Will Fees Silence Web Radio?

WASHINGTON, D.C. -- The budding Internet radio industry is squaring off against the recording industry, saying a proposed new fee for Webcasting music could run Web radio out of business.

"We are not asking for a free ride," says Frank Schliemann, founder of Internet-based Onion River Radio. "But we will be bankrupted by the exorbitant flat fee that equals 78 percent of our gross revenue." Schliemann was among dozens of Webcast supporters testifying before the Senate Judiciary Committee this week. Dozens more Webcasters swarmed Capitol Hill last week in a lobbying effort.

Independent Webcasters like Live365, CyberRadio2000, and Ultimate 80s are up in arms over scheduled royalty fees for performance and music-label rights. They say the .14 cents per song per listener--just over one-tenth of a cent--recommended in February by the Copyright Arbitration Royalty Panel, an arm of the U.S. Copyright office, is unjustly high. In many cases it exceeds the revenues of smaller Web-based stations.

The music labels, however, say Webcasters have been getting off cheap. The Recording Industry Association of America is among the competing lobbyists. It pushed the CARP to crack down on Web-based stations that the RIAA says do not adequately compensate copyright holders.

The 1998 Digital Millennium Copyright Act first required Webcasters to pay copyright royalties to both performers and record companies. In exchange, Webcasters were allowed, just like conventional radio stations, to play any copyrighted music they wished without seeking permission first, a rule known as compulsory licensing. The U.S. Copyright office appointed the three-person CARP to schedule hearings and determine fees.

Conventional radio broadcasters pay 3 to 4 percent of their revenue for composer and publisher royalties, Schliemann says. He and other Webcasters want Internet radio to have a similar royalty arrangement that bases payments on a percentage of revenue, not the flat fee per song that CARP proposes.

Most independent Webcasters can stay online only if the royalty is calculated on a percentage-of-revenue basis, according to Kurt Hanson, publisher of the Radio and Internet Newsletter. The U.S. Copyright office is scheduled to consider the CARP recommendation on May 21. It could choose to reject the fee structure, modify it, or accept it unchanged.

"If the office accepts the CARP's recommendation, the next logical step ... would be to petition Congress for a change in the DMCA," Hanson says. "However, by the time that could be accomplished, most of today's pioneering Webcasters would be out of business."

Although CARP set hearings with both music companies and Internet radio stations, some observers say the participants were not representative of the young industry. The Webcasters invited to participate in the negotiations, selected at the suggestion of the recording industry, were almost all large companies, says Jonathan Potter, director of the Digital Media Association, an industry group. For example, the participants included AOL and Clear Channel, which is the nation's largest owner of conventional radio stations as well as an owner of Webcasting stations.

By having a relative few giants stand in for the entire Internet radio industry, "The panel erroneously simulated negotiations in a noncompetitive market, which ... resulted in the CARP assessing an anticompetitive ... rate," Potter says.

He points to one example of a doomed Webcaster under the proposed rates, Beethoven.com. The classical music Internet radio station would owe $48,720 in royalties under the CARP arbitration. Beethoven.com's total revenue, however, is $33,500.

"The CARP proposal is a rate that cannot be justified financially," Potter says.

The RIAA--which vociferously pursued Napster into court and has made a priority of enforcing copyrights in digital media--denies it is trying to put independent Webcasters out of business.

"It is natural for copyright owners to seek a higher rate of compensation, and for users to seek a lower rate," says Hilary Rosen, RIAA's chief executive officer. She decried a perceived tendency to "listen to rhetoric" that accuses the CARP of favoring larger companies.

The CARP proceeding was a last resort, Rosen reminded the Senate committee this week. The Webcasters' compulsory license under the DMCA has allowed them to avoid royalty fees for several years while fees have been under discussion, she says.

"They have already had the start-up boost in starting their business," Rosen told the senators. "Nobody was 'outgunned'," she added, in regard to criticism of the CARP hearings last year. "The arbitrators had access to a huge amount of confidential financial data about the Webcasting and recording business.... Even if some smaller Webcasters did not participate, their view was well represented."

Many smaller Webcasters, however, are hopeful.

"I think things are in our favor at the moment," says Jim Atkinson of St. Louis, who owns 3WK.com. He believes the Webcasters' lobbying efforts last week made a difference in the minds of congressional representatives. 3WK.com's gross income last year was less than $10,000, Atkinson says; under the CARP plan its royalty fees would be $34,000.

Mike Hayes, founder of Twangcast.com in Virginia, agrees. "I believe we have raised an interest level that was not there before," he says.

Hayes went on the air with his country music Internet radio station on January 1, 1999, and says the .14-cent fee would put him out of business in a week.

"Music that Webcasters play is music you will not hear on commercial radio," Hayes says. "We're promoting the little artists, just like they promote the big artists."

Hayes says he is willing to paying a "reasonable royalty fee" based on percentage of revenue. But he fears the fledgling industry has not had a fair shot at survival.

"I don't think the intent of the DMCA was to put ten or twelve thousand people out of business," he says. "But that's what'll happen if the RIAA gets its way."