The Last Days of Internet Radio?

A decision by the Copyright Royalty Board to raise royalty fees could put some small online radio stations out of business

by Olga Kharif

Kurt Hanson runs a Chicago-based online radio station that streams more than 300 channels of classical, jazz, oldies, and other music genres aimed at adults. The station, AccuRadio, lures more than 1 million visitors a month—not bad for a startup that's only been around since 2002. If a Mar. 5 decision by the Copyright Royalty Board (CRB) takes effect, AccuRadio may not be around much longer.

The decision, due to take effect sometime during the next two months, could raise royalty fees paid by some online radio stations more than tenfold—enough to put many smaller stations out of business, Hanson says. Currently, most small Webcasters have paid royalties calculated as a percentage of revenue. Under the new rule, those outfits will begin paying on a per-song, per-listener basis. "The more intensively an individual service is used and consequently the more the rights being licensed are used, the more the service pays, and in direct proportion to the usage," according to the 115-page ruling.

Here's what the change will mean for AccuRadio. The station employs six full-time staff members and records about $500,000 in annual sales, mostly from advertising. Of that, Hanson pays record labels about $50,000 in royalty fees. The rule change, which will impose fees retroactively, will jack up royalty fees to more than $600,000 for 2006. Other Webcasters will be in the same boat. "I don't think any of the operators would break even," Hanson says. "Internet radio is in danger of becoming extinct," shouts a headline posted on the company's Web site, urging listeners to sign a petition or send a message to Congress. "The rates are so high that they exceed 100% of most Webcasters' total revenues!"

Battle Royal

Hanson and his peers aren't getting much sympathy from music labels and SoundExchange, the company that collects royalties on behalf of the recording industry and urged the royalty fee change. The last time royalties were negotiated, in 2002, "we had the same exact response: that this is terrible, it's going to put everybody out of business," says SoundExchange Executive Director John Simson. "But the industry grew." Indeed, revenue from online streaming music radio has risen to $500 million from $49 million in 2003.

But that's thanks in part to Congress, which stepped in and decreed that smaller Webcasters would pay on a per-revenue basis. Larger Webcasters such as Time Warner's (TWX) AOL Radio, Yahoo!'s (YHOO) online station, and Clear Channel's (CCU) Online Music & Radio already pay on a per-listener, per-song basis—though their rates too would rise under the most recent set of changes.

Specifically, from 2006 to 2008, Web radio music royalty rates will double to 0.14¢ every time a song is streamed to a listener. For a Webcaster playing 14 songs an hour, that will come to 2¢ per listener per hour in 2008. For radio stations with thousands or millions of listeners, those pennies add up. "The rates are disastrous," says Joe Kennedy, chief executive of Pandora, which creates custom radio streams for users. "I'm not aware of any Internet radio service that believes they can sustain a business at the rates set by this decision." The board stipulates further double-digit royalty rate increases through 2010.