The (knife) fight over Internet radio royalties continues

Joe Kennedy, chief executive of Pandora, carries a weapon in his battle over Internet radio royalty rates that he says could kill his popular online music site: a Stiletto.

Not the old-fashioned, sharpened-steel knife popular with mobsters and dancing street gangs in "West Side Story." This is the high-tech Stiletto 100 Portable Satellite Radio from Sirius. Kennedy brandishes it when he meets with members of Congress to highlight what he calls the inequity of the royalty rates.

The Stiletto has two antennas. One picks up Sirius' satellite signal and the other connects via Wi-Fi. But songs played over those connections pay different performance royalty rates.

"It's the same station, the same songs,'' Kennedy told me, holding the sleek white-and-black radio as he snacked on a Mediterranean wrap in the cafeteria of a Congressional office building. "It's absolutely absurd."

It was Kennedy's third trip to Washington in the last month as he pleads for Congress to help resolve the dispute between some Internet radio webcasters and SoundExchange, the organization that collects and distributes digital performance royalties. Those royalties are for the specific recording of a song performance (as opposed to royalties to composers and music publishers for the music and lyrics).

When most of the world last tuned into the issue nearly a year ago, webcasters and SoundExchange were at odds over new performance royalty rates. Earlier in 2007, a special panel of federal judges called the Copyright Royalty Board significantly hiked the royalty rates. The board eliminated a provision that allowed small webcasters to pay 10% to 12% of their revenue instead of a flat per-song fee for each listener. And the judges ruled that the those fees should gradually increase, more than doubling by 2010 to .19 of a cent.

Pandora and many other webcasters screamed bloody murder. Those fractions of a penny might not sound like much. But they're multiplied by the number of listeners for any given song and...

... can add up to millions of dollars a year. Webcasters complained their royalty payments would exceed their actual revenues.

Some small webcasters shut down before the new rates kicked in on July 15. Others went to federal court to try to overturn the new rates. That appeal is pending. Meanwhile, under pressure from Congress, SoundExchange announced in July that it would not seek immediate payment of the higher rates as it tried to hammer out an agreement with webcasters. SoundExchange is free to negotiate different rates on behalf of the musicians and record labels.

Depending on whom you ask, those negotiations are either still moving along (SoundExchange's take) or have pretty much broken down (Pandora's view).

John Simson, SoundExchange's executive director, said the new rates wouldn't hinder the growth of Internet radio.

“While there still are few who are loudly predicting the demise of Internet radio, a la the boy who cried wolf, the on-the-ground reality is saying something quite different," Simson said in a news release last night. "There is a lot of money to be made in Internet radio and royalty rates are not a barrier to developing strong, workable business models."

SoundExchange spokesman Richard Ades said today that many webcasters were paying the new rates without a problem. He noted that this year's rate of .14 of a cent per song per listener means that it costs only $10 a year for a person listening to 15 songs an hour for 40 hours a month.

SaveNetRadio, a coalition of webcasters, listeners, artists and record labels opposed to the royalty rates, jabbed back today, saying the new rates were having a "devastating effect" on Internet radio.

At Oakland-based Pandora, which has 13 million registered users on its free, ad-supported site, the tab for 2008 would be $18 million under the new rates, Kennedy said. That's most of the company's projected $25 million in revenue.

"It's taking 70%-plus of our revenues," Kennedy said. Pandora is paying SoundExchange the old rate, which amounts to $10 million for 2008, but he doesn't know how long that can continue.

He noted that the Copyright Royalty Board last year set new rates for satellite radio that started at 6% of revenue in 2007 and rise to 8% by 2012. And old-fashioned, over-the-air radio stations don't pay performance royalties at all.

Some lawmakers have been flirting with the issue. Reps. Jay Inslee (D-Wash.) and Don Manzullo (R.-Ill.), introduced the Internet Radio Equality Act last spring to nullify the royalty board decision. It has attracted a substantial 148 co-sponsors and helps put pressure on SoundExchange. But a Senate version by Sen. Ron Wyden (D.-Ore.) has only five co-sponsors, meaning the chance of anything happening this year is slim.

