Record Industry Proposes Huge Streaming Royalty Fees

If a new online radio webcasting royalty rate, proposed last week by the Copyright Royalty Board (CRB) of the US Library of Congress, is ratified and put into effect, BetaNews estimates that online webcasting leader AOL Radio may receive a bill for copyright holders' royalties retroactive to 2006 amounting to $23.7 million, payable to a collective representing the US recording industry. And assuming the service doesn't become more popular, it could find itself paying as much as $56.3 million in copyright royalties in 2010.

This while the world's three major copyright holders' groups - ASCAP, BMI, and SESAC - collectively charge terrestrial broadcast radio stations $972 per year per station, for the rights to broadcast exactly the same music to an equivalent or larger audience.

Last week, after having met with representatives of the recording, broadcast, and webcasting industries, the CRB sided with an industry group comprised of recording industry representatives in recommending that online radio webcasters pay royalty fees to a rights holders' collective based on the individual performances of songs for individual listeners.

Such a system would be in very stark contrast to the annual one-time, flat fees paid by terrestrial broadcast radio stations, for the general rights to play from large lists of songs throughout the year.

The SoundExchange industry group, whose board of directors is comprised of representatives from all four major music publishers, several lesser publishers, and the RIAA, suggested a royalties system whereby commercial online webcasters would pay $.0008 (eight hundredths of one cent) per performance, per listener, for all popular music streamed over the Internet during 2006. While on the surface this may seem a trifle amount, the surface proves very thin and fragile when you apply some math to these figures.

With the help of some common Web radio industry statistics provided by the Radio and Internet Newsletter (RAIN), and Web radio ratings for November 2006 from comScore Arbitron, we used our trusty spreadsheet to create a ballpark estimate of how much today's major webcasters might have to pay. Here's how Arbitron calculates listenership for online radio: During certain hours of the day, Arbitron gathers listener data for 15-minute periods ("quarter-hours," or QH) to gauge how many listeners are online simultaneously.

Last November, between the hours of 6:00 am and 7:00 pm weekdays, AOL Radio had an average quarter-hour (AQH) listenership of 336,364. When you expand that time window to the hours of 6:00 am and 12:00 am daily (including Sundays), that number reduces to 210,694. The overnight hours aren't typically sampled, but RAIN's publisher and AccuRadio Inc. CEO Kurt Hanson typically estimates those hours to garner about 10% of the broader total AQH.

Applying that formula to the Arbitron numbers, during each week in the month of November, AOL Radio served up an average of 569,614,272 performances to individual users. Assuming a flat annual rate, that's about 29.6 trillion songs per year for 2006. Under the new fees proposed by the CRB, the service would owe royalties on each and every one.

Meanwhile, #2 online radio service LaunchCast may owe retroactive royalties for last year in the neighborhood of $18.3 million, online services of #3 Clear Channel Communications may owe around $10 million, and Live365.com may owe $6.8 million.

In deliberating a fair rate structure for online royalties, the SoundExchange proposal was compared to a system proposed by the Digital Media Association, whose member companies include AOL Music, Live365.com, and Yahoo Music. DiMA proposed a rate structure that computed either $.00025 per performance or 5.5% of a service's revenue, for all its channels collected together.

But the testimony of an expert witness, Dr. Adam Jaffe, convinced the CRB that it should avoid instituting a revenue-oriented approach, "because the revenue that a licensee derives, even from its music-related activities can be influenced by a variety of factors that have nothing to do with music."

In other words, it might be unfair for some services to devote a percentage of advertising revenue to royalties, when other non-commercial services might not be similarly charged.

Besides, states the CRB in its report last week, "percentage of revenue metrics ultimately demand a clear definition of revenue so as to properly relate the fee to the value of the rights being provided, and no such clear definition has been proffered by the [deliberating] parties."

Meanwhile, representatives of radio stations with online interests proposed an ASCAP-like flat annual fee of as much as $8,000 per annum, and National Public Radio proposed a fee of as much as $80,000 per annum. CRB rejected their proposals for various reasons, including that these stations could not create a justifiable metric for converting flat rates to gradually increasing ratings for stations. As a station becomes more popular, it would end up paying less per song, CRB argued; and besides, non-commercial broadcasters such as NPR use music differently, and on a different scale, than commercial broadcasters.

The only fair flat annual fee, the CRB concluded, would have to differentiate between commercial and non-commercial broadcasters. (The report failed to mention that US law already distinguishes between the royalty fees that NPR, PBS, and other public broadcasters pay to ASCAP, BMI, and SESAC, and those which commercial broadcasters pay. Strangely, the public broadcasters pay slightly more.)

To review: CRB rejected DiMA's proposal because its members couldn't adequately define "revenue" to its satisfaction. It then rejected broadcasters' proposals because their flat annual fees couldn't translate to "per use" metrics in a way that's scalable and fair to all involved, the CRB concluded. So it accepted SoundExchange's proposal not so much for what it explained but for what it refrained from attempting to explain.

For small, non-commercial webcasters, however, there is a small exemption: A small streaming service may be charged a flat rate of $500 per annum, good toward the first 159,140 "aggregate tuning hours" of service. That gives small webcasters a reprieve for the first 5,304 listeners who tune in a station for an hour per day, every day, for a month. After then, the station gets charged the full per-performance, per-listener rate.

But the CRB, in its report, sounded a note of caution on that point as well, arguing that there may not be consensus over the definition of "small" in the context of webcasting. It cited the testimony of AccuRadio's Kurt Hanson in this statement:

"There is no evidence in the record about how the Copyright Royalty Judges would delineate between small webcasters and large webcasters. Similarly, while Mr. Hanson asserts that a percentage-of-revenue [licensing framework, as DiMA suggested] is necessary because 'this is a nascent industry' or because small entrepreneurs require such a structure, he offers no evidence to support that assertion or to help define the parameters of the assertion."

CRB made this statement in dismissing Hanson's claim, which it actually quotes: "Obviously, were there to be a sound recording royalty based on performances that was at an extremely low rate...a percentage-of-revenue model might not be required," Hanson testified. "And just as obviously, a confiscatory percentage-of-revenue rate would not allow [small commercial webcasters] to survive."

In last week's RAIN newsletter, the proprietor of independent online streaming service Radio Paradise, Bill Goldsmith, wrote, "Our obligation under this rate structure would be equal to over 125% of our total income. There is no practical way for us to increase our income so dramatically as to render that affordable...That's a truly sad - and deeply un-American - state of affairs. I can only hope that the copyright board recognizes their error in time for the business that I have devoted seven years of love, sweat, time, and energy building up is torn to pieces by the wolves of the music industry."