Internet Radio and Royalty Payments

Lynne Kiesling

While we’re discussing music, we are on the verge of another nail in the coffin of Internet radio, in the form of royalty payments. In mid-April the U.S. Copyright Royalty Board decided to affirm a prior ruling it had made to raise royalty rates that Internet-only radio stations pay:

Released March 1, the new rules (PDF) prescribe rate hikes of .08 cents per song per listener retroactive to 2006. The rates would climb to .19 cents per song by 2010, which amounts to a 30 percent increase per year. Each station would also have to hand over a minimum $500 royalty payment under the ruling.

The judges in their decision issued two clarifications–one about the way royalties would be calculated for 2006 and 2007 and another stating that the royalty rules would also apply to music streamed over mobile devices. But they left a number of other questions about the ruling unanswered.

Internet radio operators argue that, when compared with broadcast and satellite radio, they already pay the highest royalty rates in proportion to their revenue, and any further changes could imperil their offerings. A group of artists, labels, Webcasters and listeners has formed the SaveNetRadio Coalition to pressure Congress to get involved.

“As a former touring musician myself, I’m no stranger to the challenges facing working musicians,” Tim Westergren, founder of the Internet radio service Pandora, wrote in a Monday e-mail. “The issue we have with the recent ruling is that it puts the cost of streaming far out of the range of ANY Webcaster’s business potential.”

Take, for example, soma fm’s Groove Salad, which right now has 5774 listeners. In the past hour Groove Salad has played 10 songs. That means that in just the past hour alone, soma fm would have to pay 5774x10x0.08=$4619.20 in royalties. With 168 hours in a week and 52 weeks in a year, if this hour is representative, soma fm would have to pay annual royalties of $40,353,331 just for Groove Salad alone!!!!

This per-performance royalty structure for Internet radio differs substantially from the traditional royalty structure that traditional broadcasters pay, and it makes the royalty responsibilities on the Internet radio stations disproportionately higher relative to their listener base. For example, these recent statistics from BetaNews show how disproportionate these results are:

For our research, we wanted to compare what streaming radio providers would be charged by SoundExchange against the fees that broadcast radio stations today pay to the three major performance royalty organizations (PRO) – ASCAP, BMI, and SESAC. While indeed, some radio stations do pay as little as $972 per year in total royalty fees to PROs, as BetaNews reported Tuesday, in practice, we’ve since learned this isn’t an average that applies to all stations, and major metropolitan radio stations do pay significantly more.

Nonetheless, there’s still a considerable gap between PRO fees and SoundExchange’s proposed “per-performance” fees, as our updated statistics demonstrates.

Radio stations collectively bargain for the royalty fees they pay to PROs; and as Keith Meehan, the executive director of the Radio Music License Committee, kindly explained to us today, the compromises these bargaining parties make effectively set a cap on how much PROs can collect from all stations combined.

As Meehan explained, in 2002 for ASCAP and 2003 for BMI, the two organizations calculated the amount of maximum royalty collections they could each live with, based on a percentage of radio stations’ estimated revenue retroactive to 2001. Then they agreed to stop using stations’ revenue as a benchmark for determining royalty rates from that time forward, switching instead to a formula that takes the maximum collectable amount for each year, and works it backwards to determine a fair rate that each station can contribute to it.

As a result, we absolutely know the amount of royalties that these two firms are expected to receive for 2006. For ASCAP, the agreed upon amount is $208,650,000. That’s as much as it can collect from radio broadcasters in the US, no more. For BMI, the figure is $208,000,000 even.

OK … so the entire broadcast radio industry pays royalties of $416 million annually, and these new royalties would impose fees of $40 million, 10 percent of that amount, on an online station with 5774 listeners? How fair is that?

Of course artists should be paid for their creations (but I think one would be naive to expect that record labels will pass most or all of this royalty on to the artists!), but is this royalty a good way to meet that objective? One consequence of the demise of stations like soma fm and WOXY would be that fewer consumers would be exposed to artists whose CDs they would then go out and buy. That would decrease artist incomes. How fair is that?

If you want some more background on this issue, soma fm has a nice overview page. If you care about this issue, visit SaveNetRadio.org, call your Congressional representatives, and urge them to support the Internet Radio Equality Act, HR 2060.

The new, unfair royalty structure is due to go into effect on May 15 unless this legislation passes.

UPDATE: my corrected understanding of the actual royalty rate is in this post; I was off by two decimal points, but it’s still an unreasonable royalty relative to those paid by radio broadcasters.