The webcasting deal: What took so long?

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How high were the webcasting royalties set by a federal copyright board more than two years ago? So high that the bacon-saving discountannounced Tuesday for ‘pureplay’ webcasters will still require large ones to pay at least25% of their revenues to SoundExchange, the agency that represents labels and performing artists. Techdirt’s Mike Masnick also notes that the deal calls for a minimum annual fee of $25,000-- not exactly chump change. Nevertheless, webcaster Kurt Hanson hailed the agreement, saying that the rates imposed by the Copyright Royalty Board ‘would almost certainly have been a death warrant -- they were the [equivalent] of 70%, 100%, or even more of some webcasters’ total revenues.’

Those percentages seem outrageous, but consider this: The royalty set by the CRB for 2009 amounted to 2.7 cents per listener per hour of music streamed. The fact that such a fee would amount to 70% or more of a webcaster’s income shows how little these companies have been able to generate from advertisers. The picture has actually worsened for webcasters this year as advertisers cut their spending online and off, strengthening the companies’ argument for a discount.

If the numbers were so stark, why did it take a virtual eternity for webcasters and the music industry to agree on a model that seems sustainable? I’d blame four things:

• An arbitration process that discouraged the two sides from bargaining. Under federal copyright law, webcasters have the right to play songs online (subject to some irritating limits on playlists and customization), but the royalty rate is set by mutual consent. If the sides can’t agree, a federal panel sets the rate. But the mere existence of the panel made webcasters and SoundExchange reluctant to strike deals, for fear of sacrificing too much and having the panel apply those terms to the entire field.
  
• The webcasters’ belief that Congress would save them by passing something like the Internet Radio Equality Act. It wasn’t as quixotic as it sounds -- that’s what happened in 2002, after the Copyright Office imposed the initial royalty rates for online broadcasters.
  
• The wide range of webcasting businesses, which hindered agreement on a percentage-of-revenue model. One often-repeated argument coming out of the SoundExchange camp was that some webcasters were Internet powerhouses. But companies such as Yahoo and AOL weren’t making boatloads of money off their webcasts -- they had many other sources of revenue, and they wanted the royalty calculation to be based just on the revenue directly attributable to their music streams. (Both companies, by the way, turned over much of their webcasting businesslast year to a major over-the-air radio chain, CBS.) SoundExchange naturally resisted that argument, arguing that it would encourage companies to cross-subsidize their webcasting operations and run fewer ads in their streams. Significantly, the deal announced Tuesday doesn’t apply to multifaceted operations -- it’s for companies that do webcasting and nothing else.
  
• The copyright holders’ interest in maximizing the amount of revenue, not maximizing the number of webcasters. Major labels and performing artists weren’t offended by the prospect of high rates driving struggling websites out of business. They wanted listeners to go to sites that were capable of generating significant royalty payments. The webcasters, meanwhile, were struggling to line up advertisers and attract listeners, who had (and have) an ever-increasing number of alternative sources of free music. Over the months of negotiations, SoundExchange agreed to establish several tiers of discounts for hobbyists and small commercial webcasters, with audience caps and limits on songs streamed. The latest deal has tiers too, offering webcasters with less than $1.25 million in revenue the ability to pay 10% to 14% of revenue or 7% of expenses, whichever is greater. ‘There was certainly concern on our side that many, many small services might erode audience from services who really were trying to make a business work,’ SoundExchange Executive Director John Simson said in an e-mail.

SoundExchange also agreed to cut the per-song royalties by about 50% for non-subscription webcasters in the new deal. But the more significant step forward is its willingness to accept a percentage of revenue even from popular webcasters, albeit a higher one than it collects from satellite radio services. (That’s another thing webcasters find galling: how much more they pay, in percentage terms, than their competitors. On the other hand, their business models and costs are quite different.) Such arrangements aligns the interests of webcasters, labels and performers far better than per-song royalties do. But it’s worth remembering that SoundExchange characterized the new deal as ‘experimental,’ signifying its hesitation to commit to a percentage-of-revenue model. Considering how well such an arrangement has worked for music publishers and conventional radio stations, I’m betting labels and performers will grow comfortable with it as well.

-- Jon Healey

Healey writes editorials for The Times’ Opinion Manufacturing Division.