Like an LP, two sides to this debate

Royalty rise irks webcasters, but musicians and families are grateful

Antoinette Kadore wondered how she was going to do it. Hurricane Katrina had pushed more than 5 feet of water into her New Orleans bar and left her wondering how the business could survive.

Ernie K-Doe's Mother-in-Law Lounge is named for Kadore's late husband, Ernie Kadore, a legendary N'awlins R&B singer who used K-Doe as his stage name and had his biggest hit in 1961 with "Mother-in-Law." K-Doe died in 2001, but the lounge continued as a living monument to him — until Katrina nearly put it under water.

So it was like manna from heaven when Kadore received a phone call from nonprofit performance rights organization Sound-Exchange telling her that her late husband's estate was due a royalty payment for all the times his music had been streamed over the Internet.

"The money came at a time when it was desperately needed in a devastated area," she said. "I was overwhelmed. Not only did it help me get things back together, but it's good that Ernie's work is recognized."

Royalties such as these mark the first time in U.S. history that musicians get paid for performances outside of a live venue. While it isn't much (for most artists, the average payment is $360), it means a lot to people like Kadore.

Webcasters, though, don't share these happy feelings. In March, the Copyright Royalty Board increased the rate they must pay to artists and copyright holders, and some say that increase will put them out of business.

From big radio groups to small mom-and-pop outfits, they have asked a federal court to suspend the July 15 "true up," when the rate increase is to go into effect, and a "day of silence" in protest is planned for today.

"Without fair payment to those who create great recordings, the breadth of those recordings will diminish," SoundExchange executive director John Simson said. "Artists and independent labels are small businesses too, and they face difficult times as people change the way they consume music."

The audience for Internet radio has grown to more than 50 million people. Through 2006, SoundExchange has distributed nearly $30 million to artists, with about 60% of that coming from satellite radio royalty.

"I think all artists should get paid," said Kenneth Townsel, a bluegrass musician who founded the Sand Mountain Boys. "It ain't a freebie job. You don't work eight to 10 hours a day for free. That's your bread and butter."

Townsel now runs a short-haul trucking business based in Albertville, Ala. "I had to give up (his music career)," he said over the sound of air wrenches and hammers. "But, oh God, I'd rather do that than anything else."

The royalty doesn't just go to widows of dead bluesmen and obscure bluegrass pickers. Connie Lemos, an heir of Ritchie Valens, also was contacted.

Being an heir to a pioneering rocker who died in an infamous plane crash gets one lots of come-ons. At first, she didn't believe it when SoundExchange's Bill Holland called her trying to give away money.

"We were surprised to hear that there was such a thing," she said. "Not ever hearing of Sound-Exchange, we checked it out with our lawyer, and he said it was safe. We submitted our forms and said let's see what happens."

Holland, a professional musician and a former bureau chief at Billboard magazine, finds the artists or their representatives for SoundExchange. From his cluttered office in Hyattsville, Md., he plays private eye as he tries to track down musicians owed money.

"Sometimes I feel like Santa Claus," he said. "But it's better than Santa Claus because I'm for real, and this is money these people are owed. They've worked for this their entire lives."

The royalty was mandated by Congress as part of the Digital Performance Right in Sound Recording Act, which became effective in 1996. Portions of the law were clarified two years later in the Digital Millennium Copyright Act that applied the royalty to webcasts and satellite radio. (Music delivered via cable was included in the original act.) SoundExchange was established as an unincorporated division of the RIAA to pay artists directly (it has since been spun off as an independent organization).

The royalty is split 50-50 between artist and copyright owner, typically a label.

On March 2, the CRB ruled that webcasters must pay each time a listener hears a song at a rate that began at 0.08 cents in 2006 and rises to 0.19 cents in 2010. The ruling also established a $500 minimum payment for each Web channel.

Through 2005, Internet stations could pay royalties based on either the number of songs they played or the number of hours listeners tuned in, and small companies had the option of giving SoundExchange about 12% of their revenue. That changed with the CRB ruling. By some estimates, the change amounts to a 300% increase.

Tim Westergren, founder of Pandora Media, a music software business that has become one of the most popular Internet radio stations, said webcasters aren't opposed to paying artists. But they feel the rate set by the CRB is too high for a company struggling to get started.

"If our business model is destroyed, then investors won't support it," Westergren said.

In addition to the small, family operators on the Internet, such bigger players as Yahoo, Clear Channel and NPR also are pushing legislation that would roll back the rate to one that is lower than the one set in 1995.

The Internet Radio Equality Act would annul the March 2 decision by the CRB, arbitrarily set the rate at 7.5% of revenue and change the rate-setting standard now used by the CRB to determine Internet radio royalties.

Reps. Jay Inslee, D-Wash., and Donald Mazullo, R-Ill., introduced the act in the House, with Sens. Ron Wyden, D-Ore., and Sam Brownback, R-Kan., doing so in the Senate.

Jonathan Potter, executive director of the trade group Digital Music Assn., called the bill "Internet radio's last best hope."

Meanwhile, SoundExchange has offered some webcasters a deal: Those with revenue of less than $1.5 million a year can pay the same rate they paid under the 1995 rules.

"The net result of this proposal is that small webcasters would be guaranteed no increase in royalty payments for 13 years, from 1998-2010," SoundExchange general counsel Michael Huppe said.

It also offered noncommercial webcasters, mostly college stations, a deal that would allow them to pay $500 a year for most services. Smaller institutions would get an even bigger break.

The issue has garnered the attention of Congress. Rep. Nydia Velazquez, D-N.Y., chairwoman of the House Committee on Small Business, has scheduled a hearing for Thursday.