Kennedy and Pandora founder Tim Westegren are trying to sound the alarms. And continuing the stiletto theme, Kennedy said they feel like Kitty Genovese, who infamously died from stab wounds outside her New York City apartment building in 1964 after other residents ignored her screams for help.

"We're screaming at the top of our lungs, waiting for somebody to do something," Kennedy said. "We're going to be the Kitty Genovese of Internet radio."

-- Jim Puzzanghera

Puzzanghera, a Times staff writer, covers tech and media policy from Washington

Photos: Retro Radio, by PetroleumJelliffe via Flickr. Joe Kennedy, courtesy of Pandora

Comments

[Brandon]

John Simson doesn't mention these new rates are not being forced on all of us, at least not yet. That's why we are still here. As far as I know every webcasting business, aside from a handful of hobbyists, are paying performance royalties to SoundExchange according the old rates.

Ok, Richard Ades is either out of touch with the broadcasting world and lacks common sense, or doing his job well, spin-doctoring and deflecting the real issues. I'm guessing he's really good at his job. He's tried to mislead people on the true cost. It's easy to see the true cost. The 2008 rate is 0.0014 cents per performance. A performance is the song making it to one person's ears. The industry standard for measure your audience is ATH (aggregate tuning hours), sometimes called TSL (time spent listening). So if you're a very tiny channel with 18,000 ATH in one month that more of less means this:

18000 ATH / 30 Days / 24 hours = 25 listeners

So you had about 25 simultaneous listeners on 24 x 7 for the last 30 days.

Lets be generous and say you only played 10 - 5 minute songs per hour, leaving 10 minutes per hour for ads or bantering.

18000 ATH * 10 songs per hour * 0.0014 per song = $252 per month

You could also do:

25 people * 10 songs per hour * 24 hours * 30 days * 0.0014 per song = $252

$252 per month for a mere 25 listeners, or $10.08 per individual listener slot ($252/25 listeners) each month . That's just for royalties paid to SoundExchange. You also have to pay ASCAP, BMI, SESAC plus all your operating expenses, but these guys rarely exceed 2% of a broadcasters gross revenues.

If you're the size of SomaFM, LoudCity or DI then, you've got maybe 3,000 - 10,000 people listening at all times, then you're looking at $35,000 - $80,000 per month in royalties paid to SoundExchange alone. We're talking about small sustainable boot strapped business being a fraction of an AM/FM small market size (which don't pay SoundExchange), paying far more than any realistic revenue expectation. If you're like Pandora then it's off the charts.

Meanwhile the same CRB judges that handed us a noose, let satellite radio pay 6-8% of revenues. AM/FM radio continues to pay nothing. Though it should be mentioned that these guys do pay the CRB rates for their Internet simulcasts, but this is only a very tiny part of their business, unlike webcasters which are Internet only. It also goes to show you how stupid this is, because they pay different rates depending on the transmission medium. That's right, they pay wildly different rates if their music goes over AM/FM, a satellite signal or the Internet.

I agree with John that the new rates won't hinder growth of Internet radio, because a seemingly increasing number of broadcasting and broadcast-like services come online and totally ignore SoundExchange, and there doesn't seem to be any consequence for it. Services like Project Playlist and Muxtape are allowed to popup, blossum, grow and eventually profit through loop-holes and sometimes brazen disregard intellectual property. All without paying a dime to SoundExchange. Sometimes if they get a big enough buzz the major record labels approach them and negotiate direct deals, bypassing the SoundExchange filter where require them to share revenue 50/50 with the artists. It's win-win, unless you're one of the artists.

Meanwhile the people with a conscience are taking personal time to visit Congress and ask for help. It's another case of people going through the meat grinder while trying to do the right thing.

