Radio Royalties on Repeat Mode

Image via Wikipedia The latest (yet not new) story on Pandora claiming they will pull the plug if there isn't relief on the proposed new streaming radio royalty rates has people talking again. The discussions and debates on these potentially crippling rates (see previous posts and savenetradio.com) are heating up again thanks to the Pandora story (and the recent RIAA-backed shutdown of Muxtape).

I agree that it is a very complex issue - with many parties to be considered. Webcasters, songwriters, artists, record labels, technologists, legislators, consumers. There are some that think that the music "establishment" (aka major labels, RIAA, SoundExchange) are doing everything in their power to reverse the clock so they can go back into history and undo some of their previous actions. The hope is, that in doing so, they create a better future for recorded music sales - one in which they own and control every piece of the pie. Others go so far to say that the labels actually have a vested interest in *killing* streaming radio as they see it as actually a replacement to sales. By killing the existing ecosystem, they can start over (an idea I don't totally disagree with). It's like those movies where some madman wants to nuke the planet so we can "start anew" and cleanse the sins of humanity's past.

I don't really know where I am going with this... other than, this is how I see the most recent actions of the "establishment". I may be somewhat naive, this is how this whole thing seems to be playing out:

Act 1

• labels give terrestrial radio the rights to broadcast royalty-free (to generate awareness and sales of physical product)

Act 2

• labels want more promotion so they start *paying* to get the content played (payola)

Act 3

• labels told that "pay for play" is illegal and start looking for additional (free to them) promotional outlets

Act 4

• labels want more promotion so they give MTV rights to royalty-free broadcast of music videos

Act 5

• labels see other parts of the music ecosystem starting to make money (or *not* make money, but attracting users) and think "hey, that should be ours too"

Act 6

• labels start demanding/increasing payment on plays (where they used to gladly pay for such a thing and would still be doing so if the federal government deemed it illegal)

Act 7

• streaming/radio ecosystem can't afford to be in the radio business and all exit - or move to royalty free programming (talk, news, etc.) - this is in addition to MTV/VH1's continued shift to reality TV and away from music

Act 8

• labels don't have any promotional outlets to get their content heard

Act 9

• labels continue to explore new media distribution outlets for their content (commercials, soundtracks, etc)

Act 10

• due to limited inventory and increased competition to get song "placement" labels offer royalty-free content

Act 11

• go to Act 1

“The definition of insanity is doing the same thing over and over again and expecting different results” - Albert Einstein

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Hypothetical: Pay For One, But Take Another

I'm on a large listserv that is haunted by a wide range of professionals and artists that discuss many of the issues and opportunities that currently present themselves to the digital media market. I started a thread last week that simply posed the following hypothetical:

Someone pays a subscription music service for their "to-go" plan in perpetuity ($15/month for life) but instead of downloading any of the DRM'd content from that service they "acquire" DRMless MP3 versions of the same songs.

Is this deemed "illegal"? They are paying the labels their per month minimums which in turn are paid out to the rights holders (assuming the user is only acquiring content that is also licensed to the subscription provider they are paying) - and since they are paying in perpetuity then the issue of "owning" versus "renting" (and the 30-day licenses) is a non-issue.

The logic (albeit many see as flawed) being that if you pay the monthly subscription fees in perpetuity (basically "renting" it for life), than theoretically the artists and labels end up making far more than they do off a one-time sale of the track. Therefore, if someone pays Rhapsody their $15/month for the rest of their life for the right to listen to a track - but then go and "steal" those tracks from somewhere else - the net net is a positive for the labels and artists. This is the "music as a utility" (some say "tax") argument that the industry has yet to embrace, although their could be grassroots movement of consumers just paying these subscription services (using them as little more than a collection agency) then going off and "acquire" all the tracks they can find off of MP3 blogs, P2P networks, etc. with a clear conscience in knowing that the rights holders are still be remunerated.

The fact is, I know *many* people that discover and listen to new music from MP3 blogs and/or The Hype Machine that also happen to subscribe to services. They find the stuff on the blogs, they listen to it there. If they like it, their choice is to either:

A). Download it directly from there
B). Copy the artist/song info, go to the store of choice (potentially
launching a big heavy media player), log in and buy it. Perish the thought
that they find *lots* of songs they want to buy. Rinse. Lather. Repeat.

The bottom line is that in the current digital music legal and business framework it is easier to steal than to buy legally.

This thread has been active for almost a week now and spun into a very lively debate that has started to cover much larger topics that I originally intended (which is great). But to boil it back down to the original question and the more relevant follow up of... Would you feel morally comfortable with this scenario?

Breaking News: New Streaming Radio Legislation Being Introduced

Hot off the presses at RAIN...

The Internet Radio Equality Act (.pdf) has just been introduced (in mid-afternoon) by Representative Jay Inslee (D-WA, pictured right) and eight cosponsors, with more cosponsors on the bill expected shortly.

The bill has five major provisions:

* Nullifies the recent decision of the CRB judges

* Changes the royalty rate-setting standard that applies to Internet radio royalty arbitrations in the future so that it is the same standard that applies to satellite radio royalty arbitrations -- the 801(b)(1) standard that balances the needs of copyright owners, copyright users, and the public (rather than "willing buyer / willing seller"). (For more detail on this point, read the recent RAIN issue on "Copyright law," here.)

* Instructs future CRBs that the minimum annual royalty per service may be set no higher than $500.

