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The (knife) fight over Internet radio royalties continues

June 4, 2008 |  4:04 pm

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."

Pandora CEO Joe Kennedy 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