Small Internet radio hit by new royalty rates

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NEW YORK - Small webcasters are crying foul over new royalty rates they must pay for streaming recordings.

After a two-year proceeding, the Copyright Royalty Board (CRB) has set rates for commercial and noncommercial webcasts and Internet simulcasts, which some executives say will put them out of business.

"This is going to be a major problem for the little guys," says Robert Kimball, senior VP/general counsel for RealNetworks. "For small webcasters and companies that have built their models around free ad-based radio, it's going to be an absolutely massive increase in royalties owed."

Under copyright law, owners of sound recordings must license their music for noninteractive webcasts and simulcasts. Webcasters and broadcasters may negotiate an individual rate directly with copyright owners or they may obtain the statutory compulsory license from government-designated agency SoundExchange at a set rate. SoundExchange must pay 50% of the royalties to the copyright owners (typically labels), 45% to featured artists and 5% to a union fund set up to pay background musicians and singers.

The last time rates were set in 2002 by the Librarian of Congress, broadcasters and the Recording Industry Assn. of America, the lobby group for the major U.S. labels, privately agreed that ad-based commercial services had the option to pay a fraction of a penny per stream or per aggregate tuning hour (the average number of songs played per hour, or ATH), multiplied by the number of users. Noncommercial broadcasters, like National Public Radio (NPR), would pay an annual flat fee between $500 and $2,500.

Meanwhile, Congress enacted the Small Webcasters Settlement Act, which essentially let the little guys pay a percentage of revenue. That law expired in 2005. With the CRB now deciding new rates for 2006-2010, commercial webcast and simulcast rates are $0.0008 per stream (up from about $0.0007), with a minimum of $500 annually per channel or station.

The hardest hit by the decision may be aggregators. SoundExchange reports that Live365 aggregates up to 5,000 stations, which may mean a minimum payment of $500 for each station. Boston-based Loud City, with two full-time employees, offers 500 channels, according to its Web site.

"It kills off opportunities for artists and small broadcasters to be heard," says Mark Lam, CEO of Live365. "It's a very onerous decision that will impact our business and would take out most of our stations."

In the 115-page opinion released March 5, the judges emphasized that they cannot guarantee a profit to everyone who enters the market. "To allow inefficient market participants to continue to use as much music as they want and for as long a time period as they want without compensating copyright owners on the same basis as more efficient market participants trivializes the property rights of copyright owners."

The judges found that, though noncommercial broadcasters used to have limited geographic reach, on the Internet, they can compete with commercial services. So above the average NPR ATH, they must pay commercial rates.

Ruth Seymour, GM of NPR-member station KCRW in Santa Monica, Calif., estimates the station will be on the hook for $216,000 in payments this year under the new rates. "We operate in the basement of a community college, so this is a big bite," she says.

The bargaining table seems like the next stop for webcasters. "We are discussing with our member companies direct licensing alternatives," says Jonathan Potter, executive director of the Digital Media Assn.
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