A Reprieve for Net Radio

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A Reprieve for Net Radio
The music industry won't impose higher royalty rates on Webcasters—yet. Stay tuned, though
by Olga Kharif

Web radio will keep playing, rather than play dead, come July 15. The music industry won't impose higher royalty rates, which were to take effect that day, but the good news for Webcasters may prove fleeting.

The reprieve came July 12 when some 20 representatives of music labels, traditional radio networks, and Webcasters met on Capitol Hill, with industry royalty collector SoundExchange agreeing to hold off on the new fees while negotiations continue. The higher rates, approved in March by the Copyright Royalty Board (see BusinessWeek.com, 3/7/07, "The Last Days of Internet Radio?"), are so much higher than those currently paid that many Webcasters claimed that they will be forced out of business.

The music industry, by not sticking firmly to the deadline, appears to be giving credence to that dire declaration. "SoundExchange is in the business of generating revenues, and it's not going to help them if a good chunk of the industry goes out of business," explains Paul Palumbo, research director for AccuStream iMedia Research.

Large-Scale Talks Planned

SoundExchange also agreed to cap a new minimum royalty fee at $50,000 per station per year in place of a $500-per-music-"stream" fee mandated by the CRB, says Tim Westergren, founder of Pandora, a customizable online radio station. That marks a huge win for Webcasters because with online radio technology, each individual Web user can create a custom stream.

Webcasters had struck an adamant stance on the issue, refusing for months to respond to compromise proposals issued by SoundExchange. "We weren't going to do any kind of a proposal until that fee was gone," Westergren says, pointing out that Pandora, with more than 7 million registered listeners, would have owed millions of dollars in royalties. With that settled, "we are absolutely committed to figuring out solutions," he says.

SoundExchange and Webcasters are now expected to gather for a large-scale negotiating session early in the week starting July 16, says Westergren, who was present during the July 12 meeting. At the heart of next week's discussions: the exact royalty rates Webcasters will be required to pay.

Devilish Details Remain

The Webcasting side now believes a compromise can be reached, and fast. "Our plan is to come to the negotiating table and be very reasonable," says Ian Rogers, general manager of Yahoo! (YHOO) Music. Rogers says the parties may ax the per-song fee in favor of a revenue-sharing agreement, which would allow the music industry to benefit as Net radio's sales grow. Web radio listening is expected to balloon as wireless broadband technologies such as WiMAX spread, enabling Web radio to become a mainstay in cars.

Alternatively, the two sides could hammer out tiered royalty rates, charging different fees to Webcasters of different sizes, says Dave Van Dyke, an analyst with consultancy Bridge Ratings. Perhaps nonprofit stations would pay different, lower fees as well. Whatever the compromise, if one is reached at all, Webcasters "are still going to have to pay the piper very shortly," Van Dyke says. While the minimum-fee compromise has appeased many large Webcasters, a deal on royalties is critical for smaller stations. "You may still see hundreds, if not thousands, of Webcasters go out of business," he says.

The Net radio business is not yet all that lucrative, generating just tens of millions in ad revenue per year, Palumbo estimates. "The industry is immature in what it can withstand in terms of royalty payments," he says.

Yet even if the talks collapse, just as illegal music sharing persists despite being outlawed, the Wild West of Web radio won't disappear overnight. "There are still a lot of Webcasters who are going to continue to broadcast no matter what," says Tom Webster, an analyst with consultancy Edison Media Research.

Kharif is a reporter for BusinessWeek.com in Portland, Ore.