Analysis: Web radio fights for survival

The 1970s classic hit "The Day the Music Died" referred to the death of rocker Buddy Holly, but for many Internet radio stations and their listeners, doomsday is October 20.

By then, tens of thousands of US-based Webcasters must pay millions of dollars in back royalties for the songs they stream to listeners online. Already, hundreds of Webcasters are shutting down operations, complaining that the fees exceed their annual revenues. The rates, set by the US Librarian of Congress and the Copyright Office, are higher than those assessed to standard broadcast radio. The music labels' trade organization, the Recording Industry Association of America Inc. (RIAA), is unsympathetic.

"The death date for Internet radio has been reset to October 20," says Kurt Hanson, publisher of Radio and Internet Newsletter (RAIN), which is tracking Internet stations as they close down. So far, he says, hundreds have fallen out of an estimated 50,000 stations. Of those, about 10,000 are "commercial" stations that earn revenues through advertising or subscriptions, according to market researchers.

A bill introduced in Congress last week would provide temporary respite from the fees. However, with lawmakers on hiatus until September, supporters will have to work fast to pass the measure before the Webcasters must pay up.

Culprit: DMCA

Webcasters have been living on borrowed time since the 1998 passage of the Digital Millennium Copyright Act (DMCA). Among its controversial provisions is one imposing so-called performance royalties specifically for the recording artists and music labels. Most Webcasters say they have no complaint with that approach, already the norm in most nations. They disagree with the fees--and with charging Internet stations only.

Performance royalty rates were initially set at 0.14 cents per song per listener, retroactive three and a half years (when negotiations began). The figure horrified Webcasters, who say it far exceeds what most of them make. The Librarian of Congress cut the rate in half on June 20. But those fractions of a cent still add up to very large numbers very quickly.

The decision "will still bankrupt almost everyone who isn't a subsidiary of a deep-pocketed corporation," says RAIN's Hanson.

For example, St. Louis-based 3WK will owe more than US$17,000 in October just to get up to date. "Last year, we took in $10,000," says Jim Atkinson, co-owner of the station, which streams what he calls "indie alternative rock" or "college music" targeted at 25- to 34-year-old men.

"We'll be out of business if [the fee] stands the way it is," Atkinson says. Tracking firm MeasureCast rated 3WK the number 12 station in June. Ratings cover all Webcasters, including commercial broadcast stations with Web streaming operations.

"Our first reaction [to the decision] was shock and frustration, because it's a rate that pushes most small businesses out of the industry, and assures that only the biggest corporations will be streaming music on the Internet," concurs Kevin Shively, director of interactive media at Web-only station

"If we can survive, will it be worth it? I'm skeptical," he adds.

Broadcast Gets a Bargain

Webcasters find it particularly frustrating that their fees exceed those typically paid to songwriters and publishers. Broadcast stations pay under an agreement among Broadcast Music Inc. (BMI), the American Society of Composers, Authors, and Publishers (ASCAP), and the Society of European Stage Authors and Composers (SESAC). Fees run about $250 yearly or a relatively small percentage of gross revenues (less than 5 percent).

The DMCA ordered Webcast royalties to be set under a so-called marketplace-based deal, reflecting what the copyright owners would be willing to accept for licensing, and prices a real-world Webcaster would be willing to pay. This meant they'd be based on existing deals negotiated between Webcasters and the RIAA. The only one was between Yahoo and the RIAA.

And that precedent-setting deal purposely made it hard--if not impossible--for smaller Webcasters to compete, says Mark Cuban, founder of streaming media pioneer, acquired by Yahoo for $6 billion in 1999. "If there was a charge per song, it's obvious lots of Webcasters couldn't afford to stay in business on their own," Cuban said in a June statement to Hanson's RAIN. That would force Webcasters to use services, he says.

Interestingly, Yahoo recently stopped streaming Webcasts from broadcast radio stations, but still streams Internet-only radio channels. Yahoo says the change has nothing to do with the new royalties; its private deal with the RIAA has expired.

Seeking a Battleground

Webcasters have a few lifelines. The Internet Radio Fairness Act, introduced last week by Rep. Rick Boucher (D-Virginia) and Rep. Jay Inslee (D-Washington), would dump the DMCA's requirement to base Webcast fees on existing deals.

"What we will propose will be to set a rate that's based on what's been a traditional standard for evaluating royalties," Inslee says. "I think that will probably result in a smaller royalty, particularly for some of the smaller entities that we think are at great risk as a result of the number that was chosen by the Librarian of Congress."

The bill would temporarily waive the fees while a new Copyright Arbitration Royalty Panel reconsiders rates. But with Congress recessed until September, lawmakers will have only a few weeks to consider the change before the Webcasters' deadline. The bill has no companion legislation in the Senate, which would speed its consideration.

