Pandora: Last gasp for Internet radio can't be further prolonged

Since March 2007, when the Copyright Royalty Board exacted a per-performance, per listener fee on streaming online services, pundits have declared a deathwatch on Internet radio. Recently, Pandora's founder expressed the same dire outlook.

This weekend, Pandora founder Tim Westergren told the Washington Post that his service is nearing the point where shutting down is the only feasible option. Despite the fact that Pandora is among the top 200 most popular United States Web sites (and climbing), and that the Pandora iPhone application is among the App Store's 10 most downloaded, Westergren said his company is still losing money.

Pandora is losing so much that, as Westergren said, "The moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we're doing is wasting money." Almost 70 percent of Pandora's revenue goes to paying royalties, he added.

And Westergren knows he's not alone in it. "This is like a last stand for webcasting," he told the Post. Indeed, as the Copyright Royalty Board's decision last year will more than double the per-play fee (from $0.0008 per play to $0.0019 per play) by 2010 if a deal is not reached to change the situation.

Terrestrial radio, conversely, does not have to pay performance royalties. The traditionally held belief is that it serves as a benefit to labels and artists by boosting sales of recorded media, and is therefore exempt from paying per performance. But the Performance Rights Act (HR 4789) seeks to change this. If this act were to pass, an annual fee would be put upon terrestrial commercial radio broadcasters comparable to the one satellite broadcaster Sirius XM must pay.

SoundExchange, the group representing labels and artists, has expressed its view that the legislative discussion should center around what it considers to be fairness -- that radio should be subject to the same brand of royalty regulations as other forms of broadcast.

Groups like the Free Radio Alliance oppose the idea behind HR 4789, calling it a tax on stations by record labels that have "struggled to adapt to a new digital world."

While it is ironic that representatives from a style of broadcast over 100 years old should call record labels into question for their antiquated notions of royalty collection, the stalemate between the two is killing Internet Radio.

If HR 4789 passes, smaller broadcasters worry that they will be forced to consider closure due to the new expenses their stations would face. On the other hand, if it does not pass and terrestrial radio remains exempt, Internet broadcasters will continue to have to pay inflated royalty charges and find some way to offset the cost by increasing advertising revenue.

Competing legislation introduced last year would cap Internet radio royalty rates at 7.5% of revenue, which beats 70%. But legislation that competes with that would use the terrestrial royalty rate as a benchmark for the Internet royalty rate. As long as the terrestrial royalty rate is zero, this third competing bill will go nowhere. And as long as it goes nowhere, the 7.5% cap bill will also go nowhere.

In any event, the interest of the listener -- which is frequently cited as the impetus for keeping services free -- appears secondary to maintaining a system where everyone gets paid.