Net Radio, Labels At Odds Over Royalties

With commercial radio outlets consolidating and playlists tightening, record labels and recording artists are having a tough time getting the airplay that fuels CD sales.

Internet radio, on the other hand, represents a new and potentially powerful ally: a medium that can expose new artists to the fans most likely to respond to them.

So why are the labels and Web broadcasters at each other’s throats?

The two sides are locked in a bitter battle over the fees Webcasters must pay labels and artists for the songs they play. After a lengthy arbitration process, Librarian of Congress James H. Billington set a royalty rate last week that left both camps unhappy--the labels and artists said they’re being ripped off, while small Webcasters said they’re being driven out of business.

Online broadcasters will have to pay almost three years’ worth of back royalties in mid-October, coughing up about $260 per listener. For some Webcasters, the amount is so daunting that they said they’ll fold unless Congress intervenes or the labels and artists agree to a smaller payment.

Some music-industry representatives said they’re willing to strike a compromise on the royalties and help small Webcasters. But they have numerous hurdles to cross en route to the happy medium.

For starters, they’re not convinced that radio over the Internet promotes CD sales. They’re also determined not to extend any favors to large Webcasters, although it’s not clear how the line should be drawn between big and small operators online.

Underlying these issues is the labels’ and artists’ desire to right what they feel is a 70-year-old wrong: Over-the-air stations don’t pay them a penny for the music they rely on to draw listeners.

Federal law requires all radio stations, whether they’re over the air or online, to pay royalties to songwriters. The current rate is about 3% of their revenues per year. But only digitally transmitted stations, including those online and on digital cable TV, must pay royalties to labels and recording artists.

Genre-Specific Stations

Consumers with an Internet connection can tune in to more than 2,500 Webcasters, many of which offer multiple genre-based channels. Although the total amount of time spent listening to Web radio is small compared with over-the-air stations, the audience is growing fast, with 77 million Internet users in the U.S. having tuned in at least once.

MeasureCast Inc. gathers data on the total time spent listening to more than 1,100 Web broadcasters, a statistic that reflects audience size and the time each listener spends tuned in. That time has more than doubled since the beginning of the year, despite a 10% drop in the number of stations online, spokesman Sven Haarhoff said. Compared with January 2001, total listening time is seven times greater.

Based on the rate set last week--.07 cent per song per listener--the total amount of royalties paid could be more than $10 million, said Jay Rosenthal of the Recording Artists Coalition, a group that represents musicians. That amount would be split evenly between labels and artists.

The amount collected will depend on the number of stations that stay in business. And that, in turn, could hinge on the ability of small players to win more favorable royalty terms or develop more sales.

Advocates of Internet radio said it’s a better promotional tool for labels and artists than conventional radio stations. Online stations typically identify songs and artists as the music plays, in contrast to over-the-air stations, many of which don’t name all the artists whom they play.

And online stations often make it easy for listeners to buy the music they hear, encouraging impulse purchases.

In addition, many Internet-only stations delve deeply into genres that are hard to find over the air, giving artists a unique avenue for exposure. Because these stations are so tightly targeted, they help introduce new or obscure artists to listeners likely to appreciate their style of music.

But John Simson, executive director of SoundExchange Inc.--the subsidiary of the Recording Industry Assn. of America that negotiates and collects royalties--said these genre-based stations have just as much potential to eat into CD sales as to spur them. For many consumers, he said, “if they can get a great Chicago blues channel [online], they’ll put it on, and they’ll never feel the need to buy a Chicago blues record.”

Promotion Potential

Record labels agree with Webcasters that the Internet can be a powerful promotional tool that circumvents over-the-air radio. But they’re finding plenty of ways to use the Net that don’t involve online broadcasters.

For example, starting today, Sony Corp.’s Columbia Records is using AOL Time Warner Inc.’s America Online and the Netscape Web site to promote the new record from Bruce Springsteen and the E Street Band, providing on-demand access to a series of tracks before the CD is released July 30. Eager to provide the songs through the Net first, Columbia sent a cease-and-desist order to a New York radio station Friday that was playing an unauthorized version of the title track.

Rosenthal said he will urge SoundExchange to provide discounted royalty rates to small Webcasters, particularly ones that feature artists not on the major record labels. But it’s crucial for Webcasting businesses to “take into consideration the [librarian of Congress’] rates from Day 1.”

The Recording Artists Coalition has “always been in favor of a very viable, independent Internet community, meaning non-major-label [outlets],” Rosenthal said. But, he said, nobody has proved that the business model they’ve proposed will fail because of the royalty rates.

And even if some stations fail, he said, that’s the way it goes.

“We need them, but we want the ones that are viable, that figure out how to make it work” without neglecting artists, he said. “It is not mutually exclusive, this concept of us getting paid and having a viable business.”