What looms for Internet Radio?

As always, the authority on webcasting Kurt Hanson summarizes perfectly the fight to the death of internet radio. I still remain optimistic that a favorable outcome will surface that allows us to keep broadcasting at a reasonable rate. Here is Kurt's great article found at KurtHanson.com

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BY KURT HANSON
Today, July 16th, was supposed to be the "The Day the Music Died" for Internet radio, had the CRB judges' decision on 2006-10 royalty rates stood firm. But instead, the music is still playing as the parties involved try to reach various negotiated settlements — under the watchful eye of Congress.

At a closed-door "roundtable" meeting last Thursday convened by House Commerce Committee member Rep. Ed Markey, and attended by various representatives of the music industry and certain invited webcasters [RAIN coverage here], the parties were apparently told to work expeditiously toward negotiated solutions that would provide reasonable compensation for copyright owners while keeping the nascent Internet radio industry alive and well.

One highlight of that meeting, confirmed by both sides, was an agreement on a cap to the $500-per-channel minimum set in the CRB decision, setting that rate at a maximum of a service's first 100 channels.

Another highlight was an apparent commitment by the music industry — with top representatives of both SoundExchange and the RIAA in the room — to not go after webcasters for obligations greater than 2000-05 rates for any webcasting done during this period in which negotiations are in progress.

There are so many issues going on here that it might be best to discuss them in an FAQ format:

So, SoundExchange won't sue webcasters?
This may have been a bit of clever language in John Simson's statements to RAIN last Thursday night [ here]. Simson said that SoundExchange wouldn't be suing anyone this week, but the fact is that SoundExchange apparently doesn't have the RIGHT to sue anyone!

In fact, as various lawyers have pointed out over the weekend, enforcement is in the hands of the copyright owners — i.e., the labels. Even in lawsuits when the RIAA seems to be the plaintiff — e.g., vs. Grandma and her progeny — it is actually the labels who have either assigned their rights to the RIAA for purposes of the lawsuit or, more likely, are the named plaintiffs and the RIAA is simply managing the lawsuit with outside counsel.

But the fact that label representatives were also present at the Congressional roundtable certainly would make one feel that they concurred with the spirit of this promise.

All right, so which negotiations are in progress?
The two publicly-announced negotiations are between SoundExchange and two groups of smaller webcasters.

First, we know that SoundExchange is negotiating with the group of Small Commercial Webcasters that was represented in the CRB hearings by lawyer David Oxenford. SX offered in a press release seven weeks ago [ here] to extend the terms of "small webcaster" license from 2000-05 for the 2006-10 period, with some "minor" modifications. (That license allowed a royalty rate of about 12% of revenues for webcasters whose annual revenues were $1.2 million or less.) Those modifications might logically include an increase in the revenues cap so that small webcasters could continue to grow for another five years, plus some mechanism to insure that SX gets some royalties even from webcasters with minimal or ineffective revenue-generating efforts.

Second, we know that SoundExchange is also negotiating with various subgroups of noncommercial webcasters (e.g., NPR member stations and college broadcasters) on a renewal of their last agreement, as proposed in a SX press release six weeks ago [here]. Although the terms of that agreement involve a relatively low royalty rate, they also include reporting requirements that some webcasters find impossible or unwieldy to meet. "We've made some significant progress, for instance, in our negotiations with the Corporation for Public Broadcasting," SoundExchange spokesperson Richard Ades told NewsFactor.com on Friday.

We can also infer that the Commerce committee roundtable has relaunched negotiations between large, Internet-only webcasters as represented by the Digital Media Association (DiMA), as the resolution of the $500-per-channel minimum (which would have worked out to a multi-billion-dollar annual obligation for a webcaster like Pandora) should now allow the parties to focus on the issue of the rates themselves. (Webcasters argue that the CRB decision's annual rate increases, going up to $.0019 per performance by 2010, will destroy any webcaster's business model. One possible solution might be an agreement on an optional percentage-of-revenues royalty rate for large webcasters.)

One possible holdup to the negotiations between SX and DiMA may be two conditions that SX says they put on their acceptance of the 100-station cap on the minimums — better reporting compliance and "help" with the issue of stream-ripping. The second is more problematic: If SoundExchange literally means "help," then webcasters would almost certainly be pleased to work with them, as webcasters don't want their streams "ripped" by consumers either. On the other hand, if "help" is a code word for wanting all Internet radio streams wrapped in mandatory DRM technology, that's quite different, as it would shut down the types of streaming that most consumers want.

(Further, as Wired.com blogger Eliot Van Buskirk notes today, "I don't have data to back this up, but I sincerely doubt that many people are streamripping personalized radio stations. Why bother, when you can just turn on the station again? Besides, there are easier and better ways to download songs, if that's what you want to do.)"

It is also logical that there should be negotiations going on between AM/FM broadcasters who stream and SoundExchange, although the issues involved might be very similar to the ones described above in the DiMA discussions.

"Hobbyists" are not per se represented in these negotiations, as they did not participate as a class in the CRB hearings. However, the smaller ones will benefit if aggregators like Live365 (a DiMA member) survive, and the larger ones would probably benefit from a Small Commercial Webcaster resolution.

So how big a check should I write today?
Officially, the CRB decision is still in force, meaning that "true-up" checks are now officially due to SoundExchange for the period from January 1, 2006, to May 31, 2007. For large webcasters, if the per-channel-minimum is ignored, that's about a 5% increase over what they already paid for 2006... but it's a 44% increase for the months to date of 2007. For small webcasters, the true-up might be 1,000% or more increase and would certainly bankrupt virtually all such operators.

Realistically, based on outcome of the Commerce roundtable, RAIN understands that most webcasters plan to continue to make payments under their 2000-05 rates while the negotiations continue.

SX's remedy against non-payors or underpayors is to get 1.5% per month in interest on underpayments.

And what else is hanging out there?
With the goal of keeping webcasters legal while these negotiations are continuing, H.R. 3015 was introduced last Thursday night in the House of Representatives to delay the effective date of the CRB decision by 60 days [previous RAIN coverage here]. The legislation was introduced by the Chairwoman and Ranking Republican of the House Small Business Committee — Nydia Velasquez (D-NY) and Steve Chabot (R-OH).

And there is still an appeal of the CRB decision under consideration by the U.S. Court of Appeals in Washington, DC. While they denied an emergency stay of the judges' decision last week, the appeals process continues.

But, most importantly, if the current negotiations don't pan out, there is still the looming possibility of the "Internet Radio Equality Act," whereby Congress would change the standard by which the CRB judges make their decisions in the future. The bill also would set a royalty rate for the current five-year period at 7.5% of revenues, which roughly approximates what satellite radio pays for the same royalty.