Royalties and the Internet: The Conflict Continues

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There are many flavors of radio out there ranging from broadcast to digital to purely Internet-based. Without too much work, you can find many of the same songs on each. What makes things interesting is the uneven way that royalty fees are dealt with across these various delivery mechanisms. Jim Puzzanghera over at The Los Angeles Times brings us both some news and some background on this highly divisive issue:

Joe Kennedy, chief executive of Pandora, carries a weapon in his battle over Internet radio royalty rates that he says could kill his popular online music site: a Stiletto.

Not the old-fashioned, sharpened-steel knife popular with mobsters and dancing street gangs in “West Side Story.” This is the high-tech Stiletto 100 Portable Satellite Radio from Sirius. Kennedy brandishes it when he meets with members of Congress to highlight what he calls the inequity of the royalty rates.

The Stiletto has two antennas. One picks up Sirius’ satellite signal and the other connects via Wi-Fi. But songs played over those connections pay different performance royalty rates.

“It’s the same station, the same songs,” Kennedy told me, holding the sleek white-and-black radio as he snacked on a Mediterranean wrap in the cafeteria of a Congressional office building. “It’s absolutely absurd.”

It does seem rather counterintuitive, and on first glance, might not seem like much to worry over. A few percent of a penny here and there cannot amount to much, can it? Multiply that by the number of listeners available online and it suddenly spirals into the stratosphere becoming million of dollars.

Sound Exchange, the company that is responsible for collection and distribution on digital performance royalties, has been battling with webcasting stations for well over a year now. Many of the smaller operations such as local public radio stations simply cannot afford to stream if the Sound Exchange sponsored version of the royalty rates becomes final.

When most of the world last tuned into the issue nearly a year ago, webcasters and SoundExchange were at odds over new performance royalty rates. Earlier in 2007, a special panel of federal judges called the Copyright Royalty Board significantly hiked the royalty rates. The board eliminated a provision that allowed small webcasters to pay 10% to 12% of their revenue instead of a flat per-song fee for each listener. And the judges ruled that the those fees should gradually increase, more than doubling by 2010 to .19 of a cent.

Pandora and many other webcasters screamed bloody murder. Those fractions of a penny might not sound like much. But they’re multiplied by the number of listeners for any given song and…

… can add up to millions of dollars a year. Webcasters complained their royalty payments would exceed their actual revenues.

Some small webcasters shut down before the new rates kicked in on July 15. Others went to federal court to try to overturn the new rates. That appeal is pending.

Sound Exchange executive director John Simpson reportedly compared the cries of outrage from the webmaster to “the boy who cried wolf,” claiming that the “on the ground reality” is that “strong business models can easily overcome the burden of the fees. In the meantime both purely streaming operations like Pandora and broadcast stations that stream their signal are watching with apprehension. To many in the industry, Sound Exchange seems to be characterized as the wolf at the door.

SaveNetRadio, a coalition of webcasters, listeners, artists and record labels opposed to the royalty rates, jabbed back today, saying the new rates were having a “devastating effect” on Internet radio.

At Oakland-based Pandora, which has 13 million registered users on its free, ad-supported site, the tab for 2008 would be $18 million under the new rates, Kennedy said. That’s most of the company’s projected $25 million in revenue.

“It’s taking 70%-plus of our revenues,” Kennedy said. Pandora is paying SoundExchange the old rate, which amounts to $10 million for 2008, but he doesn’t know how long that can continue.

He noted that the Copyright Royalty Board last year set new rates for satellite radio that started at 6% of revenue in 2007 and rise to 8% by 2012. And old-fashioned, over-the-air radio stations don’t pay performance royalties at all.

No matter which side of the fracas you find yourself on, it is obvious that the application of royalty fees is not very even handed at present. Like so many things in this age of accelerating technology, it would seem that the establishment of legalities lags far behind the advancement of the technology itself.

This does provide interesting food for thought when it comes to the subject of how quickly law and regulation can be applied to rapidly changing technologies such as these. It begs the question of how well those making these decisions actually understand the ramifications of the advancements being regulated. In addition, I would surmise that in many cases, the tech will have moved on by the time the legalities are worked out.

Some lawmakers have been flirting with the issue. Reps. Jay Inslee (D-Wash.) and Don Manzullo (R.-Ill.), introduced the Internet Radio Equality Act last spring to nullify the royalty board decision. It has attracted a substantial 148 co-sponsors and helps put pressure on SoundExchange. But a Senate version by Sen. Ron Wyden (D.-Ore.) has only five co-sponsors, meaning the chance of anything happening this year is slim.

Kennedy and Pandora founder Tim Westegren are trying to sound the alarms. And continuing the stiletto theme, Kennedy said they feel like Kitty Genovese, who infamously died from stab wounds outside her New York City apartment building in 1964 after other residents ignored her screams for help.

I had the pleasure of meeting Tim year before last at the New Orleans Jazz & Heritage Festival. He struck me as both extremely intelligent and highly impassioned by his cause. His arguments are very compelling, especially when delivered face to face.

This is a far reaching issue which will be responsible for shaping the face of radio’s Internet aspect once it is settled. Anyone with a stake in this side of the industry should make a point of educating themselves on the subject and monitoring the news about it.

Image courtesy of The Gold Guys, used according to its Creative Commons license

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