Anyway, this will probably all be irrelevant in a few more years. In 1999 a large meteorite named Napster slammed into Earth and forever changed the relationship between people and and music for that generation and those after. The major labels, being the dinosaurs, reacted in a legal way (it was their right to after all) rather than seeing this as a life changing event and adapting sooner. A whole generation was downloading music before they could drive cars, have girlfriends/boyfriends or professional jobs. An expectation was set. Those people now have disposable income, and they aren't throwing as much money at record labels as previous generations. They've probably been lost to the majors forever.

My guess is the major record labels, the biggest stumbling block for resolution to the royalty issue, will continue to shrivel, which will hopefully make room for people on all sides with progressive ideas for a new world.

[Rusty Hodge]

"Richard Ades said it costs only $10 a year for a person listening to 15 songs an hour for 40 hours a month" or roughly 1.8 hours per workday (the majority of internet radio listening happens at work now). But most people listen way more than that, the come in to work and turn on the radio, and don't turn it off until they leave. So the real cost per listener is more close to $40 per year PER LISTENER, just in SoundExchange royalties.

The only webcasters who are paying the current rates to SoundExchange are the ones work are negotiating or already have negotiated deals with the large labels at vastly reduced rates. So they're only paying SoundExchange for the non-major label material they play. Last.FM was good example of this, as after they got big and had millions in VC funding, they hired lawyers to negotiate retroactive deals with all the majors and most of the larger independent labels.

Unfortunately for many small and mid-sized net radio broadcasters, this doesn't make much sense because we play mostly material from independent labels. Not to mention we can't afford to hire the $400 an hour lawyers to handle these negotiations. But then we're not gambling that we'll get bought for $250 million either; we just want to operate sustainable businesses.

In all fairness to SoundExchange, they have offered an extension of the "Small Webcasters Amendment" to smaller broadcasters, which is based on 10-12% of their gross revenues. While this is higher than what Sirius and XM pay, it's a figure that won't instantly put us out of business. The problem is the size cap that comes along with this: we're limited to total revenues that are under 1.25 million a year, and worse we're limited to the size of our audience, which was (seemingly arbitrarily) set at a maximum of 5,000,000 listener hours, or an average of 6,800 concurrent listeners. Once we average more than that, we have to start paying at the per song, per listener rates.

There is a transition period where you pay 10-12% plus the per song per listener for those listeners over the maximum, but for every million listener hours over the 5 million you go, you have to pay $15,000 more in royalties per month. (One million listener hours a month is an average of 1365 concurrent listeners).

In the case of SomaFM, we are doing about 6 million listener hours a month currently. Under the old rates, we'd be paying about $2500 a month in SoundExchange royalties. But under these new rates - even including the Small Webcaster "exceptions", we'd be paying over $17,000 a month. And if we were paying at the "large webcaster rates", which we soon will be forced to, we'll be paying $84,000 a month - or more than three times our gross revenue.

And these rates increase in 2009 and 2010 as well.

It just doesn't work. You are either forced to stay very small, or get a ton of VC financing and try to strike deals with all the labels directly, or the third choice: just say screw it and not bother with paying the royalties at all. Which is what a lot of the new music startup services are doing.

SomaFM is not a big player. Sites like AOL and Yahoo's Launchcast radio get 6-10 times the number if listeners we get.

(Note: I use the average number of days in a month of 30.5 in all my calculations)

[David Hanson]

This article definitely dived into things I had always wondered about. I am an avid listener to Pandora, and I think it's an amazing idea and can help music a lot. There is a ton of potential behind it. However I have never scratched at the surface of the business side of how those type of things work. This article did do the job of starting to go into the current royalties feud and that helped shed some light on the issue, but there is still much more to look into. I suppose I should feel it as my "smart consumer" responsibility to take the initiative to understand better how these things work. Perhaps this article will be the starting point.

Now, my perspective. To me, it does seem unfair to the internet-based radio stations that they provide basically the same service as other radio stations (actually, a better service!), and yet have to end up paying so much more. It makes me wonder if what I have said in my previous paragraph (my ignorance to the workings of the internet radio business), probably leaves the door open to a company like SoundExchange to take advantage of the new internet radio business. Education is key to a fair and just way of national business, and this article does just that: educate.