New royalty rates may kill online radio

Will new costs put radio stations out of business?

Will a recently approved increase in music royalty fees for Internet radio operators kill online radio?

The answer is yes, according to operators of Internet radio stations who are railing against a March 2 decision to increase music royalty fees for Web radio operators.

But that's not the case, said a spokesman for SoundExchange, the group set up by the Recording Industry Association of America (RIAA) to collect those royalties for performers and record companies.

Under a ruling by the US Copyright Royalty Board of the Library of Congress, royalty rates will be changed from a percentage of revenue to a per-song, per-listener fee. The entities affected include pure play Internet radio stations, digital music stations like Pandora.com and traditional broadcast stations that also stream their programs.

"In our case, we've been operating for the last five years under what's called the small commercial webcaster royalty rate, which is something that Congress sort of forced SoundExchange to offer small webcasters so they didn't go bankrupt five years ago," said Kurt Hanson, who runs Chicago-based AccuRadio.com and also publishes the Radio and Internet Newsletter. "That rate -- the sound recordings royalty -- is about 12 percent of revenues. Broadcast radio pays a composer royalty and has never had to pay the sound recordings royalty," Hanson said.

Under that royalty agreement, which has been in place since 2002, the rates paid to performers were between 6 percent and 12 percent of a station's revenue.

But the revenue percentage deal negotiated between the RIAA and Internet radio stations in 2002 expired, and after unsuccessful negotiations between the two entities, Congress created the Copyright Royalty Board to come up with new royalty fees.

The new rates charge US$.0008 per song per listener for 2006 (the royalty board's ruling is retroactive to 2006); US$.0011 in 2007; US$.0014 for 2008; US$.0018 for 2009; and US$.0019 for 2010. For multichannel operators like Pandora.com, a service that helps users find music on the Web, the fee is a flat US$500 per radio channel for a particular number of listening hours per month.

Hanson said that under the previous royalty rate, his radio station paid US$48,000. Under this decision, AccuRadio's royalty obligation for 2006 would be US$600,000, he said.

"So we're bankrupt," he said.

Hanson said Web radio operators are considering their options, which could include an appeal of the board's ruling.

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