The Royalty Problem
Conventional radio broadcasters pay royalties to music associations (such as BMI and ASCAP) for the right to play the music we hear every day on the radio. The rates charged by the associations are the only royalties charged to broadcast radio stations. Radio broadcasters typically don't pay fees to the record companies for the ability to play their recordings on-air. The historic thinking behind this rule is that record companies actually benefit from having their songs played on the radio, as airplay will lead to sales of records, tapes, and CDs.
Conventional broadcasters were able to build their businesses over a period of years as the radio licensing rules were under development. And the rate structure now in place for conventional radio allows broadcasters to thrive. That's one reason that industry consolidation happened on such a wide scale in such a short time: Broadcast radio stations are lucrative.
Not so with Internet radio. Before I even mention the royalty issues, just think about the other impediments webcasters face. The first ought to be obvious to anyone who works in the online arena: advertising rates. Advertising rates for Internet-based media have seen a steady four-year decline and remain at levels that make it extraordinarily difficult for companies to build online businesses based solely on advertising revenue. The second problem is that the listening audience for Internet radio is still small. Really small. Even though webcasters justifiably see the entire world as a potential audience, that audience typically has a dial-up Internet connection and tinny-sounding $35 speakers.
With just those impediments, it would take years for Internet radio to really penetrate deeply into the public consciousness. The royalty rates for webcasters, however, threaten to keep the medium from ever maturing.
The DMCA Strikes Again
Webcasters, of course, must compensate copyright owners when they wish to play music recordings to an Internet-based audience, just like broadcasters in the offline world do. As with everything at the intersection of music and the Internet, however, it's not quite so easy as in the offline world.
By now, most everyone is familiar with the Digital Millennium Copyright Act (DMCA), the 1998 legislation that defined the rules and liabilities of copying digital media. One of the lesser-known provisions of the DMCA, however, involves Internet radio. The statute gives record companies the right to collect royalties whenever one of their songs is broadcast over the Internet. That's a right the record companies don't have with existing radio stations. In the offline world, broadcasters only pay royalties to the songwriters; they don't pay for performance rights for the sound recordings.
The questionable rationale for the Internet-only radio tax was that Internet transmissions were perfect copies of the digital original and likely would hurt CD sales. That's in sharp contrast to the stated reason for exempting offline broadcasters from the same kind of fee, they help sell CDs. Hence, Internet broadcasters were not given a level playing field.
The Copyright Arbitration Royalty Panel (CARP), under the auspices of the United States Library of Congress, was charged with determining how much webcasters would have to pay. CARP's mission was to create a compulsory webcasting license allowing individuals and companies "to perform sound recordings publicly by means of digital audio transmissions and to make ephemeral recordings of sound recordings."
The royalty rate published by CARP, however, would have turned Internet radio into the FM broadcasts of the 1960s. It created one rate for simulcasts from AM/FM stations (.07 cents per song per listener) and another, twice as high, for pure webcasters (.14 cents per song per listener). The pure webcaster, of course, was the group least able to afford a high royalty rate.
When CARP came out with these rates in February of 2002, many wondered whether anyone on the panel knew how to do math. A webcaster with even a modest number of listeners, say a thousand at any given time, would have had to pay royalties close to $200,000 a year to the recording industry. Given the advertising rates for Internet-based media, commercials would have had to outnumber songs by a wide margin to allow the webcasting industry to break even.
Not surprisingly, hundreds of webcasters announced that they would stop broadcasting altogether if the CARP royalty rates went into effect.
Radio's Sound Salvation
Internet radio is at the same place FM was in the 1950s. The few webcasters we have are dwindling in number. Those we do have are duplicating the feeds they send over conventional radio. An audience is looking for reasons to tune in at the very time that small innovators are being pushed out of the industry by regulations.
But just like the FCC of the 1960s, the solution that will jumpstart the industry lies with Washington, D.C.
In an attempt to override the onerous CARP rates, concerned webcasters and legislators drafted new legislation called the Small Webcaster Settlement Act of 2002 (SWSA), which the Senate approved in November 2002. The act makes one small, but vitally important, change to the structure of webcasting royalties. It lets small webcasters opt for a newly negotiated rate structure based on their revenue. If the SWSA becomes law, participating webcasters can elect to pay either a percentage of their gross revenues or of their costs instead of the CARP fee-per-song rates.
Years from now, when we look back at the history of Internet radio, the SWSA legislation will loom large. While the DMCA placed heavy new burdens on webcasters that threatened to put them out of business, the SWSA restores rationality to royalty-rate collection. It's just the kind of thing that may bring variety and innovation back to Internet radio. Just like the golden days of FM.
Bret A. Fausett is an intellectual property and Internet attorney with Hancock, Rothert & Bunshoft. You can reach him at [email protected].
