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Yahoo, AOL May Abandon Web Radio

Yahoo! Inc. and Time Warner Inc.’s AOL unit may shut down their Web radio services after being hit with a 38 percent increase in royalties to air music.

“We’re not going to stay in the business if cost is more than we make long term,” Ian Rogers, general manager at Yahoo’s music unit, said in an interview.

Yahoo and AOL stopped directing users to their radio sites after SoundExchange, the Washington-based group representing artists and record labels, began collecting the higher fees in July. Those royalties may stifle the growth of Internet radio, which increased listeners 39 percent in the past year, according to researcher ComScore Inc. in Reston, Virginia.

Radio sites have been “dealt a severe blow,” said Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co. in New York. “It seems very unlikely that at this stage a solution will be reached.”

Yahoo, based in Sunnyvale, California, is promoting a music service offering videos and songs for sale rather than its Launchcast, the largest Web radio site, Rogers said.

As a result, the number of people using Launchcast fell 11 percent to 5.1 million in October, according to ComScore. AOL Radio users declined 10 percent to 2.7 million from 3 million. Radio sites attracted 51.2 million U.S. visitors last month, more than a quarter of all U.S. Web users.

`Very Challenging’

SoundExchange, which represents record companies including Sony BMG, Warner Music Group Corp., and Vivendi SA’s Universal Music Group, sought the royalty increase amid a drop in industry revenue. U.S. sales of compact discs fell 20 percent from 2004 to 2006, according to data from the Recording Industry Association of America.

The two sides couldn’t agree on new rates in late 2005, putting the matter before the Copyright Royalty Board, a panel of three judges appointed by the U.S. Copyright Office.

Siding with the music companies, the board in March ordered that royalties be raised to 0.11 cent for each song listened to from 0.08 cent last year. The rate is scheduled to reach 0.19 cent in 2010.

“The current math doesn’t add up,” said Lisa Namerow, managing director of AOL Radio in Dulles, Virginia. “If the rates remain as they are, it would be very challenging to sustain a business that is profitable.” The radio sites generate revenue by selling advertising.

Losing Money

Yahoo and AOL don’t disclose the finances of their Web radio units. Oakland, California-based Pandora Media Inc., the largest privately owned Internet radio company, is losing money, founder Tim Westergren said in an interview.

The companies are hoping to wrest a reduction in the royalties in discussions that have been held since July with SoundExchange, which has offered lower fees to smaller Internet radio sites. The major Webcasters are represented in the talks by the Washington-based Digital Media Association, which also has asked the U.S. Court of Appeals in Washington to overturn the royalty board.

Peter LoFrumento, a spokesman for Santa Monica, California- based Universal Music Group, the world’s largest record company, referred questions on the royalties to SoundExchange. John McKay, a spokesman for New York-based Sony BMG, the second-biggest music company, also declined to comment. The company is owned by Sony Corp. and Bertelsmann AG.

“We want to make sure there’s fair treatment of everybody,” said Richard Ades, a SoundExchange spokesman. “That doesn’t mean cutting what the recording artists are paid.” SoundExchange collects monthly fees for more than 3,000 record labels and 20,000 artists.

Threat to Growth

The new rates are a fair increase from modest levels, Cathy Fink, a Grammy Award-winning children’s musician, told Congress in June. “The royalty fees that were ultimately set by the board reflected the value of the recordings,” Fink said in written testimony.

According to analyst Lindsay, the higher fees will “kill the growth” of Yahoo’s Launchcast. Revenue at Yahoo’s music unit may rise 4.7 percent to $45 million in 2008, compared with a 19 percent increase this year, he estimated. Launchcast accounts for about a quarter of the division’s sales, Lindsay said.

Total sales at Yahoo reached $6.43 billion last year, while net income was $751.4 million. AOL’s 2006 operating profit amounted to $1.92 billion on revenue of $7.87 billion.

Yahoo advanced $1.03 to $26.62 at 10:53 a.m. New York time in Nasdaq Stock Market trading. Time Warner gained 37 cents to $16.93 on the New York Stock Exchange.

“We’re really re-examining the radio model,” AOL’s Namerow said. “Shutting down the business” is a possibility if Webcasters and the music industry don’t come to an agreement.

Bills in Congress

Congress may be the last resort for the Webcasters. Bills introduced in the House by Democratic Representative Jay Inslee of Washington and in the Senate by Democratic Senator Ron Wyden of Oregon would repeal the royalty increases. Democratic Representative Edward Markey of Massachusetts said in July that Congress may act if a compromise isn’t reached.

Failure to reduce royalties may mean shutting down Pandora, founder Westergren said.

“At the new rates we’re losing tons of money,” he said. “If we don’t think there’s a real answer that’s going to happen, it’s our fiduciary responsibility to stop.”

To contact the reporter on this story: Meg Tirrell in New York at [email protected]

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