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From Wired News. http://www.wired.com

Internet radio companies big and small are revving up for a fight with the Copyright Royalty Board that could lead to the halls of Congress and — some fear — the end of streaming music stations in the United States.

The panicked preparation follows last Friday’s buzz-killing bombshell: As 50 million or so online radio listeners geared up for their weekends, the board released new royalty rates representing a potential tenfold increase webcasters would have to pay out.

In the old, percentage-based fee system, webcasters paid SoundExchange — the Recording Industry Association of America-associated organization that pushed the Copyright Royalty Board to adopt the new rates — between 6 percent and 12 percent of their revenue, depending on audience reach. The new system charges all webcasters a flat fee per song per listener; for instance, in 2007, streaming companies would owe $0.0011 per song per listener (rates change based on year).

That amount may not sound like much, but it adds up quickly. Consider, for instance, AOL Music, with its average of 210,694 listeners for November 2006. According to calculations made by the Radio and Internet Newsletter, or RAIN, AOL retroactively owes about $1.65 million in sound-recording royalties for that month alone (and that doesn’t include songwriting royalties). By the end of this year, according to RAIN, the company could owe roughly $20 million — unless the rates are overturned by the board or by Congress, which is still a possibility.

Larger services that offer thousands of channels, such as the free Pandora, are also facing a huge spike in royalty costs. Kurt Hanson, publisher of RAIN and CEO of AccuRadio, went so far as to speculate that Pandora, which is based in the United States, could “disappear” as a result of the new rates. Overseas competitors like Last.fm, which is based in London and removed from the board’s restrictions, could easily claim Pandora’s market share. If Pandora has to pay the annual $500 minimum for each channel, Hanson said, its sound-recording royalty bill for 2006 alone would be capped at about $2 billion (based on the service’s 300 million registered users, each of whom gets to create up to 100 unique channels).

“The rates are disastrous,” says Joe Kennedy, CEO of Pandora. “I’m not aware of any internet radio service that believes it can sustain a business at the rates set by this decision.”

The situation for smaller webcasters isn’t any better. And for the likes of Bill Goldsmith, who runs Radio Paradise, it’s far worse: “This royalty structure would wipe out an entire class of business, small independent webcasters such as myself and my wife. Our obligation under this rate structure would be equal to over 125 percent of our total income.”

The smallest webcasters, who use services such as Live365 for their shows, will likely vanish as well unless the rates are overturned. RAIN pegs Live365’s royalty obligation for 2006 at approximately $4.2 million — and that’s not counting the minimum $500 it could owe annually for thousands of its channels. Again, that’s in addition to other royalty fees. (The site, like most others, already pays songwriter royalties to performing rights organizations BMI, ASCAP and SESAC.)

Live365 did not respond to e-mail and phone queries from Wired News in time for publication, and Yahoo declined to comment. SoundExchange also failed to respond.

Hanson, who testified at the hearings on behalf of small webcasters, said he doesn’t “think the people actually running the record labels want to see internet radio shut down,” but that SoundExchange’s lawyers had planned “an aggressive, win-all-you-can battle in Washington. I think they were more successful than they expected to be.”

Pandora’s Joe Kennedy believes the board’s decision will not stand — it’s simply too extreme. He wrote to Wired News, “The only reason the (online streaming) services are not shutting down today is the belief that rationality will ultimately prevail here, either through appeal or congressional intervention.” (A third option, according to Hanson, is that SoundExchange could choose to continue licensing music as a share of revenue, as it did before the Copyright Royalty Board decision.)

Only webcasters that were involved in the original Copyright Royalty Board decision-making process (Yahoo, AOL, Live365 and a few smaller webcasters including Radioio, Ultimate80s and Accuradio) will be able to file an appeal, and they have 15 days to do so.

The House Commerce Committee’s telecommunications subcommittee is holding a hearing on March 7 to hear testimony on the current and future radio industry. Witnesses will include Mel Karmazin from Sirius, Peter Smith from broadcaster Greater Media and Bob Kimball from RealNetworks.

If the new rates stick, online music fans may come to expect far less innovation, variety and quality when it comes to internet radio. Some industry experts fear that even more users could be driven to illicit services that pay no royalties or those that operate from other countries.

   
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