Vol. 12, No. 2,856W - The American Reporter - March 18, 2006


by Pete Guttenberg
American Reporter Correspondent
Glendale, Calif.

GLENDALE, Calif. -- I am writing to express my strong fear that the U.S. Copyright Office, in its efforts to set a "sound recordings performance royalty" rate for Internet radio as required by the Digital Millennium Copyright Act (DMCA), may be about to make a decision that will bankrupt virtually all Webcasters and effectively destroy Internet radio as a medium. This issue is not about Napster -- in fact, quite the opposite! Internet radio is a perfectly legal new medium, in its very early stages but growing in popularity, that is offering wonderful benefits for musicians and record companies as well as for consumers.

Internet radio at this moment is a young but thriving medium:

There are tens of thousands of Webcasters, including thousands of small business people; many of them music fans broadcasting via companies like Live365 and Shoutcast, but also hundreds or even thousands of commercial operations, plus thousands of broadcast radio stations around the world that are "simulcasting" on the Internet.

Tens of millions of Americans have sampled Internet radio, according to a study available at Arbitron.com, and the number of loyal Internet radio listeners in the U.S. is in the millions -- and growing at over 100 percent per year.

Also, significantly, the most-popular Internet radio formats are those that are not available on AM and FM radio in most cities, including various forms of classical, Americana, "world music," bluegrass,trance/electronica, and various forms of jazz.

In short, Internet radio is a medium that does not deserve to bebankrupted and shut down 60 days from today.

Royalty's Rationale 'Flawed'

As you may know, over-the-air broadcasters have traditionally had to pay royalties to the composers of musical works, but not to the record companies and performers, as Congress has always felt that record companies and performers have benefited sufficiently from the promotional value of radio airplay. (Note that record companies actually spend hundreds of millions of dollars each year in their efforts to encourage radio stations to play their product!)

In 1998, however, the DMCA established a new "sound recordings performance royalty" for digital media, including Internet radio, under the rationale that digital copies are "perfect" copies and thus might put record company revenues at risk.

With the benefit of hindsight, we can now see that this rationale is flawed. Here's why: People don't make copies of the music on Internet radio at all! (Furthermore, even if they could, the music on Internet radio is almost always delivered in a reduced-quality format. Thus, it's true that Internet radio could theoretically offer consumers a "perfect" copy -- but only of a low-quality original!)

It's no doubt true that record company may be revenues are at risk in this "digital millennium," but, if so, that's due to the phenomenon of MP3 file-sharing (e.g., Napster) and the growing popularity of CD burners, which allow consumers to make unlimited perfect copies of CDs.

But Internet radio is not one of the problems! In fact, it's giving new exposure to dozens of musical genres and thousands of artists who can't get radio airplay on traditional AM and FM radio.

Plan Could End I-Radio

Despite all of the above, unless and until the DMCA is amended, the Copyright Office is still obligated to set a royalty rate. Yet, the Copyright Arbitration Royalty Panel (CARP) that was convened last summer reached the conclusion that is probably far more draconian than anything Congress intended.

Record companies initially asked Webcasters for a royalty of 15 percentof gross revenues. Webcasters initially countered by offering something close to three percent of gross revenues (analogous to the royalty they pay composers). Thus, the two sides went to arbitration in front of the CARP.

Unfortunately, the CARP's recent recommendation to the Copyright Officeis not a percentage of revenues, but rather a price per-song-streamed, multiplied by the number of listeners for that particular song. Specifically, for Internet-only Webcasters, their recommendation was 14 cents per song, per listener (or about 2 cents per hour per listener), with discounted rates for AM and FM simulcasts and non-commercial radio broadcasters. Even if Webcasters eventually achieve the same advertising success that broadcasters have achieved (building on a base of 75 years' of effort), that would work out to a royalty rate of 20 percent of gross revenues!

