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Internet Radio Hears the Sound of Defeat

Amid continued controversy over applying the Fairness Doctrine to radio, the controversy over charging webcasters millions in retroactive royalty fees has seemingly come to a conclusion. On Thursday, the House of Representatives failed to come to the rescue of webcasters in a dispute with record companies over new royalty rates the Copyright Royalty Board (CRB) put into place. Still, many broadcasters claim they cannot afford the increased fees and might go silent forever.

At the hearing, the committee explored ways of revising the regulations that aimed to maintain a wide variety of listening options while also ensuring that artists are fairly compensated. Witnesses from broadcasting companies testified as to the impact a flat fee system would have on their businesses, and supported maintaining the current revenue-based payment approach. Musicians discussed how the Internet is an important vehicle for getting their music out, particularly for newer artists who do not yet have a strong fan base, demonstrating the vital role webcasters play in the music industry.

“Internet radio provides an important opportunity to diversify listening options and promote lesser-known artists who otherwise would not have their songs broadcast,” Chair of the Committee on Small Business, Nydia M. Velazquez, said in a statement. “This is a new and exciting field with vast potential for growth, but the CRB regulations will be a major obstacle for expansion of the industry.”

Communications Breakdown

Maybe so, but Congress has decided not to interfere with the CRB regulations. The royalty rate increase begins July 15, but Velazquez, along with many others, is hoping that the record label owners, musicians and webcasters can come together and resolve the issue on their own.

SoundExchange, the company that collects royalties on behalf of the music labels, had already proposed webcasters could continue to pay the current, lower royalty rates Congress set in 2002 for the next three years. Under that scenario, firms would pay a percentage of their revenue, a system beneficial to small companies with lower profit margins.

The new CRB regulations, by contrast, designate a flat fee that must be paid each time a song is played. Some industry insiders have projected that royalty payments will more than double. Others say fees will triple. What is certain is that the new regulations will cover all broadcasts since January 1, 2006, leaving webcasters open to high back-fees and possible legal action for unauthorized public performance.

Webcasters rejected SoundExchange’s previous offer to keep the 2002 guidelines in place, noting that it would keep large players from making a profit and put smaller webcasters out of business. Mike McGuire, a Gartner analyst, said the situation is grim for webcasters of all sizes.

The Cost of Radio Freedom

“The music industry wants to extract more revenue from webcasters who are using their content. The risk of jacking fees up is that it’s not an equal distribution. The larger sites have a greater ability to pay than smaller webcasters,” McGuire noted.

Some industry watchers might ask why the music industry should support a webcasting business model that might never generate much revenue for copyright owners or artists. But McGuire called that question shortsighted. “How could we have predicted four years ago the popularity of a site that allows people to post short clips of video, like YouTube?” he asked. “There’s no organized theme or principle to YouTube. It’s just video. Would we have come up with a billion-dollar valuation? Probably not.”

McGuire’s point is this: Dynamics on the Internet change quickly and it’s difficult to accurately predict how business models will pan out in the future. So, the music industry and the webcasters who broadcast their content to some 57 million listeners are back to the same challenge. “The industry wants to extract as much revenue as it can,” McGuire concluded, “but asking for too much, too soon risks foregoing or foreclosing significant revenue opportunities in the future.”

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