Will Terrestrial Radio Save Its Streaming Counterpart?

In June 2009, we covered what appeared to be conclusion of the story of internet radio royalties. Apparently the story's not quite done, at least according to a town hall meeting held recently by the National Association of Broadcasters (NAB).

The debate about performance rights royalties for internet radio has been raging for years. Numerous attempts to reach an agreement on royalties for internet radio had failed, so SoundExchange, which is closely tied to the Recording Industry of America (RIAA), changed course and went after fledgling satellite radio.

Upon reaching an agreement with satellite radio, that precedent was then used as leverage in discussion of streaming radio royalty rates. 

SoundExchange was instrumental in pushing through the initial internet webcaster licensing fees in 2007, at fairly high royalty percentages, so in 2009 it offered an experimental lower rate and revenue sharing model.

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

The risk, it turns out, is well calculated: in several of our articles, we pointed out that going after satellite to go after internet radio was just another step in a tactical battle to go after traditional broadcasters. This battle has been raging since the 1920s, with radio proponents saying they drive sales of music, while artists' representatives claim that radio takes away from sales of albums.

Fast-forward to 2010 and NAB's town hall meeting.

With Congress considering the Performance Rights Act, which would grant a royalty from any performance-internet, on-air, in-store, satellite-the NAB entered into discussions with MusicFIRST, an advocacy group representing the major labels.

"The label representatives asked for 8 percent of total radio revenues and either a lower streaming rate or 25 percent of digital revenue," said Steve Newberry, CEO of Commonwealth Broadcasting and the NAB's Joint Board Chair. "Both of those were absolutely unacceptable to the radio industry and both of them were rejected immediately."

Between the initial meeting between NAB and MusicFIRST in February and the most recent meetings in July, a series of "educational" meetings were held to allow both sides to explain their specifics.

It's worth noting an interesting tie exists between SoundExchange and MusicFIRST. As first reported in Wired magazine in 2007, SoundExchange, a 501c6 member-based organization, noted that its board had approved use of a portion of collected artists' royalties to fund MusicFIRST.

In other words, and apparently without a sense of irony, the artists are partially funding a music-label advocacy group, indirectly giving part of their royalties back to the music labels.

The logic, from SoundExchange's board's perspective, may be that musicFIRST's big labels can better wage the battle with NAB's lobbyists, and that a successful passing of the Performance Rights Act would mean performance royalties for terrestrial radio would then benefit SoundExchange's artists.

The tie between the artist and label advocacy organizations is further re-enforced by the royalty rates that terrestrial radio may pay, should the Performance Rights Act pass Congress, estimated by the NAB at approximately $100 million in annual royalties.

The proposed royalties break down this way:

  • 1 percent of net revenue for stations earning more than $1.25 million in net revenue
  • $5,000 for stations with $500,000 to $1.25 million in net revenue
  • $2,500 for stations with $100,000 to $500,000 in net revenue (or 1 percent or revenue, if lower)
  • $500 for stations with $50,000 to $100,000 in net revenue
  • $100 for stations under $50,000 in net revenue (or 1 percent or revenue, if lower)
  • $1,000 flat rate for non-profit stations with revenue over $100,000

The concept of charging on net revenue is not new, as it is part of the internet radio experimental rates, but the logistics of tracking-and enforcing-the net revenue sharing agreements could be tricky. It's not out of bounds to think that the Internal Revenue Service could be indirectly tasked with enforcing royalty payment transfer from the stations to MusicFIRST. In addition, if non-profit stations are paying a flat rate, the question of whether these are government or private donor funds being shunted off to MusicFIRST may set a disturbing precedent.

After all this talk of terrestrial radio, what does internet radio get out of the deal?

According to the NAB, the royalty rates noted above would also come with a 10 percent reduction in internet radio royalties, and the rates would be set by Congress, rather than the Copyright Royalty Board.

"I have always believed that it's better to engage and talk and discuss when there are issues that affect the radio industry," said NAB CEO Gordon Smith, a former Senator. "I believe that it's better to shape the future than have it imposed upon us."

In other words, negotiating with MusicFIRST might eliminate the passage of the Performance Rights Act, which may jeopardize the 10 percent royalty reduction for internet radio.

In NAB's mind, the problem isn't going away; while it may be able to avert the passage of the Performance Rights Act this year, resistance to royalty rates may finally be futile.

""Other things that we may want as radio may-and I emphasize may-run into this issue," Smith said, referring to the give and take of Congress. "I think I know how to beat [royalties] for a long time to come, but understand that you're spending your capital on defense instead of on offense, getting the things that you may want."

Newberry added that radio is "particularly vulnerable" to Congressional intervention, given the label's effective lobbying.

Newberry also added that adding the analog FM chip to every mobile device has the potential to further lower streaming royalty rates, and to forge an agreement over royalties on streamed commercials, a contentious issue that has kept smaller stations from streaming their programming.

So, in the end, terrestrial radio might just save internet radio. On the other hand, consumer electronics manufacturers may not be eager to add FM chips to mobile devices.

"Forced inclusion of an additional antenna, processor, and radio receiver will compromise features that consumers truly desire, such as long battery life and light weight," said Gary Shapiro, CEO of the Consumer Electronics Association. "Reducing product performance, mandating inclusion of features consumers don't want, and replacing product innovation by companies like Amazon, Apple, Motorola, and HP-Palm with government design mandates are not in our national interest."

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