Labels to Strangle Internet Radio?

The last frontier of independent programming is under siege; thousands of webcasters may be put out of business

Credit: Dennis Cox

After two years of battling downloading sites such as Napster, Morpheus and Kazaa, the music industry has opened a new front in its Internet war: Web radio. During the past few years, webcasters — from major outlets such as Radio Free Virgin to tiny operations such as the all-porpo-soundtrack station Fluffertra X — have quietly built a huge new audience: An estimated 25 million listeners tune in to 10,000 different stations.

Now, record companies have proposed a new set of royalty rates and regulations that could drive many of these independent webcasters off the air. "There's no question in my mind that this will put people out of business," says Will Lewis, a management consultant for listener-supported KCRW-FM, in Santa Monica, California.

For fans of cutting-edge music seeking relief from the monolithic programming of commercial rock radio, the Internet has been a little bit of heaven, making unique local programming from around the country as close as their computers. Research firm GartnerG2 says fifteen percent of all Internet users tune in to Web radio. And they are loyal. According to MeasureCast, a company that monitors Internet radio, the average Web listener tunes in for four hours a day.

Web surfers who regularly listen to the popular online version of The New Afternoon Show, a daily dose of new independent and import recordings broadcast daily on New York's WNYU-FM, got a glimpse of the future when the station suspended its webcasts in early April in anticipation of costs associated with the new rules. Other stations are following suit, and many fear the proposed rules will deal thousands of webcasters a death blow.

"The royalties are three and four times their gross revenues," says Jonathan Potter, executive director of the Digital Media Association, a Washington, D.C., trade and lobbying group whose members include the major commercial webcasters as well as smaller outlets. Potter questions the decision by the Recording Industry Association of America, the record labels' lobby group, to seek royalties from tiny mom-and-pop webcasters who post programming for the fun of it. "These people are doing it because they love it, not to make money. It's just remarkable the way the record industry continues to alienate its best customers."

The new regulations won initial approval largely through the lobbying efforts of the RIAA, and will be decided on by the Librarian of Congress by the end of May. The change is a result of 1998's Digital Millennium Copyright Act, which, among other things, granted record companies and artists the right to be paid an additional royalty whenever their recordings are played on Internet radio. Unlike existing royalties paid to songwriters and music publishers, which are based on annual licensing fees, the royalties webcasters would have to pay record companies and performers would be figured on a per-song and per-listener basis. The fee — 14/100ths of a cent — sounds minuscule but quickly adds up to a much higher figure than the set fee paid to songwriters and music publishers. And while many webcasters say they are not opposed to paying the royalty, they complain that the rate and the cost of complying with the rules, which were proposed in February by a Copyright Arbitration Royalty Panel, will bankrupt them.

"If they were going to try and say that 100 percent of the music we program is subject to RIAA fees, our royalty bill would be about $30,000 a year," says Ken Freedman, station manager of WFMU-FM, in Jersey City, New Jersey. Because the royalty rate would be retroactive to 1998, when the DMCA was passed, Freedman says his station could be looking at a bill of $120,000 — an enormous load for an independent, non-commercial outlet whose total operating budget is $700,000 a year.

Michael Bracy, director of government relations for the Future of Music Coalition in Washington, D.C., says small webcasters have been caught up in a regulatory net intended for bigger fish such as AOL Time Warner, Microsoft and Yahoo!, companies with plans for large commercial Internet-music operations. "Nobody in Washington is publicly interested in shutting down noncommercial webcasters," Bracy says.

Yet the recommended rates come on the heels of the record industry's battle against file-sharing services, and Steve Marks, senior vice president of business affairs for the RIAA, says record companies and performers have to consider how they are going to make money in the future. "The way people consume music is changing," Marks says. "In the past, [record labels and performers] only got paid on sales. Now technology is changing the way people consume music, and there is no guarantee regarding the future sale of CDs." He defends the new rates as fair, noting that noncommercial stations pay less than a third of the rate for commercial webcasters, and predicts that the payments are "not likely to add up to very much." Says Marks, "We want Internet radio to be successful. These are companies paying us royalties, which we don't get for over-the-air broadcasts. Why on earth would we want to push them out of business?"

The new royalty and reporting recommendations have raised eyebrows in Congress. On April 22nd, a group of twenty congressmen, led by Rep. Rick Boucher (D-Va.) and Rep. Chris Cannon (R-Utah), wrote to the Librarian of Congress expressing fears that the panel's rules and rates were not in keeping with the DMCA's intended goal of encouraging media growth on the Internet.

Additionally, webcasters would have to provide extensive information about every song played — including who the copyright holders are; the album's title, label and bar-code number; and the year it was released — as well as report who is listening, including when they log on and off and where they live. Brian Zisk, technology director for the Future of Music Coalition, views the reporting regulations as an end run by the RIAA to get webcasters to do the record industry's market research. "The more information the RIAA can get, the more valuable their database is," he says. And while forthcoming technology is expected to make gathering this kind of information easier, webcasters complain that they can't afford the time and expense required, and that it will eliminate thousands of mom-and-pop webcasters.

Although statements by the RIAA have expressed disappointment that the royalty rate suggested by the panel isn't higher, the record-industry group has indicated a willingness to deal. In a late-April letter to the Librarian of Congress, the RIAA said it was willing to drop reporting requirements on listeners. And on the issue of royalties, the group has cut a confidential one-year agreement with the Corporation for Public Broadcasting covering royalties for public-radio stations, perhaps signaling a willingness to entertain arrangements with other noncommercial webcasters.

Still, that hasn't mollified some of the webcasters, who are girding for an all-out legal war. "We have a game plan," says WFMU's Freedman, "which is not to comply if the recommendations are ratified — although I don't think they will be."

And what does Freedman think the RIAA's response will be? "We expect to be ignored or sued. If they sue us, we'll defend ourselves in court. People are intrigued by our approach but think we're suicidal. Most stations are just scared out of their wits."