Technology

Webcasters' Plea Falls on Deaf Ears


Internet radio broadcasters will need to fend for themselves in the face of efforts by the music industry to raise royalty fees, as Congress holds off on intervening

Small Webcasters intent on keeping Internet radio stations from going out of business best not look to Congress for help. That's the message from a June 28 House of Representatives hearing aimed at resolving a dispute over efforts to increase the royalties paid by Web radio stations to musicians and record labels for spinning their songs.

At issue is a move by the recording industry and SoundExchange, the company that collects royalties on behalf of music labels, to increase the fees paid by Internet radio stations to play songs (see BusinessWeek.com, 3/7/07, "The Last Days of Internet Radio?"). Small Webcasters say the fee hike will put them out of business and were looking to Congress to intervene, as it did the last time royalties were headed higher. The increase kicks in July 15.

No can do, said House Small Business Committee Chairwoman Nydia Velazquez. The New York Democrat said she'd prefer Webcasters and the music industry come up with their own compromise. "I really don't think Congress would be the best type of vehicle to resolve this type of issue," she said after the testimony of seven witnesses, including independent record-label owners, musicians, and Webcasters. "July 15 is just around the corner, and I hope the two parties can come together and resolve this issue."

Nitty-Gritty Negotiation

Some legislators said they're genuinely puzzled about how to come up with a decision that would appease both parties. "I have not heard what the win-win is," said Representative Yvette Clarke (D-N.Y.) after hearing the witnesses' testimony.

The remarks may serve as a barometer of Washington's attitudes toward Internet radio at a critical juncture for the broadcasting industry. Bills relating to Web radio are making their way through committees in the House and the Senate, while the recording industry plans to impose new royalty fees on traditional radio, also referred to as terrestrial radio.

Meantime, representatives of Web radio, listened to by 57 million Americans each week, will redouble efforts to reach a compromise. "We might now be at the beginning of real negotiations with SoundExchange," says Ian Rogers, general manager of Web radio leader Yahoo! (YHOO) Music. Webcasters and SoundExchange had reached an impasse. SoundExchange offered a compromise in May allowing small broadcasters to enjoy the existing lower royalty rates, set by Congress in 2002, through 2010.

Webcasters rejected that proposal, saying the definition of a small broadcaster is so narrow that most Web radio businesses will soon outgrow it quickly and will be forced to pay regular rates. These regular royalty rates, set by the Copyright Royalty Board (CRB) in March, are triple what they are today. They will prevent even popular networks like Yahoo! Music from reaching profitability and drive smaller Webcasters out of business, according to broadcasters. SoundExchange believes the new rates are reasonable and fair.

Compromise or Disaster?

So, what alternatives might SoundExchange and Webcasters reach? In her closing questions, Velazquez seemed to suggest that the warring sides change the definition of a small Webcaster to allow larger companies to pay lower rates. Another possibility is creating a tiered royalty structure, suggests Dave Van Dyke, president of consultancy Bridge Ratings. Instead of differentiating only between small and large broadcasters, resulting in a steep rate increase for small stations that cross the line, the disputants could come up with different rates to be paid by the very small, midsize, and larger broadcasters, he says. Another option: broadcasters pay a share of revenue, as do satellite radio providers. Satellite radio companies Sirius (SIRI) and XM (XMSR) pay about 7.5% royalties.

That said, Webcasters and the music industry could yet leave crafting of the compromise to Congress or the courts. Webcasters are appealing the CRB decision and hope an appeals court judge will take the case before July 15, says David Oxenford, partner at law firm Davis Wright Tremaine , which represents Webcasters in the appeal. The appeals court, however, may not act on time—or in the Webcasters' favor.

In the House, 121 members have co-sponsored the so-called Internet Radio Equality Act, proposing charging Webcasters the same royalties as satellite radio broadcasters. Four sponsors of a similar bill going through the Senate include former Presidential hopeful John Kerry (D-Mass.). "Committee members are very concerned there's a train wreck coming," says Jon Potter, executive director of the Digital Media Assn., representing Webcasters. What they may not know is how to avert it.

Kharif is a reporter for BusinessWeek.com in Portland, Ore.

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