The Internet Radio Royalty Follies

Newly proposed bills that would rescind a decision to increase fees paid for recordings would benefit big Webcasters at the expense of artists and labels

by John Simson

Editor's note: This is the first of at least two Viewpoints on a decision by the Copyright Royalty Board to raise Internet radio royalty fees (see BusinessWeek.com, 3/7/07, "The Last Days of Internet Radio?").

There's a lot of commotion in Washington these days over Internet radio royalty rates. Much of it is coming from large corporate Webcasters and their lobbyists, who are trying to execute a classic Washington end-run. They don't like the results they got from a process they set in motion, so they have gone back to Congress with sky-is-falling histrionics in hopes of getting a do-over.

They're hiding behind a coalition that portrays itself as being a grassroots movement made up of small, independent Webcasters, when in fact large corporate Webcasters funded the coalition and are calling the shots.

The issue? Fair and reasonable royalty rates to compensate performers and record labels when their music is played via Webcasting (also referred to as Internet radio) and on satellite radio and cable audio music channels.

Panel Review

Some quick background: A few years ago, legislators set out to strike a balance between the rights of artists and labels to be fairly compensated for their work and the needs of Webcasters and satellite services to obtain licenses for massive quantities of music. To do that, Congress established a system to set royalty rates for music played via digital technology. Every recording protected under U.S. law could be used by a service, provided that service abided by the terms of the license and paid rates set by a panel of arbitrators and approved by the Librarian of Congress.

After the first Webcasting proceeding ended in 2002, Webcasters claimed that the process cost too much and yielded unfairly high rates, so they successfully lobbied Congress to set up an impartial panel to set rates. This resulted in the creation of the Copyright Royalty Board (CRB), comprised of three impartial expert judges.

The CRB convened an 18-month review that involved weeks of live hearings. Judges heard from dozen of witnesses, took countless depositions, and read tens of thousands of pages of evidence from all interested parties. The judges were privy to confidential proprietary information about the revenues and costs of large and small Webcasters, commercial and noncommercial services, the financial details of performers and record labels large and small, and private deals that had been negotiated between Webcasters and record companies.

Cyber-Chickens?

In short, the CRB did what Congress asked it to do, at the behest of Webcasters. But when the CRB set what it judged to be fair and reasonable royalty rates, the Webcasters decided they were too high, cried foul and denounced the very process they had sought.

Large corporations like Time Warner's (TWX) AOL, Microsoft (MSFT), Yahoo! (YHOO), and Clear Channel (CCU) are in the Webcasting business in a big way. But you would not know it from the coalition set up by big Webcasters to fight the CRB's decision. According to the Chicken Little-themed coalition, the industry is made up of small, independent business Webcasters, and the new rates will cause Webcasting to "die."

While nothing could be further from the truth, a bill was recently introduced by Representatives Jay Inslee (D-Wash.) and Don Manzullo (R-Ill.) that would drastically cut the royalty rates and provide large commercial Webcasters with an estimated annual windfall of $10 million or more that would otherwise be paid to artists and labels. Comparable legislation was introduced in the Senate May 10 by Ron Wyden (D-Ore.) and Sam Brownback (R-Kan.).

If the intent of the Inslee and Manzullo bill was truly to help small Webcasters, a bill to push forward the Small Webcaster Settlement Act of 2003 would have accomplished that. In 2003, Congress decided on policy grounds that small Webcasters should receive a below-market rate, given the infancy of the medium.

Putting Things in Context

Viable, financially profitable Webcasters seem to feel they should be able to play music and make a healthy profit without fairly compensating performers and record labels. The nonprofit group of which I am executive director, SoundExchange, collects and distributes royalties due artists and labels when their music is Webcast and serves as an advocate for these hard-working individuals who far too often are being left out of the equation.

After all, what we're talking about here is music Webcasting, where businesses are being built around a sole product: music. Those who are profiting from playing that music need to pay fair and reasonable rates, which is what the CRB set out to accomplish, and achieved.

To put the whole matter in context consider that, under terms of the CRB decision, a consumer who listens 40 hours a month to one Webcaster will cost the Webcaster only 68 cents a month in royalties in 2007—a sum far less than most Webcasters charge listeners for subscriptions.

A pretty fundamental premise for running a business is that if you make a product, you sell it for whatever price you wish and keep the profits—but if you don't make the product, you sell it only if you pay a reasonable fee to those who did make it. But that's a premise with which some of those in the Webcasting business don't agree, and that's why they're running to Congress to escape.

Simson is executive director of SoundExchange, which collects and distributes royalties on behalf of the recording industry.