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Interactive Music Under Attack

On Monday, the U.S. Copyright Office began hearings, known as the Copyright Arbitration Royalty Panel (CARP), to decide on webcasting fees. For years, many companies have been operating without knowing how much they must pay in music licensing fees. The decision will have a huge financial impact for streamers.

In particular, one of the biggest battles being played now is with interactive Internet radio. The Recording Industry Association of America (RIAA) claims that some streaming music companies are too interactive – meaning users can choose genres and rate songs – and thus should fall under the Digital Millennium Copyright Act (DMCA). That watershed act, passed in 1998, set up certain rules for webcasters, including requiring compulsory licenses for webcasters if they choose to use record labels’ music in a limited fashion. While valuable in providing guidelines for a new industry, the DMCA, however, was vague in some of its language.

For example, the DMCA does not define interactivity and only states that under the statutory license, webcasters must pay royalty fees for recorded music to the labels after the music is played.

As the arbitration hearings continue, a decision will have to be made within six months as to what the rates will be for companies qualifying under the statutory license. The question on interactivity is whether the "consumer-influenced" stations –sites where a listener can choose the genre, but not the actual songs themselves – will qualify for those rates, or whether they will have to pay additional fees if their services are deemed interactive. If so, the interactive webcasters would need to devise direct licensing agreements with each label, a complex and onerous task that most providers want to avoid.

Lawsuits Galore

Since the DMCA was too vague, MusicMatch, MTVi, Xact Radio and other companies filed suit asking a San Francisco court to define interactivity so they can be included in the U.S. Copyright Office's arbitration panel. But the RIAA asked the courts to bar several webcasters from the upcoming proceedings claiming that the personalization features that they offer render their services interactive and thus ineligible for the compulsory provision.

When the RIAA filed suit against Launch.com in late May, claiming that the online radio company’s service permitted too much interactivity, Launch temporarily took down its service. Launch eventually settled suits with Warner Music and Universal and was acquired by Yahoo! for $12 million in late June.

Lawsuits also plagued MusicMatch, which started its subscription-based radio service called Radio MX in May, which allowed users to set favorite artists and skip through songs. The RIAA, however, said the service was too interactive, and didn't fall under the compulsory license. Last week, MusicMatch gave up the legal fight and dropped its lawsuit against the RIAA by signing a licensing agreement with the labels. Meanwhile other companies were striking their own deals. Upstart company FullAudio announced it had received licenses with all five major labels for its upcoming music service.

Pushing the Limits of Interactivity

Operating within the framework of the compulsory license is the key to continuing to do business for many of the webcasters, said Jonathan Potter, executive director of DIMA. "The question is how far can they push the envelope and stay within the bounds of statutory license. That's it — that’s your cost of doing business. But if you cross the line your cost of doing business is whatever the record labels dictate and you need permissions from each copyright holder through a standard licensing agreement," he explained.

However, the RIAA does not think the prospect of negotiating individual licenses with each label is going to make or break anyone’s business. "The notion that the cost to obtain these licenses is any greater or any less expensive than other parts of their businesses, such as bandwidth, is not realistic. I don’t see any impediment for anyone wishing to get a direct license from the labels," said Steven Marks, senior vice president business affairs for the RIAA.

While Potter states he is exceedingly certain his constituents (the webcasters) are in compliance with the DMCA, Marks is equally confident that certain webcasters are not, when they offer personalization services that are "specially created for an individual user," he said. That's why the single definition of interactivity is so essential to both parties. When it comes, most likely from the courts, it could determine the future and viability of many of the companies operating within this space.

"Some will survive and some won’t because there is a legal battle to fight. Some companies die on contact with the legal industry," said Phil Leigh, vice president digital media with Raymond James & Associates.

"For Internet radio to prosper, it must contain levels of consumer influence and if the statutory license doesn’t cover that, the effect on webcasters would be adverse," said Bob Ohlweiler, senior vice president of business development for MusicMatch. The ability to interact, to various degrees, with the music you listen to online is what makes online radio different from terrestrial radio, he explained. "The idea that Internet radio should be just like terrestrial radio is like saying e-mail should follow the same rules as snail mail. Doing it without consumer influence [doesn’t make sense]," he said. A legal victory for the RIAA would likely curtail that huge advantage of Internet radio, he said.

End of Interactive Internet Radio?

The middle ground of consumer-influenced stations that rides between passive listening and complete interactivity, where users have some degree of personalization, could be wiped out. That is already beginning to happen. In mid-June, Listen.com withdrew from DIMA’s suit against the RIAA, which in turn agreed to withdraw its objection to Listen.com’s participation in CARP.

