Internet Radio Royalties

I am a huge fan of Internet Radio. I listen to it all the time, on my laptop and on our Sonos system. I listen to broadcast radio stations that stream their station like WEHM in East Hampton, I listen to "internet only" radio like Radio Paradise, and I listen to radio 2.0 services like last.fm, pandora, and the hypemachine.

In fact, many of the naysayers about HD in the comments to my most recent post on that topic cite radio over the Internet as the nail in the coffin for satellite and HD radio. I do think that getting radio delivered over the Internet is a great thing and when high bandwidth reliable wireless Internet is available everywhere, that may be the best way to get radio. That's a long way away, however.

Yesterday, I got a comment from Druce (I always get great comments from Druce) pointing me to this post on RAIN (Radio and Internet Newsletter). I'll pull some quotes in case you don't feel like clicking on that link:

The Copyright Royalty Board (CRB) has announced its decision on Internet radio royalty rates, rejecting all of the arguments made by Webcasters and instead adopting the "per play" rate proposal put forth by SoundExchange(a digital music fee collection body created by the RIAA).

RAIN has learned the rates that the Board has decided on, effective retroactively through the beginning of 2006. They are as follows:                                

            

                                                                                                                                                                                                                                                                                                                        

2006	$.0008 per performance
2007	$.0011 per performance
2008	$.0014 per performance
2009	$.0018 per performance
2010	$.0019 per performance

A "performance" is defined as the streaming of one song to one listener; thus a station that has an average audience of 500 listeners racks up 500 "performances" for each song it plays.

RAIN goes on to suggest that these rates are non economic for services like Pandora, last.fm, and internet only services like Radio Paradise.  RAIN also suggests that these rates aren't going to hurt traditional radio broadcasters like CBS Radio and Clear Channel. But I don't understand why they would be non economic for the new players and not for the older players.

Anyway, I am not sure how big of a deal this is, but it certainly seems like a troubling development. If you know more about this, please leave a comment.

                         

Comments

[Erik Schwartz]

It's been a while since I worried about this stuff. I seem to recall that if you're retransmitting a terriestrial, over the air broadcast online, there is no additional fee other than the ASCAP, BMI and SESAC licenses.

Now it's been a long time since I was involved in DIMA stuff, so this might have changed.

These rates are onerous enough to really kill online radio. Personally I'm staying away from the business side of the music industry right now. The industry is in way too much flux. Between the labels, technology and the growing power of Apple it's very difficult to understand how to build a new business in that area.

[Rags Gupta]

Fred, I don't think it will be the death knell for the industry but will surely impact funding, valuations, profitability. The big guys like CBS & ClearChannel can better afford these rates, even as a loss leader. Imagine if you're a business and you just found out that the key input to your COGS will rise by more than 250% in the next 3 years. More thoughts at http://www.ragsgupta.com/weblog/2007/03/new_royalty_rat.html

[Jon Smirl]

If you do the math this will force Real to charge $35-40/mth for Rhapsody in 2010. That's per listener, if more than one stream is active in the household it will be even more.

Compare that to the 200 channels of television I'm getting with unlimited simultaneous viewers on different channels for $42/mth.

Net result will be to destroy Internet radio and drive homes to satellite for background music where one fee covers all home and mobile use.

This could also end the availability of Music Choice on cable since it may triple the fees they are paying.

The problem here is that ratings account for people walking out of the room and leaving the TV turned on. Internet radio doesn't allow for this.

[Hank Williams]

Unfortunately, Pandora, last.fm and Hype Machine are not radio services in the manner defined by the DMCA and so do not qualify for the above rates. The rates you cite are statutory rates for compulsory licensing of what you might call non-interactive radio services. This means services that don’t let you skip songs and that do not create personalized experiences for you.

Services that do personalize do not get the benefit of compulsory rates determined by the library of congress. These services must negotiate with the record labels to get licenses in the same way that Rhapsody, for example, does.

