Wednesday, April 25, 2007

The crisis facing internet radio

There is a crisis facing internet radio: new mandatory royalty rates are so high that they will force most or all independent internet radio stations off the air.

Since the passage of the DPRA and its successor, the DMCA, internet radio has been required to pay high royalties for internet music broadcasts. Higher than satellite radio pays, and much much higher than over-the-air broadcasters pay (which is nothing, since they're legally exempted by copyright law).

You would think that royalties would be set based on the types of "music transmissions" - for example, a subscription on-demand music service would pay more than a traditional radio service that plays the same music programming to a group of listeners.

I mean, you would think that AM/FM, Satellite and Internet radio stations would all pay the same kinds of royalties, right? But no! Due to DPRA and DMCA, digital transmission services (e.g. over the internet or digital satellite) are treated very differently. This is because back in the 90s, when the DMCA was passed, people equated "digital" with perfect, and the record labels were freaking out. After all, the labels thought that home taping was killing music... and that was just cassettes. Imagine, they though, what will happen when people can make unlimited perfect digital copies of our music!

So the RIAA successfully lobbied for legislation in the DPRA that said any digital transmissions of sound recordings (i.e. music) would require royalty payments to be made.

Yet the DPRA is based on a fundamentally flawed assumption -- the assumption that "digital transmission" allows unlimited perfect digital copies of the original work.

Internet radio stations do not distribute perfect digital copies of the original copyrighted performance; instead, they use formats such as MP3 and WMA. Such broadcasts are drastically "compressed" and (I'm sure you know) nowhere near a perfect digital copy. Most broadcasters also segue songs together, and make announcements over the beginnings and ends of songs. It's just like over-the-air radio, and in many cases, the audio quality of the internet broadcast is slightly inferior to an analog FM broadcast!

So over the years, internet radio broadcasters have had to pay royalties to playback music that they don't otherwise have explicit permission from the copyright owner to play. This is called the "compulsory license", and it's paid to an organization that was spun out of the RIAA called SoundExchange. SoundExchange collects royalties and is supposed to distribute them to artists.

So far, so good. We've been paying 10% of our gross revenues. (10% for first $250,000; 12% in excess of that.) We feel a bit cheated because the over-the-air guys don't have to pay at all, and the satellite guys only pay about 7.5%. Still, we can work with it. Some smaller stations can't handle the minimum annual fee of $2000, so they join aggregators like LoudCity or Live365 to reduce their royalty costs.

But every 5 years, the royalties get adjusted. And for the 2006-2010 period, it was quite an adjustment.

In March of 2007, the CRB (Copyright Royalty Board) released the rates for 2006-2010. Not only have they have gone up drastically - by 2010, the rates will be 150% higher than the 2005 rates.  In addition, and more problematic for independent web radio stations: the way royalties are computed has changed: stations can no longer pay based on our gross revenue but have to pay based "aggregate tuning hours".  For SomaFM, this means our royalties for 2006 will be increased retroactively from about $20,000 to about $600,000. That's more than 3 times what we made in 2006. And our royalties for 2007, based on our current audience size, will be over $1 million dollars, and over $1.5 million by 2009. That's if our audience size stays the same.

Now SoundExchange says these rates are fair. Since the hearings were closed to the public, we don't know everything that was presented to come up with these supposed fair rates. But we have heard that the rates were based on mis-information, including the fact that the numbers were based on on-demand music subscription services. The bottom line is that the new rates are so high that US-based internet radio as we know it will go away. Even big players like Pandora have said they don't have a viable business plan with these new increases in royalties.

So a coalition of net broadcasters have gotten together, started a site called and working together with the trade association DiMA, the Digital Media Association and a DC lobbying firm and have succeeded today in getting a bill introduced in the house that would legislate the royalties paid by interent broadcasters are on par with those paid by other services, like satellite radio. The bill is called the "Internet Radio Equality Act", it was introduced on April 26th by Representatives Jay Inslee (D-WA) and Donald Manzullo (R-IL).

The Internet Radio Equality Act would:

1.       Annul the CRB decision and set royalty rates at 7.5% of revenues – the same rate that satellite radio pays – for 2006-2010; and
2.       Change the rate-setting standard currently used by the CRB to determine Internet radio royalties, and substitute the standard that applies to most other statutory licenses, including satellite radio, jukeboxes and sound recordings.

So now it is up to you, and up to Congress to pass this bill. Get on the phone, call your congressman/woman and ask them to support the "Internet Radio Equality Act" introduced by Representatives Inslee and Manzullo.

It doesn't take long to call. If your representative is already aware of it, they'll just want to take your name and address (to verify you are a constituent) and will tally your call for support. If they're not aware of it, you might need to explain it to them. But has some basic "talking points" to help you out with that.

We are at a critical juncture for internet radio. If this bill doesn't get passed, independent net radio will be forced off the air; and the only net broadcasters will be those who can afford to treat their internet radio operations as a "loss leader"- and that means the same big companies that run all the AM and FM stations out there. Is that what you want to see happen to net radio?


Blogger daniel said...

Just another instance of the music industry having NO CLUE about their own business. The more their customers get exposed to their music, the more music they will sell. Nothing like free advertising, right. Right?

Corporate rock STILL sucks.

And Soma still doesn't.

April 27, 2007 5:12 AM  
Blogger Clint said...


Don't play music that is owned by greedy corporate bastards who are charging you royalties on it. Simple. Why are you playing their crap anyways, you're a techno station, play some of the ten trillion free techno tracks on the internet for once, give some new artist a chance, and screw the big labels. I read through your entire post thinking I must be missing something and they are going to start charging royalties on music not owned by large labels, but no, I didn't see that. If you don't want to die stop drinking the poison!!!! How can you stand there complaining about them charging for something THEY OWN!!! Really, to see a techno music station so unable to play unsigned music makes me sad, it's like you don't even consider it an option?? This is a good thing, this will force you and everyone else to play non corporate music.

April 27, 2007 6:12 AM  
Blogger Rusty Hodge said...


Unfortunately, under copyright law, we have to get permission (a waiver) for every single track we play. We play hardly any major-label tracks on most of our channels. A few of our channels play major label stuff, but it's all back-catalog vintage stuff.

Where the problem occurs is when an indy label then sells out to a larger label, or licenses their albums to a major.

The RIAA lobbied for this law (dating from 1995) and it is in their favor, but it doesn't just apply to major label material; it applies to all copyrighted material.

Unsigned does not = non-copyrighted. And most of the small labels we work with are not in a position to grant a waiver to every net radio station that asks for one; they want to have lawyers look at it, etc. Often, they tell us they want us to play their music but they can't sign waiver - they're worried that it will affect any other licensing deals they are working on.

We could likely get away with using non-major label music without any problem. But it's a grey area - without agreements in place with every copyright holder we would still be liable for copyright infringement.

And then we have the issue of where we play a song, it gets popular, a major-associated label makes a deal to license it, and no we're no longer allowed to play it. Our listeners won't like that!

And we've ben paying royalties for years. The rates have just gone up drastically for 2006 on (and just announced in March 2007). Our issue is that net radio pays substantially more than satellite radio does for the same material. That's what we're trying to fix. Sorry if I didn't make that clear in my posting.

April 27, 2007 10:00 AM  
Anonymous The_Man said...

I think the thing to look to in the future is Internet Radio featuring Unsigned Artists. If you want corporate radio featuring the mainstream artists you can find a streaming station of just about any genre owned by just about any company in the broadcasting game. Internet exclusive stations won't have much a chance against them anyway.

September 19, 2008 7:19 PM  

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