U.S. Official Cuts Proposed Royalty for Online Music

A top federal official Thursday slashed the fees that many online radio stations must pay for music, a decision angering record labels and musicians yet still threatening the survival of small Internet broadcasters.

Librarian of Congress James H. Billington cut by 50% the royalties that federal arbitrators had proposed for Web-only stations, reducing their total annual bill by millions of dollars. But Billington required Web stations to pay a flat fee for each song played, rather than letting them pay a percentage of their revenue, a decision that spells doom for scores of fledgling companies trying to provide radio for niche tastes on the Net for free, critics said.

“This decision drives Beethoven.com and almost all ... small commercial Webcasters out of business,” said Kevin Shively, director of interactive media at the online classical music outlet. “It virtually guarantees that Internet radio will consolidate to the point where there’s no distinction between Internet radio and terrestrial radio”--a medium dominated by a few giant companies that exerts tight control over what songs get on the air.

Cary Sherman, president of the Recording Industry Assn. of America, was equally displeased with the ruling, which he said “simply does not reflect the fair market value of the music.”

“The import of this decision is that artists and record labels will subsidize the Webcasting businesses of multibillion-dollar companies like Yahoo, AOL, RealNetworks and Viacom,” Sherman said in a statement.

Billington’s ruling won’t have any immediate effect because the per-song fees won’t have to be paid until late this year. Oct. 20 will be a real day of reckoning for Webcasters, though, because that’s the day they’ll have to pay royalties on all music played from Oct. 28, 1998, to Sept. 1, 2002.

Over-the-air and online radio stations already pay royalties to songwriters, but they’ve yet to pay fees to labels and recording artists. In 1998, Congress ordered online stations to pay royalties to labels and artists for songs transmitted digitally, with the fees being set by an arbitration panel. The courts later held that the law also applied to the Internet transmissions of over-the-air stations.

After a protracted study, the arbitration panel recommended in February that commercial Internet-only stations pay 0.14 cent per song per listener and over-the-air stations 0.07 cent per song if they simulcast their programs on the Internet.

Billington set aside the panel’s proposal last month, and Thursday he decreed that Internet-only stations and simulcasters alike must pay .07 cent per song. That translates to about $92 per listener per year. For a popular outlet such as Radioio, the annual bill would be about $62,000.

Contrary to Sherman’s statement, RealNetworks’ subscription radio services aren’t covered by the ruling, and Yahoo isn’t covered because it already pays royalties to labels and artists under a deal previously negotiated with the RIAA. The terms of Yahoo’s deal became the foundation for the arbitrators’ proposal and Billington’s ruling.

One problem with the whole process is that “the entire industry’s rate is being determined by what one company [Yahoo] did,” said Adam Cohen, an attorney for one group of Webcasters. Internet and over-the-air broadcasters are expected to press for legislation to change the way royalties are set and, possibly, roll back the rates set by Billington.

The RIAA’s licensing arm, SoundExchange, says it’s willing to negotiate a compromise that lets small Webcasters pay a percentage of their revenue. But the labels don’t want to extend the same terms to major media companies, which can afford to pay more for the music they play online.

The leading trade group for online music and video companies, the Digital Media Assn., has opposed this approach, calling for all companies to receive the same terms. Some small Webcasters have been trying to negotiate a deal with SoundExchange, but they say they haven’t gotten any response to their proposals.

“It’s gone slowly.... But we’re moving forward,” said John Simson, executive director of SoundExchange. He said he expects negotiations to pick up within the next two weeks.

By charging a percentage of revenue, small companies’ royalty bills would reflect their ability to sell advertisements and sponsorships, not how much music they played.

Over-the-air stations, which have tried in vain to be exempted completely from the new royalties, sought to pay no more than .02 cent per song. “The librarian’s decision places a prohibitive financial burden on radio-station streaming, and will likely result in the termination of this fledgling service to listeners,” said Eddie Fritts, chief executive of the National Assn. of Broadcasters.

Added Zack Zalon, general manager of RadioFreeVirgin: “Small Webcasters, the very group that Congress intended to assist ... will be put out of business.” And because of that, he said, consumers who don’t care for mainstream over-the-air fare “will have nowhere to get their music.”