Pandora feigns a belief that they qualify for compulsory licensing. In truth, behind closed doors, they know better, and they know at some point the labels are coming after them if they don’t come to the table. Last.fm has also been operating under this pseudo belief that they qualify for the compulsory license with the statutory rates. But in the last few weeks they demonstrated that they know better when they signed agreements with Warner and EMI at presumably higher rates than the cited statutory rates. Of course these deals don’t mean that much without Universal onboard since everyone always lets those guys do the dirty work and they have by far the largest catalog.

So the interesting question is not whether the compulsory rates are too high. In fact the real question is whether the *negotiated* rates that will be required for these services to operate are sustainable, or what business model changes will be required.

[hank williams]

In response to Jon, Real already pays *far* more than 0.0008 per spin. They pay 0.01 per spin to operate. This is higher than the compulsory radio license fee and would be higher than a negotiated interactive fee because it is fully on demand as opposed to interactive radio which does not give you full song selection control. So, to be clear, Rhapsody is making money for Real Networks at the much higher 0.01 per spin.

[Chris Gilbey]

I am not going to suggest I know the granular issues of the proposed fee schedule in the US. I do have some insights into what happened in Australia though.

I was in the music biz for many years, was an early investor in FM Radio and had an online radio station in 2000 (bigfatradio).

In Australia there is a similar arrangement in place with regard to Internet Radio per play fees. The difference here - and I would be particularly interested in someone checking this for the US - is that terrestrial radio stations that already pay for content via the basic terms and conditions of their agreements with both of the societies do not have to pay any additional fee for rebroadcast via internet.

It would be interesting to see if this same structure is in place in the US. It would then represent an opportunity to buy up cheap terrestrial licenses of small AM stations and pay a very small set of fees for performing rights etc and then issue podcasts. Of course this doesn't address the LastFM and Pandora models of creating playlists on the fly....

In any event I have no doubt that if a dedicated online music company acquired a terrestrial license it would get a lot more clout in the negotiations...

[Jason Herskowitz]

RAIN's rough calculation is that, based on the 2006 rates, AOL would be paying upwards of $20 million in royalties for Radio last year. And if listenership metrics stayed flat through 2010, that means the bill would be close to $50 million/year by the end of the decade.

So, you want to create the next killer online radio service and grow it virally to be the "next big thing"? You better raise about $30 million dollars just so you can pay your bill when they come collecting. Oh, that's right.... no one will do that, instead we will see further innovation around how to skirt around royalty liabilites via various legal loopholes and safe harbor.

Congrats to the Copyright Royalty Board, it appears that by 2010 they will have effectively priced many of the legitimate online broadcasters out of business... paving the way for many other technologies and approaches where they most likely won't see a dime.

[Jon Smirl]

At a penny a play Real is pretty exposed at $10/mth. If I leave Rhapsody running in my basement and ignore it: 30 days * 24 hrs * 60 min / 3.5 min per track = 12,342 tracks or a royalty due of $123/mth. If you listen to Rhapsody over 2hr/day they are losing money.

Somebody has music turned on somewhere in my household probably 16 hours a day. Real plus a Sonos system looks like a disaster for them.

How can they be paying so much? Who pays $10/mth to subscribe and then doesn't use the service.

[David Oxenford]

In answer to a couple of the questions posted above, these rates do apply to the Internet streaming of over-the-air broadcast signals. While the fees paid by broadcasters to the Performing Rights Organizations (as least ASCAP and BMI) for the right to the over-the-air public performance of a composition do cover streaming, in the US there is no royalty for the over-the-air broadcast of the sound recording itself. The royalty in the sound recording only applies to non-broadcast digital services (like internet and satellite radio). And it applies to anyone who streams a noninteractive service on the internet, including broadcasters. For more information about the background of the CRB decision, and some details about the decision itself, see the posting on my blog http://www.broadcastlawblog.com/archives/internet-radio-more-on-the-copyright-royalty-board-decision-on-internet-radio-music-royalties.html

As for Pandora and other services with some degree of consumer influence - where the line is drawn as to how much influence is too much is still to be determined. There has been some litigation on the issue, but no definitive answer. Some use of consumer preferences to develop a stream seems to be allowed (e.g. limited use of a skip button, streams developed based on favorites) but who knows where the outer limit of this functionality will lie.