Legislators delayed its introduction to muster bipartisan support, Inslee says. The bill has ten other cosponsors. He calls passage "realistic" despite the tight timetable, because Webcasters are lobbying hard.

"We need emergency-room treatment for this," Inslee adds.

Webcasters could also appeal the existing ruling--an expensive endeavor for the smaller stations that are already hurt the most. And the Washington, D.C., Circuit Court of Appeals is highly conservative and would probably uphold the decision, says John Jeffrey, executive vice president and general counsel for Live365, a Web hosting and tools provider for thousands of individual Webcasters.

Live365 claims to be the world's largest Internet radio provider, with tens of thousands of independent stations using its services. Jeffrey doubts it will go bust under the fees, largely because the company is funded by financial angels with deep pockets. But he notes, "it means going backwards. We have a $1 million liability [for past fees] and going forward it means a base rate of $100,000 per month." When Live365 passes along at least part of the new fees to clients, its customer base is bound to shrink as unprofitable and marginal Webcasters fold up their operations, Jeffrey adds. The new fee structure "very dramatically affects us."

Paired With Pirates

Some Webcasters say they are unfairly tarred by the same brush as file-swapping programs--an RIAA nemesis. Songs played on Internet radio are not good candidates for pirated downloads, they say.

Audio streams on the Internet are MP3 files in formats ranging from 28 kbps up to 128 kbps--much lower quality than the music stream from a CD, says Bill Goldsmith, owner of Radio Paradise, a Webcaster in Paradise, California. While a Webcast stream contains the full audio-frequency spectrum, it omits many of the digital bits that make up the original recording on a CD. As a result, MP3s contain distortion and other audio artifacts that CDs don't. In contrast, a song broadcast on FM radio will contain slightly less than the entire frequency range in the original recording but will have far less distortion than an MP3.

Even at 128 kbps, "you're throwing away seven out of every eight bits of the original stream," Goldsmith says.

Also, online songs are often played sequentially and without breaks, hampering downloads. And DJs frequently talk over the music or between tunes. Certainly it makes Webcast music less inviting for downloading than pirated digital copies taken from original CDs, distributed on peer-to-peer sites.

The RIAA seems to be taking a preemptive approach in its opposition. "New technologies are facilitating the widespread looting of recordings, eating away at the sales that have been the sole source of revenues underlying the entire recording industry," Hillary Rosen, chairman and chief executive officer of the RIAA, told a U.S. Senate hearing in mid-May.

"Technology is moving the consumer away from buying physical goods in the record store, [so] new distribution systems must be available to spread out the risk and ensure a return to those who invest in the creation of sound recordings," she said. "As technology develops, there must be an incentive for labels and artists to license other forms of music delivery."

But the RIAA opposes charging performance royalties on a BMI/ASCAP/SESAC model. Webcasters characterize that stance as sheer greed by the record companies.

Still Fighting

Exempt from the Webcast royalty plan are Webcasters affiliated with National Public Radio (NPR) and the Corporation for Public Broadcasting (CPB), which inked a two-year private settlement with the RIAA before the ruling from the Librarian of Congress. However, some public stations not affiliated with CPB are already dropping their streams, according to Save Our Streams, a group dedicated to furthering Web radio.

Attitudes of other Webcasters range from threatened to defiant to hopeful.

"My goals are pretty modest. I'm just looking to make a decent living and not compromise [musical tastes]," says Radio Paradise's Goldsmith, who spent decades in commercial radio before striking out on his own. His fees under the new rates will be about 120 percent of his revenues before expenses, he adds.

Still, Goldsmith is confident of his own survival. "I have no intention of caving in to the fear that I have to pay that bill [because] I'm totally confident that reason will prevail," he says.

The record labels are afraid the upstarts will disrupt the longstanding way they make money, say Goldsmith and other Webcasters. The established model is to promote a few blockbuster hits to giant media conglomerates that control most of the broadcast radio stations. Webcasting gives listeners choices instead of mass-manufactured, homogeneous music, they argue.

"Folks will continue to find what it is that they want to listen to, and we just want to be there to fill that need," says Kerry Swanson, assistant station manager and chief operating officer at KPLU FM, an NPR station at Pacific Lutheran University in Tacoma, Washington, that simultaneously Webcasts on The jazz station ranked fifth on Arbitron's May list of the top 75 Webcast channels.

Most proponents of Web radio believe the RIAA and its members will eventually drown in the Internet radio tsunami. And the RIAA may even find that its fears are misplaced.

"In the early days of [broadcast] radio, [record companies] tried to shut down radio stations because they were afraid that nobody would buy records if they played them on the air," says KPLU's Swanson. "If we can work out a [business] model that allows streaming to expose artists to audiences with intense interests, that benefits everybody."

Paradise Radio's Goldsmith agrees. "I truly believe that providers of quality content will survive no matter what happens to the distribution chain. Quality will always matter."

Stephen Chiger and Anne Ju contributed to this report.

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