The webcaster settled, explained Sean Ryan, Listen.com’s CEO, because it is focused on the on demand service that it plans to launch in October, which will require direct licenses because it is an interactive subscription-based service. Following the settlement, Listen discontinued certain features of its service, including the ability to skip a song and to rate songs.

"For us, skip and rate was not a big component of our focus for the fall. Is skipping a song within the DMCA? It’s a gray area. It’s not a fight we wanted to have," said Ryan. He points out that regardless of the legal outcomes, reality and history dictate that not all webcasters are going to succeed and that the market will consolidate to some degree, as it always does.

As a novel industry, the wheat is still being separated from the chaff. In addition to the expected market changes, fees could also become too onerous for some companies to survive, said Ryan. If that happens then users will simply resort to piracy to get their music, he said, an eventuality the recording industry would certainly like to avoid. That’s why it makes sense for both parties to compromise.

Piracy, coupled with the potential for Napster-like services, could harm CD sales, said Leigh. "I think ultimately the triggering factor will be an irrevocable decline in CD sales. That will trigger the labels to be more serious and more amenable," he said.

While the record labels are understandably trying to protect their intellectual property, they would be foolish to set a fee structure so high that webcasters would no longer see a compelling business model, said Bill Piwonka, vice president of marketing for MeasureCast, which tracks the Internet radio business. "I really believe the courts will decide, but I think what will happen is that this is such a compelling medium that a fee structure will be worked out that is reasonable and will allow broadcasters to have a business. Because if it’s not, the RIAA will be shooting itself in the foot," Piwonka said.

After all, the record labels really do have the most to lose, said T.S. Kelly, director of Internet Media Strategies for Nielsen NetRatings. Since the business of record labels is to drive as much consumption of their music as possible, it would behoove them to limit the outlets, including the Internet, for their artists. The RIAA’s Marks said that the association and the labels it represents, wants the online radio sector to thrive and be successful. "I think there is a very good future for [online radio]," he said. "Like any new industry there is a maturation process that takes a few years."

A tiered system of royalties for different levels of interactivity would be mutually beneficial, Kelly suggested. Instead of an all or nothing method, legislation that looks at interactivity from a "phase in" approach, creating different fees for levels of interactivity would allow the business to survive and thrive, he said. Fees would rise as companies moved up the levels from basic radio streaming with no interactivity, to choosing specific genres of music, to choosing the artists and songs themselves, otherwise considered on-demand radio. "That would be good for the labels and good for other companies as well. It has to happen. The current fee structure doesn’t allow for interactivity as quickly as it is being developed," Kelly said.

On-Demand Radio Coming Soon?

Interactivity in various forms, or consumer influence as DIMA calls it, is essential to the future of the medium. "I think it’s beginning to be fairly widely accepted that the long term value in Internet radio is going to require taking advantage of the underlying technology, which includes the ability to offer higher value services than broadcast radio," said Potter. "There is a reason why more and more companies are offering consumer influenced radio — because it’s a heck of a lot more interesting than what’s on broadcast radio."

Consumer-influenced radio is not the end game, Leigh pointed out. On demand services are. The only reason this "hybrid" form with varying degrees of personalization exists, is that it fits under the DMCA, but it’s not really what customers eventually want, he said. That’s why companies like Listen.com are focusing on the next step — on demand services.

Other webcasters, including MusicMatch, intend to launch services later this year that they openly admit are clearly interactive, no ifs, ands, or buts. In introducing these specific on-demand products, MusicMatch and Listen.com will have hammered out the individual direct licensing agreements with each label. MusicMatch will also continue to offer its current service, which it considers consumer-influenced and thus eligible for the statutory license, said Ohlweiler.

If the battle continues, the webcasting participants will likely remain the existing services, since the specter of lawyers and courtrooms has dried up the flow of venture capital into the online radio space, said Dave Goldberg, CEO of Launch Media. An environment in which companies are getting sued is not an attractive one in which to invest money, making it tough for startup players to get started, he said.

Recently, the Internet radio business had to weather some storms. When Clear Channel and other radio companies discontinued streaming their radio stations in the spring, audience figures dipped for two to three weeks and then began growing again on a weekly basis, said Piwonka. At the end of April, the MeasureCast Internet Radio Index was 130, a number that grew to 172 in mid-June. The index tracks the total number of hours streamed by online broadcasters and represents the trends in total listening time. The growth during those two months when many radio stations suspended their streaming, indicates the strength of the medium in the face of obstacles, said Piwonka. He expects the business to continue to grow in the midst of the ongoing legal battles.

Still, it's important to remember that webcasting is embryonic and these sorts of growing pains are not uncommon.

"We’re here at the birth of a new industry and we have parties with different interests trying to find a common ground," said Ohweiler. That sentiment seems to be the one thing on which all players can agree.

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