[john]

Hey, you know what you get from XM and Sirius?

Great DJ's.

While with Pandora and last.fm you get human-guided (more or less) selections, you don't have that explanatory persona.

There's real value there.

[David Porter]

Fred,

I couldn't get this to post earlier but trying again now -- I did a quick analysis of the CPM required to cover the cost of these performance royalties (http://davidporter.wordpress.com/2007/03/04/new-royalty-rates-for-internet-radio/).

Upshot is that, assuming an ad-based model is used, the roughly ~$10 CPM *per hour* required today escalates to $28 by 2010. So some combination of audio, banner and video ads run during the course of an hour will need to generate this level of revenue just to be able to pay SoundExchange.

But there's also composition royalties (ASCAP, BMI, SESAC), bandwidth and overhead to be paid before a webcaster can realize any profit.

Perhaps the most tragic aspect of this ruling, if it holds on appeal, is that a percentage-of-revenue rate for small webcasters (I believe the threshold was $1.25m in annual revenues), enacted by Congress in 2002, is no longer available. This will likely doom many smaller internet radio offerings.

[Bruce Barber]

Does anyone know where we stand on royalities for Podcasts?

John is right-- great DJ's are important to both the discovery of new music and to a greater appreciation of older songs.

As I understand it, however, it is currently (next to) impossible to pay the proper royalties necessary to legally produce a music Podcast.

[Scott Clark]

The US Copyright office puts podcasts in the downloads category..."The term “noninteractive” means that the subscriber chooses a channel rather than a particular song, and the songs that our licensees transmit cannot be manipulated by the listener, as in fast forwarding, rewinding, or downloading. Downloads are reproductions and are considered a different right not covered by statutory license and thus not part of SoundExchange’s responsibilities. Such rights must be licensed directly from the SRCO.”

Also... I have an Excel worksheet for radio station royalties on my blog if anyone is interested. No, there are no ads. If you improve the spreadsheet, send me the improved one and I'll post it!

http://sitecreations.com/blog/2007/03/internet-radio-royalties-announced.html

[Howard Greenstein]

It is annoying that we were talking about this in 2001
http://www.howardgreenstein.com/blog/stories/2002/08/23/radioRadio882001.html
and the situation has gone from bad to worse.
There are a lot of cool stations out there, including one of my favorites, http://9412.com that plays classic rock with really deep cuts, and who are always doing the PBS style fund raising drive just to stay afloat.
I will miss them if this kills them.

[druce]

The picture I have is that there is a composition copyright for 'words and music by Lennon and McCartney'. You pay them (or whoever owns that copyright) for the right to perform their song on the radio, or on a jukebox. The analog terrestrial stations pay, and it seems to be not a big deal.

Then there is a different performance copyright for Joe Cocker's recording of a Beatles song. The copyright office held that people who stream digitally have to pay the performance copyright owner, ie the record company, for each individual stream. Analog terrestrial stations don't have to pay something to the record company per Arbitron listener per song AFAIK.

(where this leaves digital HD radio or satellite is anyone's guess)

Seems kind of arbitrary that Clear Channel can use the public airwaves and not pay the record companies a dime, while an independent Internet radio station can't stream the same song on the Internet without forking it over.

Hopefully there will be public outrage, appeals, and more realistic rates.

I've discovered lots of great music on Radio Paradise, (and others like SomaFM) and Bill and Rebecca and others have put their heart into building real music communities and it would be tragic to lose them through a brain-dead regulatory decree.

[J.D.]

There's some good info on this topic (the original topic, not the topic most of the comments seem to be about) from long-time independent internet broadcaster SomaFM:

http://somafm.com/news/

[druce]

here's an analysis that concludes that an Internet radio station would owe $8.91 per listener per year in 2006, rising to $15.59 in 2010.

