Prepare To Say Aloha To Internet Radio - Webcast Royalty Decision Announced

THE TIME MACHINE's days of broadcasting online may soon come to end along with the majority of internet streamed music broadcasts around America. The Time Machine uses Live 365 and pays music royalties to ASCAP, BMI and SESAC every month. Live 365 may be put out of business with many other legit companies around the United States who are above board and insure that artists and composers get paid. Here is the latest bad news about saying "goodbye" to internet radio from RAIN reported by Daniel McSwain.

The Copyright Royalty Board (CRB) has announced its decision on Internet radio royalty rates, rejecting all of the arguments made by Webcasters and instead adopting the "per play" rate proposal put forth by SoundExchange(a digital music fee collection body created by the RIAA).

RAIN has learned the rates that the Board has decided on, effective retroactively through the beginning of 2006. They are as follows:

2006 $.0008 per performance
2007 $.0011 per performance
2008 $.0014 per performance
2009 $.0018 per performance
2010 $.0019 per performance

A "performance" is defined as the streaming of one song to one listener; thus a station that has an average audience of 500 listeners racks up 500 "performances" for each song it plays.

The minimum fee is $500 per channel per year. There is no clear definition of what a 'channel' is for services that make up individualized playlists for listeners.

For noncommercial webcasters, the fee will be $500 per channel, for up to 159,140 ATH (aggregate tuning hours) per month. They would pay the commercial rate for all transmissions above that number.

Participants are granted a 15 day period wherein they have the opportunity to ask the CRB for a re-hearing.

Within 60 days of the final determination, the decision is supposed to be published in the Federal Register, along with any technical corrections that the Board may wish to make.

Within 30 days of publication in the Federal Register, it can be appealed (but only by the participants) to the U.S. Court of Appeals of the District of Columbia.

Because a typical Internet radio station plays about 16 songs an hour, that's a royalty obligation in 2006 of about 1.28 cents per listener-hour.

In 2006, a well-run Internet radio station might have been able to sell two radio spots an hour at a $3 net CPM (cost-per-thousand), which would add up to .6 cents per listener-hour.

Even adding in ancillary revenues from occasional video gateway ads, banner ads on the website, and so forth, total revenues per listener-hour would only be in the 1.0 to 1.2 cents per listener-hour range.

That math suggests that the royalty rate decision — for the performance alone, not even including composers' royalties! — is in the in the ballpark of 100% or more of total revenues. — Kurt Hanson

How does this affect large webcasters?

Let's look at AOL as an example:

According to the comScore Arbitron ratings report for November 2006, the AOL Radio Network had a average audience ("AQH") between 6AM and Midnight of 210,694 listeners. Multiplied by about 16 songs per hour, 18 hours per day, and 31 days per month, plus adding an additional 10% to account for overnight (Mid-6AM) listening, suggests that AOL played about 2.1 billion songs that month. At the CRB's royalty rate ($0.0008 per play), I'm guessing that would create a royalty obligation to SoundExchange for the month of November of about $1.65 million. Annualized, that's about $20 million for 2006.

Here at RAIN, we're guessing that Pandora has an audience approaching that size. (Pandora founder Tim Westergren claims that Pandora now accounts for 1.5% of all Internet traffic.) Such a royalty obligation might exceed the total proceeds of all their recent rounds of venture capital plus all their sales revenues to date.

Since Last.fm is based in the U.K., another possible outcome is that Pandora dies and Last.fm becomes the "social music networking" player.

How does this affect medium-size webcasters?

Radio Paradise's Bill Goldsmith notes, "This royalty structure would wipe out an entire class of business: Small independent webcasters such as myself & my wife, who operate Radio Paradise. Our obligation under this rate structure would be equal to over 125% of our total income. There is no practical way for us to increase our income so dramatically as to render that affordable."

And Radio Paradise is perhaps the most-successful webcaster in its class! For most operators, this rate looks as if it would be >150-200% of total revenues.

How does this affect small webcasters?

Webcasters who stream through services like Live365 may be in jeopardy, as such firms' business models probably never envisioned a royalty rate this high. (Live365's royalty obligation for 2006 is running in the range of $350,000 per month, and that's not even addressing the question of the $500 per station mininum!)

How does this affect terrestrial broadcasters who stream?

The principles are the exactly same, but at the individual radio station level, the dollar amounts are of course are smaller. Clear Channel's total corporate obligation for November 2006 based on comScore Arbitron ratings and assuming 13 songs per hour, would be about $500,000... but if that's for streaming, let's say, 500 stations, it would only be a royalty obligation of about $1,000 per station per month in 2006. Are those stations selling enough online spots and website banners and sponsorships to make that affordable? I'm not sure. (The decision has no impact on news and talk stations who stream.)

What about future years?

The rate of increase in future years is huge — faster than it would seem possible that advertising revenues could possibly keep up with, much less catch up with. 2007's rate is a 37.5% increase over 2006; 2008 and 2009's annual increases are about 28% per year; and 2010 adds another 5.5% increase.

Is this the end of Internet radio?

Although this is undeniably a huge victory for the legal departments of record labels (or at least for the lawyers at their industry trade association, the RIAA), I doubt that the heads of the record labels and their marketing executives actually want to see Internet radio driven out of business. (This may be a case of "Be careful what you wish for, you may get it.")

Last summer, there were rumors of seemingly productive negotiations going on between Sound Exchange and webcasters regarding a voluntary (i.e., not statuatory) percentage-of-revenues royalty rate. Everyone's best hope, I believe — for webcasters, labels, musicians, and consumers alike — would be if those negotiations could resume.


*Steaming a radio broadcast for an audience to listen to is completely different from downloading a song. Yes...we know that some websurfers record internet streams just like people did thirty years ago on a cassette radio deck...the quality is not the greatest and requires a great deal of time and effort to edit a file a pass it around. That's assumming that someone would actually have an interest in passing around three to five to eight hour MP3 files of radio broadcast streams.

Changing the subject from royalty rates from streaming to downloading songs illegally, here is the video to one of The Time Machine's most played songs from 2006.

Weird Al's "Don't Download This Song"