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Who'll win the webcasting war?

A report from the battlefield

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Column On March 20, 2007, The Copyright Royalty Board (CRB), a three judge panel appointed by the Librarian of Congress whose mission it is to determine rates and terms for copyright statutory licenses, shocked the webcasting community by announcing dramatically higher rates for use of recorded music by large commercial and small webcasters alike.

The rate increase was so steep that, if enforced, many webcasters felt they would no longer be able to continue in business.

Under the newly proposed rates, annual fees for all station owners would be projected to reach $2.3bn by 2008. The outcry was so strong, members of the US Congress proposed legislation, The Internet Radio Equality Act, that would completely countermand the CRB's decision, and subject rates to a cap of 7.5 per cent of each station's revenues.

In the meantime, Congress has urged Sound Exchange, the independent body that represents both artists and labels, to negotiate a compromise with the webcasters. To date, the parties have not announced any significant progress; in fact, the debate is veering off-track, more demands are being made, and tension between the two is rising to the point of collapse.

As a result, Congress is threatening to take action by moving the Internet Radio Equality Act to the floor if a compromise cannot be completed by Labor Day. All the while, the fate of internet radio, including such innovative services as Pandora and Live 365, lies at stake.

What must a webcaster pay?

Webcasts of songs (as opposed to the music recordings embodying those songs) are subject to blanket licenses provided by authors' collection societies. In the US, these societies are ASCAP, BMI, and SESAC.

Each requires payment of only a small fraction of revenues from individual webcasters in return for granting the right to play any song in their repertoire.

Collectively, these three PROs, which represent virtually all commercially popular songs still protected by copyright, charge about six per cent of each webcaster's advertising and/or subscription income. The situation is a bit different for masters - that is, the recordings in which the songs are embodied.

The Digital Millenium Copyright Act (DMCA) provides a compulsory license under which qualifying webcasters can use any recorded music for fees to be determined pursuant to the statute. And it's these rates that lie at the heart of the webcasting controversy.

How the new rates compared with the old

The old rates made a clear distinction between large commercial webcasters, such as AOL and Yahoo!, small "mom and pop" webcasters, and innovative services such as Live365 and Pandora (separate rates were set forth for non-commercial and educational webcasters).

"Large" commercial webcasters will end up paying almost 300 per cent more in per-performance, per-listener royalty rates by 2010. Under the old schedule, if for example 10,000 people listened to 100 songs each day the fee would equal $762 - or a yearly fee of approximately $278,000.

The CRB judges raised this per-play, per-listener royalty schedule so that in our example the webcaster would pay $401,500 in 2007, increasing to $693,000 in 2010.

Under the old schedule, large webcasters were required to pay upfront a minimum per-channel fee of $500, capped at $2,500, notwithstanding the number of channels. Under the new schedule, the cap has been completely removed, so a webcaster with 200 channels would have to pay $100,000 upfront.

"Small" webcasters, that is those with gross revenues of less than $1.25m, were previously required to pay a proportion of gross revenues. This was deemed fair by Congress when it passed the Small Webcasters Settlement Act back in 2002, because small webcasters make much less money from advertising and subscription revenues. The CRB's recent announcement would make small webcasters responsible for paying the same rates as large webcasters. Moreover, the rates would be higher. Many webcasters could never afford to pay these rates.

In the words of Radio Paradise's Bill Goldsmith: "This royalty structure would wipe out an entire class of business: Small independent webcasters such as myself and my wife, who operate Radio Paradise. Our obligation under this rate structure would be equal to over 125 per cent of our total income. There is no practical way for us to increase our income so dramatically as to render that affordable."

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Next page: Stalemate

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