and 50 percent to labels.
Yahoo Music CEO Ian Rogers said there’s a danger that if the existing rates stick, large webcasters such as Yahoo could decide to deal directly with the labels, which typically own the sound recording rights, bypassing SoundExchange and, by extension, artists. These direct deals would also likely result in large webcasters focusing on music from Recording Industry Association of America labels, since it would be harder to set up deals with smaller labels and artists. With the royalty rate scheme suggested above — or something similar — large webcasters won’t feel the need to circumvent SoundExchange, and artists of all stripes can continue to profit from the online performance of their music.
their music to the site to relinquish all royalties for internet radio and on-demand playback. 
The post advises small bands and labels to join an indie aggregator or collection society if they want to collect the royalties owed them under the ‘royalty-free license.’ Hmmm.”
