Dissecting the Proposed Internet Radio Royalty Fees

On Tuesday, BetaNews reported on the acceptance by the US Copyright Royalty Board (CRB) of a proposal put forth by a consortium of recording industry representatives, whereby Internet streaming radio sites would be responsible for royalties for the music they play, the total of which would substantially exceed their annual revenue, probably forcing many to shut down.

Our story generated a lot of buzz in the streaming radio community, which prompted prominent members of that industry to share with us some more up-to-date statistics. With these facts in hand, BetaNews is able to make more accurate projections about what major and minor streaming radio providers - including terrestrial radio stations with Internet services - are likely to pay in royalty fees.

Using new facts presented to us by several sources, especially Eric Ronning, managing partner of online radio advertising firm Ronning Lipset Radio, BetaNews can project with some confidence that the SoundExchange group would become a $2.3 billion dollar per year business should the rates the CRB accepted last week finally become ratified.

What radio stations pay today

For our research, we wanted to compare what streaming radio providers would be charged by SoundExchange against the fees that broadcast radio stations today pay to the three major performance royalty organizations (PRO) - ASCAP, BMI, and SESAC. While indeed, some radio stations do pay as little as $972 per year in total royalty fees to PROs, as BetaNews reported Tuesday, in practice, we've since learned this isn't an average that applies to all stations, and major metropolitan radio stations do pay significantly more.

Nonetheless, there's still a considerable gap between PRO fees and SoundExchange's proposed "per-performance" fees, as our updated statistics demonstrates.

Radio stations collectively bargain for the royalty fees they pay to PROs; and as Keith Meehan, the executive director of the Radio Music License Committee, kindly explained to us today, the compromises these bargaining parties make effectively set a cap on how much PROs can collect from all stations combined.

As Meehan explained, in 2002 for ASCAP and 2003 for BMI, the two organizations calculated the amount of maximum royalty collections they could each live with, based on a percentage of radio stations' estimated revenue retroactive to 2001. Then they agreed to stop using stations' revenue as a benchmark for determining royalty rates from that time forward, switching instead to a formula that takes the maximum collectable amount for each year, and works it backwards to determine a fair rate that each station can contribute to it.

As a result, we absolutely know the amount of royalties that these two firms are expected to receive for 2006. For ASCAP, the agreed upon amount is $208,650,000. That's as much as it can collect from radio broadcasters in the US, no more. For BMI, the figure is $208,000,000 even.

No such agreement exists with SESAC. However, this #3 firm represents a small percentage of music rights holders, mostly in the religious music category. An estimate presented to Congress a few years ago stated SESAC collects about 5% of what the other two PROs take in, combined. Based on that figure, we can estimate that SESAC is owed about $20.8 million in royalties for last year.

Totaling up these figures, the three PROs receive about $437.5 million in combined revenue from terrestrial broadcasters' royalties for 2006. BMI is near to settling a continuation of its current agreement with RMLC into successive years, Meehan told us, with ASCAP's current agreement already extending into 2009. By 2010, BetaNews estimates, these PROs will be slated to receive about $550 million in royalties, regardless of the growth rate (or decline) of the radio industry.

Next: Will online music providers be treated fairly?

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