* Establishes a "transitional" royalty rate, until the 2011-15 CRB hearing is held, of either .33 cents per listener hour, or 7.5% of annual revenues, as selected by the provider for that year. Those rates would be applied retroactively to January 1, 2006. (The logic behind this rate, incidentally, is an attempt to match the royalty rate that satellite radio pays for this royalty -- thus the name of the bill.)

* Expands the Copyright Act’s Section 118 musical work license for noncommercial webcasters to enable noncomms to also perform sound recordings over Internet radio at royalty rates designed for noncommercial entities, and sets an transition royalty at 150% of the royalty amount paid by each webcaster in 2004 for their "musical works" royalty (i.e., to ASCAP, BMI, and SESAC).

Now that the bill has been introduced, the SaveNetRadio.org "call to action" is specific and direct: The site is now asking listeners to call their Representative and ask him/her to "cosponsor the Internet Radio Equality Act, introduced by Representative Jay Inslee." Once listeners click the "Call Your Representatives" button on the site and enter their zip code, they are given their Representative's House office phone number and a list of "talking points" to emphasize.

A copy of the bill in its current form (without an "H.R. ____" number attached to it yet), in .pdf form, is available here. More details tomorrow in RAIN.

SaveNetRadio

Savenetradio.org: "Listeners, Broadcasters, and interested parties - Sign the Petition - Support Internet Radio

Recent government action has dramatically increased the fees internet radio companies must pay to play the music you enjoy and threatens the future of internet radio. You can help, let your voice be heard."




Dear [recipient name was inserted here],

As a fan of Internet radio, I was alarmed to learn that the Copyright Royalty Board has decided to raise music royalty rates by 300 to 1200 percent. For most webcasters the new royalties exceed their revenue and they simply will go bankrupt and stop webcasting.

The silencing of Internet radio would be a blow to listeners like me who enjoy the wide variety of choices only available via Internet radio. This will kill the great diversity of music that I hear over the Internet and all the independent artists who have a difficult time breaking through on other forms of radio.

I respectfully request that Congress look into this matter and take action to prevent it. Please understand that time is of the essence since the new royalty rates are retroactive to January 1, 2006 so they will cause immediate bankruptcies if they become effective for even one day. Please don't let the music die.

Have you signed yet?

Net radio operators lose a round | News.blog | CNET News.com

Sigh...

Net radio operators lose a round News.blog CNET News.com: "In a potential blow to Internet radio services, a federal copyright panel on Monday largely upheld a contentious decision that would elevate royalty fees Webcasters must pay to record labels. "

I'm not sure when the Copyright Royalty Board and the RIAA will realize this, but after spending years trying to encourage legal and royalty paying music services, they are very close to succesfully killing most of them.

When users can no longer get free, ad-supported, music guess where they are going to turn?! Free "gray" services that don't generate a dime for the labels or their artists.... now they just get a bigger piece of the incredible shrinking pie.

Radio No! (Part 2)

As you can imagine, the web is buzzing with news and opinion on the future of Internet Radio after last weeks announcement on the new royalty rates. In fact, Om Malik has a quote from Tim Westergren (founder of Pandora) in which he says, "left unchanged, it’s over for us and every other internet radio service, period. Makes it un-viable. We’re staying online because we’re hopeful that sanity will eventually win out. This is a ludicrous ruling.”

If you agree (as I do), then you should check out:

http://www.save-internet-radio.com/2007/03/02/save-internet-radio/

Whether you don’t want to see your favorite internet radio station go off the air, whether you just hate the RIAA, whatever the reason: please, help us get this senseless, greedy policy designed to do nothing but line the pockets of the record industry overturned. Write to, or better yet call, your representative, your senators, and the Copyright Royalty Board. Tell your friends and family, write on your blog, digg this - help get the word out and help to Save Internet Radio!

They also have a nice walkthrough calculation where a small webcaster with 1000 listeners on average could easily rack up hundreds of thousands of dollars in royalty obligations.

Also, David Porter (formerly of Live365) has his own calculation on what that means to the amount of advertising a station would need to have to just break even.

So if we assume an average CPM of $5 for audio ads - probably a bit aggressive, at least at this stage - the webcaster would need to run at least 6 ads per hour in 2010 to cover the required SoundExchange payment. Again, to say nothing of composition royalties, bandwidth, contribution to overhead and profit.

And Rags Gupta (also formerly from Live365) has some thoughts on the implications to the industry.

• There's greater certainty for Webcasters as they've been waiting to know these rates for a while, which may have had a chilling effect with respect to their getting funded (I've counseled at least a couple of VCs looking at webcasting companies to wait until the rates have been set).
• It may also impact any M&A activity that may have been swirling (like the Last.fm/Viacom).
• Some services that allow a greater form of interactivity, like Last.fm or Pandora, may well be subject to higher rates keyed off the statutory ones based on any deals they've negotiated directly with the labels.
• Webcasters will need to respond by either upping the ad frequency, finding other revenue streams (as some have already done by inserting video ads). Some may have to use webcasting as a loss-leader to acquire users that they monetize via other means.
• Finally, if these rates do stick and streaming volume stays the same or goes up (ie companies don't fold their webcasting operations), this will mean greater revenue for labels and recording artists, who are looking for additional revenue sources under every stone these days.

There is still some hope in that these rates can be appealed. Let your voices be heard.