But the Internet radio industry is still very young and its audience is as yet too small to interest most advertisers. Thus, most Webcasters have seen very little revenue to date. In the current advertising environment, their recommendation is more like an effective royalty rate of 200 percent to 300 percent, or even more, of gross revenues!

Worse yet, this royalty rate is not only due going forward but also retroactively to October, 1998, when the DMCA was passed; and the retroactive obligation is, for most Webcasters, more like 500 percent or more of gross revenues.

With the exception of a handful of Webcasters owned by major corporations, it will bankrupt or force the shutdown of virtually everyone in the space (including all of the small businesspeople). A royalty rate of a mere 14 cents per song might not sound like a lot of money, but for a popular independent Webcaster (imagine two or three people working out of a home office or a campus apartment) that has had, say, an average audience of 1,000 listeners for the past three years, the bill for retroactive royalties -- due 45 days after the royalty rate is approved -- would be $525,600!

An effective royalty rate of 200 percent to 500 percent of gross revenues simply can't be the kind of royalty rate that Congress had mind when it passed the DMCA!

Rate Setting Illogical

How did the CARP come up with such a high royalty rate? Becausethey were instructed by the DMCA to set the rate based on the principle ofwhat a "willing buyer" and "willing seller" would agree to -- and thatinstruction was virtually impossible to fulfill.

The only relevant "willing buyer/willing seller" transaction thatthe CARP could identify was one agreement between record labels,represented by the RIAA, and Yahoo!, which was in a very unique position-- it was trying to prop up its at-the-time recent $5.3 billion purchaseof Broadcast.com. The financial situation of Yahoo! was unique -- and it was adeal put together at the height of the dotcom craze a couple of years ago.In short, it was an atypical transaction, occurring during an atypicalmoment in history,and envisioning a rich advertising market that has notyet developed (and perhaps never will).

That one deal shouldn't be expected to set a rate for an entireindustry today.

Contact Library of Congress

Although Internet radio is still in its very early stages ofgrowth, it has already given new exposure to thousands of new artists,adds diversity that is a perfect counterbalance to the effects ofconsolidation on AM and FM radio programming, and is a key motivatingfactor behind consumers signing up for broadband Internet service. Itdeserves your support.

For most Webcasters, the critical issues facing the Librarian ofCongress are (A) that the CARP arbitrators set a rate far higher than therate for composers' royalties, based largely on the Yahoo!/RIAA deal, and(B) that the CARP panel rejected the "percentage of gross revenues"royalty concept that both sides had previously been willing to accept -- and which most Webcasters were counting on to stay in business.

There is also a secondary issue worthy of your attention: TheCopyright Office has proposed complex reporting requirements fromWebcasters, almost exactly as recommended by the RIAA (18 pieces ofinformation for every song that's played and seven pieces of information onevery listener!), that would force many smaller Webcastersoff the air. Any help you could offer in this area would also beappreciated.

If the Librarian sets a rate along the lines of the CARPrecommendation, the industry will be effectively dead by the end of May.On the other hand, if the Librarian sees fit to (A) set a royaltyrate that is expressed as a percentage of gross revenues and is somewherein the range of the royalty rate paid to composers, and (B) setsmore-reasonable reporting requirements, this young industry can surviveand grow.

I urge readers to communicate to the Librarian of Congress that thelegislators, in passing the DMCA, did not intend for the royaltyrate to be set so high that it would bankrupt this fledgling industry.

For more information on this issue, see http://saveInternetradio.org/90seconds.asp. By U.S. mail, contact: Hon. James H. Billington, Librarian of Congress, 101 Independence Ave., SE, Washington DC 20540. By email, write to lcWeb@loc.gov and address your remarks to James H. Billington.

Pete Guttenberg is a Glendale-based promoter for drum and bass Internetradio shows on www.vibeflow.com. His promoting crew, Abstrakt Dimensionz,and is based in Los Angeles.

Copyright 2006 Joe Shea The American Reporter. All Rights Reserved.

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