Royalties Set for Internet Radio

We've covered the topic of broadcast licensing fees for internet radio webcasters for almost two years, starting back in 2007 when the Copyright Royalty Board (CRB) announced a set of licensing fees that threatened to shut down many internet radio services. Last week a royalty agreement was announced that, for the time being at least, has all parties saying they're satisfied.

"For more than two years," said Tim Westergren, founder of the internet radio station Pandora, "I have been eagerly anticipating the day when I could finally write these words: the royalty crisis is over!"

Westergren's Pandora had been in jeopardy during this timeframe, but especially in late 2008 as the company struggled with the burden of what Westergren and other Internet radio webcasters called excessive licensing rates. At one point, shortly after the service began receiving an uptick in listeners thanks to an iPhone application, Westergren announced the company might close if the rates were not brought down to a more manageable level.

The main proponent of licensing fees was SoundExchange, closely tied to the Recording Industry Association of America, which had solidified licensing fees for satellite radio and was instrumental in pushing through the initial internet webcaster licensing fees in 2007.

"These innovative, experimental new terms for 'pureplay' commercial webcasters," SoundExchange announced in a press release last week, "cover royalties for the internet streaming of sound recordings that offer the potential for artists and copyright holders to share in the revenue growth of pureplay webcasters."

The terms are considered experimental because they involve both lowered rates and a revenue sharing model that was introduced within the last year of negotiations.

"Time will tell if revenue sharing is the right move for both the recording community and webcasters," said John Simson, executive director of SoundExchange, "but we’re willing to take the risk in the hope that artists, rights holders and webcasters can all benefit."

The rates are now split across three types of "pureplay" webcasters: subscription-based services and free services, with the latter split into large or small. A small Internet radio webcaster is defined as one with $1.25 million or less in total revenues and would also place a cap on music streamed. All pureplay webcasters would pay an annual minimum fee of $25,000 that can then be applied to their royalties owed.

Even with these lower rates, though, Pandora is having to change its business model, especially as it is still charged a fee for songs that its listeners choose to skip upon hearing the first few seconds of the song.

"The revised royalties are quite high—higher in fact than any other form of radio," said Westergren. "As a consequence, we will have to make an adjustment that will affect about 10% of our users who are our heaviest listeners. Specifically, we are going to begin limiting listening to 40 hours per month on the free version of Pandora."

"In any given month, a listener who hits this limit can then opt for unlimited listening for the remainder of that month for just $0.99," continued Westergren. "In essence, we're asking our heaviest users to put a dollar (well, almost a dollar) in the tip jar in any month in which they listen over 40 hours. We hope this is relatively painless and affordable--the same price as a single song download."

Large pureplay services will pay the greater of either a per performance rate or 25 percent of total revenue; they also agree to provide more comprehensive reporting about the sound recordings used than current regulations currently require.

Through 2014, a one-year-shorter window than large pureplay services, the small pureplay webcasters will pay the greater of a percentage of revenue or a percentage of expenses. In return for a proxy fee, small pureplay webcasters may opt for less stringent play list reporting requirements.

After the settling of these royalty rates, the next step is now to address traditional radio play royalties, which may explain why the traditional broadcast industry has been watching the internet radio licensing negotiations with some interest.

Not only does the licensing of satellite and internet radio leave traditional broadcasters exposed as the only group that does not pay performance royalties, but it also now pits internet radio broadcasters against traditional broadcasters. The new CRB royalty rates address syndication or subscription pureplay Internet radio with a per-performance fee that, interestingly, matches the agreement reached in early 2009 between SoundExchange and the National Association of Broadcasters.

Westergren is one of those pushing for performance royalties on terrestrial radio, although it is unclear whether he is doing so for strictly business reasons, as he credits the A2IM independent artist representatives as a key group that helped to bring negotiations to a close.

"There is a new effort in Congress to fix the broader issue of how musical artists are compensated across all forms of radio," said Westergren. "The system as it stands today remains fundamentally unfair both to internet radio services like Pandora, which pay higher royalties than other forms of radio, and to musical artists, who receive no compensation at all when their music is played on AM/FM radio."

"Along with the artists whose music we play," Westergren continued, "we strongly support the establishment of a level playing field, a truly fair system, as articulated in a new bill called the Performance Rights Act (H.R. 848)."

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