Internet Radio Dealt Potentially Fatal Blow

The Copyright Royalty Board (CRB) delivered a severe blow to Internet radio operators Monday when it upheld its earlier decision regarding royalty rates that must be paid to artists for music played online.

The result is — unless Congress intervenes — royalty rates webcasters must pay will increase on May 15 between 300 and 1,200 percent, retroactive to January 2006. As a result, “the very large majority of Internet radio stations will go bankrupt,” Jonathan Potter, executive director of the Digital Media Association (DiMA), told TechNewsWorld.

DiMA represents several large webcasters, including Yahoo, AOL and Microsoft’s MSN network.

“The CRB’s denial of a rehearing today is all but a nail in the coffin for Internet radio, and May 15 now looms as the day the music will die,” Potter stated. “Internet radio provides exposure and royalties for thousands of independent artists and labels that are not represented by broadcast radio — and last year, 72 million people tuned in every month. We call on Congress to step in to save Internet radio for the artists, the labels, the webcasters and — most importantly — the tens of millions of listeners.”

Action Needed

In order for Congress to step in, Internet radio fans need to demand its intervention, Potter stressed, and a coalition was formed Monday at SaveNetRadio.org to facilitate those requests. “Every fan, every independent musician needs to contact their Congressperson today,” he noted. “It’s up to them.”

The Copyright Royalty Board declined to reconsider the matter because of a lack of new evidence. “None of the moving parties have made a sufficient showing of new evidence or clear error or manifest injustice that would warrant rehearing,” the board wrote in its decision. “To the contrary … most of the parties’ arguments in support of a rehearing or reconsideration merely restate arguments that were made or evidence that was presented during the proceeding.”

SoundExchange, which collects the online royalties from webcasters and distributes them to record labels and artists, declared the decision a victory for performing artists and record labels.

“Our artists and labels look forward to working with the Internet radio industry — large and small, commercial and noncommercial — so that together we can ensure it succeeds as a place where great music is available to music lovers of all genres,” said John Simson, the group’s executive director.

Mutual Need

However, whether Internet radio has any chance of survival under the new royalty structure is uncertain at best. “The Internet radio stations by and large have not been profitable to begin with, and these rates will put them even more in the hole,” Phil Leigh, senior analyst for Inside Digital Media, told TechNewsWorld.

It’s not just the Internet radio stations that will be harmed, either, he explained. “The record labels need alternate ways to popularize new releases, and Internet radio is one of them,” Leigh stated. “Historically, new releases were popularized on broadcast radio, but audiences are leaving those stations and going to the Web. The record labels need Internet radio.”

Traditional radio stations do not pay royalties to the recording labels, he added, but they do pay them to composers of the music, which are represented by the music publishers. Because of that, “ever since Internet radio emerged, the labels have been anxious to ensure that they would get paid in this medium,” Leigh said.

Independents Hurt Most

“The record industry is losing money faster than they can count the money they’re bringing in,” added DiMA’s Potter. “They’re desperate, because business on their core, physical product is down another 20 percent this year. So they look at every new revenue opportunity as a revenue-maximization opportunity rather than a chance to build a new market.”

Independent artists enjoy a particularly large benefit from Internet radio, with up to 37 of their playtime on nonterrestrial stations, Potter added. So “they’re going to suffer,” he said. “What you have here is a price-maximization, royalty-extraction program by the major labels, as opposed to the independent artists, who are much more interested in building a new market.”

A Boon for Illegal Sites?

However, it’s not just the smaller labels that will suffer, Potter stated — the big recording labels will be harmed too. “You can charge US$50 for a loaf of bread,” he said, “but if nobody buys the bread, the bread-makers won’t make any money.”

Ultimately, the end result of this could be an increase in illegal music-sharing online, Rob Enderle, principal analyst for the Enderle Group, told TechNewsWorld.

“This is not just a nail in Internet radio’s coffin, it is a fully upholstered coffin with a huge magnet in it and a snap-closed lid,” Enderle said. “And if you shut down the legal Web streaming sites, effectively putting them out of business with these fees, all that will do is shift people over to illegal sites. This is a case of throwing the baby out with the bath water.”

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