With a growing audience of up to 54 million monthly listeners, Internet radio is one of the biggest trends in digital music. But if you believe the industry’s leaders, it’s threatened with extinction.
They say the rates they have to pay the recording industry are bankrupting them. They’re appealing the government-set rates, pressing Congress to change the rate structure and pursuing negotiations with the industry.
Now a congressman has stepped in to oversee the negotiations and Webcasters are ramping up the rhetoric.
“We’re very supportive of paying royalties, but this structure is wrong, unfair and unaffordable,” Tim Westergren, founder of Oakland-based Pandora, said in an e-mail to the Mercury News.
The complaints have a familiar ring. Westergren and his colleagues in the Webcasting industry have issued similarly dire complaints before.
In the past, their cries have riled up Internet radio customers to pressure policy-makers and the recording industry to grant better terms, while drawing complaints of “crying wolf” from the recording industry.
A recording industry representative acknowledged that the new rate structure put in place last year is burdensome to some Webcasters.
But Michael Huppe, general counsel of Washington, D.C.-based SoundExchange, which collects royalties from Internet radio firms on behalf of the recording industry, suggested that the problem is the business models of some of the Internet radio firms.
Noting the interest that broadcast radio giants CBS and Clear Channel have shown recently in Internet radio, Huppe said, “It doesn’t look to us like the industry that dying.”
Webcasters stream songs over the Internet to listeners, typically through a Web page or a music application. Their offerings range from rebroadcasts of over-the-air stations to genre stations like light jazz to personalized channels .
Internet radio firms pay SoundExchange a royalty for each song they stream to each listener. The amount they pay is scheduled to rise from 0.08 cents in 2006 to 0.19 cents in 2010.
The recording industry has indicated a willingness to address at least some of the Webcasters’ concerns. Under terms set by the Copyright Royalty Board, the arm of the Library of Congress that set the rates, Webcasters also would have been required to pay $500 per “channel” that they stream to customers. However, SoundExchange last fall agreed to cap those charges at $50,000 per Webcaster.
Westergren and others argue that they still can’t make money because the royalty rates are too high. Royalty payments consume some 70 percent of Pandora’s revenue, Westergren told the Washington Post.
Some Webcasters pay even more. Small, independent AccuRadio owes about $67,000 a month in royalty fees this year, though its monthly revenue is only $40,000 to $50,000, said CEO Kurt Hanson.
“We would be totally bankrupted under these rates,” Hanson said.
Huppe and the recording industry argue that the figures cited by Webcasters can be misleading. Some Internet radio companies pursue customers rather than revenue as they ramp up their businesses, he said. Other companies, he said, see Internet radio as a loss leader to lure in customers to other parts of their sites.
“You can’t just look at the percentage of revenue quote and think that tells whole story,” Huppe said. “We’re very bullish” on Webcasting’s potential to make money.
Webcasters complain they must pay royalty rates that are much higher than those of any other form of radio. But Huppe argues the recording industry has its own needs. With CD sales plummeting — and little sign yet that digital downloads or anything else will replace them — the industry must find new sources of revenue.
Some analysts say the recording industry risks killing off Internet radio’s long-term potential for short-term royalty payments.
The record labels’ moves have artifi cially (limited) the range and scope of the digital music business,” said Aram Sinnreich, founder and managing partner of Radar Research, a technology consulting firm.
A ruling on the Webcasters’ appeal of the new rates likely won’t come until sometime next year. In the meantime, the Webcasters are hopeful about negotiations overseen by Rep. Howard Berman, D-Van Nuys.
“I think everyone is staying around hoping we can find a resolution,” said Jonathan Potter, executive director of the Digital Media Association, which represents many of the Webcasters.
Contact Troy Wolverton at twolverton@mercurynews.com or (408) 920-5021.
