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Will the RIAA kill net radio?

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Analysis If this movie looks familiar - it's because it is.

A royalty increase for songs played over Internet radio stations is declared, followed by doomsday predictions that the increase will bring about a cataclysmic collapse of the entire industry.

It's like 2002 all over again. That was when Copyright Royalty Board first set royalties for music played on internet radio stations. Webcasters would pay royalties to a new collection agency, SoundExchange, established by the Recording Industry Ass. of America (RIAA).

Many aspects of the predictions from five years ago have in fact taken place, though not quite on the scale that webcasting advocates feared at the time. Several small webcasters were forced to shutter their operations, and the remaining webcasters had to change their revenue models significantly. During the 2002 fracas, many friends of net radio argued that the royalty changes would destroy the diversity of choice that makes webcasting so appealing to the hardcore music fan. Take a look around at the webcasting scene today, however, and you will find a thriving bazaar of commercial and non-profit webcasters providing everything from Top 40 hits to classical oboe music.

Taking this into account, it's easy to dismiss the current pessimistic prognostications by webcasting insiders as yet another temper tantrum by a young, adolescent industry that has just suffered a major regulatory setback. But many things have changed since those tumultuous days of 2002, and the Copyright Royalty Board has revealed itself to have either an insidious grudge against, or a dangerous misunderstanding about, small and non-profit Net Radio stations.

Royalty hike

This time around, the CRB rejected the "percentage-of-revenue" suggestion coming from all parties to the royalty review (except SoundExchange, of course) and increased the royalty for music streamed under a statutory license by 170 per cent over five years, from $.0007 in 2005 to $.0019 in 2010.

The CRB also tacked on an "administrative fee" of $500 per channel payable to SoundExchange each year. Considering the fact that several small webcasters have hundreds or thousands of channels, this could easily cause a massive red tide for the webcasting industry, or at the very least result in a serious drop in the number of channels offered up to the public. This time around, therefore, the doomsdayers could be right.

A quick look at the numbers shows why. Assuming that most streaming radio stations play about 16 songs per hour, the royalty charge per listener hour in 2006 becomes 1.28 cents (16 songs * $.0008). By 2010 (assuming that Net Radio lasts that long), that number has jumped to 3.04 cents per listener hour. That much pretty much everyone can agree on.

Here's where things get a little more contentious. One commentator has argued that a properly-run web station can pull in two radio spots an hour at about a $3 CPM (cost-per-thousand-views). The Executive Director of SoundExchange, John Simson, on the other hand, believes that webcasters can sell six ads per hour, at a CPM of $20.

Under the former view, webcasters can pull in $.006 per listener hour. Given the presence of other revenue streams - banner ads and the like - the overall revenue for a typical webcaster would be about 1 to 1.2 cents per listener hour. Thus, the royalty payment for 2006 would constitute anywhere from 107 per cent to 128 per cent of the normal webcaster's total revenue. Taking Simson's approach to the numbers, webcasters can generate a whopping 12 cents per listener hour. Adding in additional revenue (which we will keep at the same level as the previous example) gives an overall revenue of 12.4 to 12.8 cents per listener hour. Thus, the 1.28 cents going to SoundExchange doesn't look so bad, amounting to only about 10 per cent of webcasters' overall revenue.

As with all disputes, the answer probably lies somewhere in the middle - but almost certainly far, far away from Simson's numbers. Without any solid industry information on advertising rate cards and revenues for webcast stations, it's impossible to know for sure what percentage of revenue the new royalty charge will take from the industry as a whole. Any webcasters care to tell us the real story?

One thing that is clear, regardless of which set of aggregate numbers you choose to follow, is that the new payments will hit the little guy hardest of all, especially once you take the $500 per channel admin fee into account. Non-profits get a bit of a break since they only have to pay the royalties once they exceed an arbitrary "aggregate tuning hour" threshold set by the CRB. Since they also have very little revenue, however, the new royalties constitute an especially onerous burden for them.

The CRB's ruling gives small commercial and non-profit webcasters the choice of the damned: they can either cough up the extra money necessary to use the statutory license for streaming music, or they can negotiate with the RIAA directly for a contractual license.

In 2002, a group comprised of several small webcasters broke away from the rest of the web community and brokered a deal with the RIAA to do just that. This backroom divide-and-conquer trick by the RIAA split the webcasting community and resulted in the Small Webcasters Settlement Act, which allowed for a negotiated license based on a percentage of revenue or expenses - whichever was greater, of course.

For this go 'round, however, more of the small webcasters and non-profits have grown some marbles and actually decided to fight.

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