A terrestrial radio station would owe $1.56 per listener rising to $1.94.

http://www.betanews.com/article/Dissecting_the_Proposed_Internet_Radio_Royalty_Fees/1173391352

[Gabriel]

There is an excellent site with thousands of online media, such as newspapers, online tv, internet radio, etc: http://www.mediaplanetaria.com.

Highly recommended!

[PocketRadio]

The smaller, independent broadcasters will obviously suffer, but I do hope it knocks Clear Channel's HD streaming off the Web, and discourage more stations from going HD:

http://www.clearchannelmusic.com/hdradio/

The Receptor HD has now been discontinued, and we know it is because a totally apathetic general public has not bought into the HD Radio farce:

http://www.radioworld.com/pages/s.0121/t.7140.html

HD is now dead in-dash:

"Satellite showdown" CNNMoney.com

"Satellite radio is a viable business model. Every car is going to have satellite radio eventually. Think of the number of cars out there, and how more people are getting used to the service, he said."

http://money.cnn.com/2006/11/07/technology/satellite/index.htm

[PocketRadio2]

HD Radio is DOA and iBiquity is looking at other options, like they have any:

http://hdradiofarce.blogspot.com/

[geofones]

From Pandora today:-
hi, it's Tim,

This is an email I hoped I would never have to send.

As you probably know, in July of 2007 we had to block usage of Pandora outside the U.S. because of the lack of a viable license structure for Internet radio streaming in other countries. It was a terrible day. We did however hold out some hope that a solution might exist for the UK, so we left it unblocked as we worked diligently with the rights organizations to negotiate an economically workable license fee. After over a year of trying, this has proved impossible. Both the PPL (which represents the record labels) and the MCPS/PRS Alliance (which represents music publishers) have demanded per track performance minima rates which are far too high to allow ad supported radio to operate and so, hugely disappointing and depressing to us as it is, we have to block the last territory outside of the US.

Based upon the IP address from which you recently visited Pandora, it appears that you are listening from the UK. If you are, in fact, listening from the US, and are denied access from Pandora on or after January 15th please contact Pandora Support: [email protected]

It continues to astound me and the rest of the team here that the industry is not working more constructively to support the growth of services that introduce listeners to new music and that are totally supportive of paying fair royalties to the creators of music. I don't often say such things, but the course being charted by the labels and publishers and their representative organizations is nothing short of disastrous for artists whom they purport to represent - and by that I mean both well known and indie artists. The only consequence of failing to support companies like Pandora that are attempting to build a sustainable radio business for the future will be the continued explosion of piracy, the continued constriction of opportunities for working musicians, and a worsening drought of new music for fans. As a former working musician myself, I find it very troubling.

We have been told to sign these totally unworkable license rates or switch off, non-negotiable...so that is what we are doing. Streaming illegally is just not in our DNA, and we have to take the threats of legal action seriously. Lest you think this is solely an international problem, you should know that we are also fighting for our survival here in the US, in the face of a crushing increase in web radio royalty rates, which if left unchanged, would mean the end of Pandora.

We know what an epicenter of musical creativity and fan support the UK has always been, which makes the prospect of not being able to launch there and having to block our first listeners all the more upsetting for us.

We know there is a lot of support from listeners and artists in the UK for Pandora and remain hopeful that at some point we'll get beyond this. We're going to keep fighting for a fair and workable rate structure that will allow us to bring Pandora back to you. We'll be sure to let you know if Pandora becomes available in the UK. There may well come a day when we need to make a direct appeal for your support to move for governmental intervention as we have in the US. In the meantime, we have no choice but to turn off service to the UK.

Pandora will stop streaming to the UK as of January 15th, 2008.

Again, on behalf of all of us at Pandora, I'm very, very sorry.

tim_signature.jpg

-Tim Westergren
(Pandora founder)