September 5, 2008

Internet Broadcasters Getting Screwed

By Jason Bracelin

Do they make Kevlar boots?

If not, someone ought to fashion a couple hundred pairs and send them to the various music industry powers that be, for once again, they're shooting themselves in the feet.

This time, it's over Internet broadcasting.

Thanks to a corrupt pay-for-play business model and centralized playlists that largely exclude local artists, traditional terrestrial radio is in danger of becoming as relevant as that Betamax player rusting in the garage.

In recent years, Internet radio has emerged as a promising alternative to the stagnating airwaves.

The best thing about the medium is that it greatly broadens the scope of the type of artists you can hear, as online music sites - such as the great Pandora, for instance - offer a huge range of sounds, from unsigned bands and obscure indie artists to deeper album cuts from more established acts.

But all this could soon end.

Last year, the Copyright Royalty Board established prohibitively high new performance royalty rates for Internet broadcasters.

Whereas terrestrial broadcasters don't have to pay any performance royalty fees, Internet broadcasters will be required to pay up to an 8 percent royalty rate for every song played. At a site like Pandora, where thousands of songs can be played simultaneously, that rate would amount to more than 70 percent of Pandora's $25 million revenue pool, and could force it out of business.

Smaller broadcasters will have to pay an even bigger percentage of their total revenues to royalty agency SoundExchange, all while traditional radio stations don't have to cough up a dime.

"There's been substantial impact," says John Potter of the Digital Media Association. "At Live365, their streaming hours are down a third. If you talk to the folks at Pandora, they're going to close their doors. AOL Radio did a deal with CBS Radio, which if not for the royalty rates, they never would have done. These companies are going to go out of business."

The main disconnect between SoundExchange and Internet broadcasters is a different view on the potential revenues available on the Web. Basically, SoundExchange is arguing that there is more money to be made than Internet broadcasters currently are earning, and it's up to those sites to generate these funds.

"The advertising market hasn't caught up to the Internet radio audience size," Potter says. "If you look at cable television and their first five years of existence, they weren't selling major national campaigns to Proctor & Gamble. There needs to be some time before the business takes off."

Let's hope for some patience then, before the music industry blasts off a few more toes.

Contact reporter Jason Bracelin at [email protected] or 702-383-0476.

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