After Napster, a New Net Target


By Jane Black Napster's June 5 announcement that it will offer a pay-subscription service with three major record labels proves that digital download service has been tamed once and for all. And so the Recording Industry Association of America (RIAA) has taken aim at another group of digital-music upstarts: Webcasters. In a suit filed on May 25, the RIAA went after Launchcast, Launch.com's online-radio service, which allows visitors to select music styles they prefer and skip songs they don't like. The RIAA claims that Launch.com needs a special "interactive" license from each music label in order to offer these services.

On June 1, Launch joined four other Webcasters and the Digital Media Assn. in another suit requesting that a federal court in California rule on what "interactive" means. The Webcasters insist that their services are not interactive, as defined by the Digital Millennium Copyright Act. They want to be treated like traditional radio stations, which are eligible for compulsory licenses.

Who's right? The 1992 Digital Millennium Act does specify that Webcasters who offer interactive services need a special license. But it is surprisingly vague on what interactive means. That's because, when Congress wrote the law, it could hardly predict what kind of interactive technologies would emerge. Its goal was simple: to promote Webcasting without hurting traditional music sales.

Since its inception in November, 1999, Launchcast has attracted more than 2.6 million music fans. But there is no evidence that personalizing a radio broadcast deters fans from buying CDs. "The suit is an attempt to slow progress until Webcasting proves it will increase the labels' profit margin. They don't want to take the chances this will turn into another Napster," says Ric Dube, an analyst with research firm Webnoize.

SKIP JUMP. Truth is, the recording industry should think twice before hauling out the big guns again. Launchcast is no Napster. Yet once again, the recording industry's is using hardball tactics that may ultimately work against its own best interests. By 2003, Webcast audiences will swell to 106 million listeners, or 39% of U.S. residents, according to Dube. Compare that to traditional radio, which, at the end of 2000, reached 28% of the U.S. population, or 75.5 million people.

The labels should take a lesson from history: In the '80s, Hollywood tried to crush the burgeoning video-rental business. Today, video rentals contribute 45% of studio revenues. Webcasting could be another revenue stream for the labels, just as traditional radio is today.

Launchcast is far from music on demand. It's more like an all-request program where only one person is calling in. Listeners are streamed a personalized broadcast based on the way they have rated various songs and bands. The higher the song is rated, the more likely the station will play it. But there's no guarantee when it will be played. Launchcast also allows listeners to skip over songs that they don't like. So if Van Halen's Jump comes on, a listener can skip over it or request that the station never play the song again.

Such features, the RIAA argues, make Launchcast pretty close to music on demand. Without a special license, which Launch has been unable to obtain from four of the major labels (BMG, Sony, EMI, and Universal), the RIAA says it's operating illegally.

SNEAKY TACTICS? The problem is those special licenses are all but unobtainable-because the labels hold the cards for licensing and don't seem to be in a cooperating mood. Launch and other Webcasters have tried to negotiate licenses for almost 18 months with some labels but have got little response, sources close to the negotiations say. Warner Music is the only label to have granted an interactive license so far. It has a deal with Launch.com, in which it is also an investor.

So the Webcasters are caught between a rock and a hard place. The labels say the Webcasters are interactive but they won't issue them the appropriate license to operate.

Behind this Catch-22, the RIAA's suit is less about interactivity than creating a pricing structure for compulsory music licenses, many Webcasters fear. Even the RIAA admits that its Launch suit is aimed at excluding Launch and fellow Webcasters -- MTVi, Listen.com, XactRadio and MusicMatch -- from an arbitration panel that will set royalty fees for online radio stations. "The need for filing a suit was driven by the schedule of the CARP [copyright arbitration proceeding], not the fact that someone did or didn't agree with us" on what constitutes an interactive music service, the RIAA Senior Vice President of Business and Legal Affairs Matt Oppenheim told Webnoize news. Oppenheim declined to discuss the case with Business Week Online.

To defeat Launch, the RIAA has also employed other tactics. For example, the RIAA suit also was filed the day that Launch closed a small round of financing. That strikes Jupiter Media Metrix music analyst Danielle Romano as a tactical ploy to put off Launch.com's investor -- an undisclosed media company. The company did announce a $2 million round of financing the following week, on May 29. But that won't last forever -- especially if it has to spend a chunk of it to defend itself from the RIAA.

NEW RULES. The federal court in California should rule on the Webcasters' case -- and fast. If the court rules that Webcasters qualify for compulsory licenses, it would free them from the specter of litigation that threatens to put many of them out business. If the services are indeed deemed interactive, it would force the record labels to negotiate for interactive licenses.

Ironically, these licenses could be cash cows for the labels. Under an interactive license, the labels are only required to pay an artist a royalty rate specified in his or her contract. On average, those royalty rates range from 6% to 12%. Compare that to the 50% they have to pay for a compulsory license. With Napster and now with the Webcasters, the music industry keeps trying to use copyright law to maintain the status quo. If the labels were smart, they'd see that embracing change can be in their own best interests. Black covers technology for BusinessWeek Online in New York


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