Will the RIAA kill net radio?

Original URL: https://www.theregister.com/2007/03/30/webcasting_royalties_analysis/

Taking control

Posted in Legal, 30th March 2007 19:04 GMT

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.

Several organizations have filed motions to reconsider with the CRB. The Digital Media Association asserted in its motion, inter alia, that SoundExchange offered expert testimony that conflicted with its positions in other royalty discussions. They attribute this to "gamesmanship," but it's not hard to see what they're really saying.

The Collegiate Webcasters and the Harvard Radio Broadcasting Company have also challenged the CRB's actions in lumping them in with all other webcasters and requiring them to maintain massive amounts of information for each song played.

SoundExchange, on the other hand, has filed its own motion arguing that the CRB's pronouncement didn't cast a wide enough net. Some of the terms the CRB used in the decision, according to SoundExchange, could exclude cellular radio, or other music delivery systems that don't use TCP/IP.

In addition to the rehearing motions, National Public Radio has already said it will file suit in the District of Columbia Circuit Court of Appeals regardless of whether its own motion is granted, since its beef with the CRB's decision goes far beyond what the CRB can address in a simple rehearing.

So gear up, Net Radio fans, looks like we've got a grudge-match on our hands.

The logical response to NPR's announcement is a simple question: isn't a lawsuit more expensive than compliance with the royalty decision? Maybe, maybe not. Since the case will go directly to appeal, many of the major expenses for things like discovery of evidence will already have occurred. Thus, the appeal itself won't run up too much of a bill beyond what NPR has already put out for as part of the whole review process.

Setting a precedent

Plus, NPR has argued that its format will make compliance with the new royalty structure particularly expensive. Since NPR plays its music interspersed with news and other non-music programming, it is unable to determine how many people are listening at the precise moment that music is played. This prevents it from determining whether the programming exceeds the tuning hour threshold and requires per-performance royalties.

Thus, NPR asserts, the CRB's decision will place a peculiarly heavy burden on it, and prevent it from fulfilling its mandate. Which is, of course, to provide the American people with free, high-quality programming so that the American people can ignore it and listen to shock jocks instead. Moreover, NPR is here to stay, and it has a vested interest in ensuring that the royalty review process works. Some legal precedent telling the CRB how to conduct a review in a decent fashion is good insurance for NPR against any outrageous royalty increases in the future.

SoundExchange, for its part, doesn't see what all the fuss is about. Webcasters have been saying that royalties will push them out of business since 2002, according to a SoundExchange spokesperson. Plus, Simson argues, the webcasters wanted the system involving the CRB, and now they have to live with the results, even if they don't like them.

But a basic question remains: Why would SoundExchange and the RIAA want to kill a source of revenue in these lean times, especially one that has the potential and the market to keep growing into the future?

The answer is complicated. One solution is that RIAA doesn't want to kill the webcasting industry, it just wants to force webcasters into licensing deals whereby it can offer them lower royalties in exchange for the end of broadcasts in mp3 format. The RIAA would love nothing more than to infect all content everywhere with DRM, and this represents a convenient means towards that end.

Another suggestion is that the RIAA does in fact want to cull the small and non-profit webcasters that offer more diverse and esoteric content, while preserving the larger, more easily-controlled players. The fact that Simson justifies the royalty increase by trotting out a sample station that rakes it in with a $20 CPM shows that he's primarily concerned with these bigger, richer stations.

From SoundExchange's perspective, cultivating a smaller number of mainstream webcasters will cut down on administrative costs, since it means fewer songs to keep track of and fewer artists to pay out to. From the RIAA's point of view, keeping listener interest in more varied musical forms and artists to a minimum will allow it to focus on the bland, mass-produced artists that have been its members' bread and butter for the past decade.

Keeping the big webcasters around while letting the small stations and non-profits wither away will keep the money streaming in, but cut out the deadwood that the organizations consider a threat to their long-term interests.

Great plan - unless that deadwood happens to be your favorite music station. ®