The Library of Congress Copyright Review Board, which sets music royalty fees, has reviewed an initial decision to increase Internet radio royalties, and found no reason to change its mind. Accordingly, as provided by the CRB’s Determination of Rates and Terms, on May 15th, Internet radio stations that previously paid an annual fee plus 10-12% of profits will now pay $500 per channel plus a flat per-song, per-user fee. The fees will be applied retroactively for 2006, and will increase each year until 2007: 2006 – $.0008 per play 2007 – $.0011 2008 – $.0014 2009 – $.0018 2010 – $.0019 The new royalty structure was opposed not just by small webcasters such as Live365 and Radio Paradise, but also by AOL, Microsoft, and Yahoo! These for-profit players contended that the scheme unfairly burdened Internet-based radio at the expense of terrestrial radio and satellite radio. Nonprofit webcasters were represented by the National Religious Broadcasters Music License Committee, Harvard Radio Broadcasting, and National Public Radio, among others. They contended that the imposition of steep new fees hit nonprofit entities even harder, because as NPR communications vice president Andi Sporkin put it, “The new rates inexplicably break with the longstanding tradition of recognizing radio’s non-commercial, non-profit role.” NPR is particularly agitated because Internet radio has been a smash hit for NPR. Internet radio providers are casting the affirmed decision as the end of the world for Internet radio. The numbers do tell a grim story. As an example, the Radio and Internet Newsletter (RAIN) does the math on the AOL Radio Network

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According to the comScore Arbitron ratings report for November 2006, the AOL Radio Network had a average audience (“AQH”) between 6AM and Midnight of 210,694 listeners. Multiplied by about 16 songs per hour, 18 hours per day, and 31 days per month, plus adding an additional 10% to account for overnight (Mid-6AM) listening, suggests that AOL played about 2.1 billion songs that month. At the CRB’s royalty rate ($0.0008 per play), I’m guessing that would create a royalty obligation to SoundExchange for the month of November of about $1.65 million. Annualized, that’s about $20 million for 2006.

AOL might be able to pay that bill, but according to RAIN, the hugely popular Pandora Internet radio service has about the same amount of traffic, and “such a royalty obligation might exceed the total proceeds of all their recent rounds of venture capital plus their sales revenues to date.” Internet radio dodged the RIAA bullet in 2002, which resulted in the annual fee + 12% formula. But this time, the odds might not favor a miraculous reversal for Internet radio. The CRB was created in 2004 specifically to deal with royalty issues.Chief Royalty Judge James S. Sledge told the Los Angeles Times, “Congress apparently made a determination for an interim specified period of time to assist a nascent industry, and that period of time has passed now.” The CRB provided five reasons why revenue-based schemes were inappropriate:

  1. Revenue does not map as directly to the right being licensed as a per-use scheme.
  2. Measurement is complicated by non-music programming that impacts revenue
  3. The term “revenue” has not been adequately defined to the satisfaction of all parties
  4. Auditing on a revenue basis is more difficult than on a pure usage basis
  5. Variables in management quality could mean that copyright holders receive inadequate compensation, or that Internet radio providers are forced to share revenue unrelated to music use

However, the CRB did not categorically rule out revenue-based approaches:

This does not mean that some revenue-based metric could not be successfully developed as a proxy for the usage-based metric at some time in the future by the parties if the problems noted above were remedied.

There is still the possibility that Congress will force a revenue-based system. As Information Week’s David DeJean observes, Rep. Markey, the Chair of the House Panel on Telecommunications and the Internet, doesn’t like the ruling. Also, because the new licensing scheme catches mobile phone providers, Olga Kharif of BusinessWeek theorizes that big telcos, anxious to push into the music market, will force Congress into action. If the effort to overturn the CRB decision fails, what will the ultimate effect be? The RIAA has framed the new licensing structure as an attempt to capture revenue that is being appropriated from record labels and their artists. But this presumes that the revenue stream will be there for the taking. If Internet radio dies, so does the revenue stream. Come to think of it, killing off Internet radio seems like a perfect way to push listeners to distributed P2P networks. Talk about winning the battle and losing the war.

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