BY KURT HANSON
America's nascent Internet radio industry continues to react in shock to Thursday's Copyright Arbitration Royalty Panel ("CARP") recommendation that Webcasters pay "performance rights" fees to record labels that are so high that they are currently more than 100% of most Webcasters' gross revenues!

The panel's recommendation was addressed to the U.S. Copyright Office, which will recommend to the Librarian of Congress whether to accept, reject or modify the rates and terms set forth in the report. The Librarian must accept or reject the report by May 21st.

Under the recommendation, Internet-only Webcasters would be required to pay royalties of .14 cents per listener per song transmitted, or roughly $.02/listener-hour (assuming about 15 songs per hour). Given the current low levels of advertiser support of Internet radio, most Webcasters are not seeing anything close to $.02./listener-hour in revenues — suggesting that the recommendation, if adopted, could essentially stop the industry dead in its tracks.

As the New York Times reported on Friday, "Representatives from both sides can continue to press the Copyright Office for proposal changes for 60 days. Eric E. Van Loon, a member of the three-person arbitration panel, said that the panel had received more than 14,000 pages of testimony from more than 50 witnesses." (According to RAIN's calculations, that works out to 280 pages of testimony per witness.)

CARP's proposed performance license fees for Internet simulcasts of AM and FM signals are half of the fees proposed for the Internet-only Webcasters -- but the simulcast portion of the Webcasting industry is already feeling pain from high streaming costs, impossibly-high AFTRA talent fees, and a lack of support from top-level management.


How did this happen?
DiMA recommended a flat per-hour fee!
It was the hope of many webcasters that the performance license fee CARP recommended would be based upon a percentage of each Webcaster's revenues. That way, the industry could grow, and the record industry could make money right along with it -- more revenues for Webcasters, more compensation for copyright owners.

However, the association representing Webcasters in the arbitration, the Washington, D.C.-based Digital Media Association ("DiMA"), may have started arbitrators down the flat-fee path in its testimony and its recommendation of a $.0015/hour license fee.

As shown on the DiMA website here, DiMA took broadcast radio's ASCAP-BMI-SESAC license fees (designed to compensate composers), which are in reality calculated as a percentage of radio station revenues, and translated them into an approximate price per hour of programming. DiMA then recommended an label-and-artists' license fee 30% lower than the composers' license fee.

Unfortunately for Webcasters, CARP embraced the concept of that translation into a flat fee...but recommended a fee 14 times higher than DiMA proposed.


Could Internet radio eventually
support a $.02/listener hour license fee?
Many observers, including all of us at RAIN, believe that advertisers will eventually embrace Internet radio as an advertising medium. After all, if, say, Arby's is willing to pay a penny to deliver a 60-second advertising to a single consumer's ears via the AM or FM band (i.e., a $10 CPM), as they are, why wouldn't they logically, eventually, be willing to pay the same penny to deliver the same advertising impression to the same pair of ears via Internet radio?

The problems right now are that (1) Internet radio audiences are still too small to warrant much agency attention, (2) in the depressed post-9/11 advertising spending environment, agencies are looking for places to cut back, not new media opportunities to consider, and (3) the agency infrastructure is not yet in place -- in other words, the department that buys Internet doesn't have audio-based creative, and typically the department that buys audio ads isn't currently allowed to buy anything on the Web.

If the medium is allowed to grow, these problems will inevitably be resolved. At that point, CARP's proposed $.02/listener-hour performance royalties might not be the kiss of death, as they would be covered by selling two spots per hour at current local or national radio station spot prices (or several spots per hour at current network radio spot prices).

But there's no way to get there! If this year's license fees are higher than anticipated gross revenues, there will be virtually no Webcasting, and thus no audience growth, and thus no interest from advertisers.

To be continued.

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From The Wall Street Journal: "On Feb. 15, disc jockey 'Cabana Boy Geoff' Alan offered up a special treat for listeners of KISS FM in Boise, Idaho: an interview with pop duo Evan and Jaron Lowenstein...

"The artists reported that they had just come from skiing at nearby Sun Valley, then praised the local scene. 'Boise's always a nice place to stop by on the way out,' Evan Lowenstein said, adding that the city 'is actually far more beautiful than I expected it to be. It's actually really nice, so happy to be here.' Mr. Alan chimed in: 'Yeah, we've got some good people here.' Later, he asked Boise fans to e-mail or call the station with questions for the performers...

"The singers had actually done the interview in San Diego a few weeks earlier. Mr. Alan himself has never been to Boise, though he offers a flurry of local touches on the show he hosts each weekday from 10 a.m. to 3 p.m. on the city's leading pop station...

"Via a practice called 'voice-tracking,' Clear Channel pipes popular out-of-town personalities from bigger markets to smaller ones, customizing their programs to make it sound as if the DJs are actually local residents.

"'We can produce higher-quality programming at a lower cost in markets where we could never afford the talent,' says Randy Michaels [pictured above], the chief executive of the company's radio unit. 'That's a huge benefit to the audience...'

"Mr. Michaels compares his model to McDonald's Corp.'s franchise system. 'A McDonald's manager may get his arms around the local community, but there are certain elements of the product that are constant,' he says. 'You may in some parts of the country get pizza and in some parts of the country get chicken, but the Big Mac is the Big Mac. How we apply those principles to radio we're still figuring out...'

"Clear Channel and its predecessor companies began installing the technology in all its stations in the late 1990s, and linking them together into a giant high-speed digital network to move digital recordings around seamlessly. Gradually, the company started piping major-market DJs into smaller cities. It even did the same with some news stations, which used local reporters feeding information to announcers in different cities, who would then send back their newscasts digitally to be put on the air...

Michaels "compares the radio shows to films, which wouldn't be 'nearly as much fun if the camera kept turning around to show you it was just a set. I don't know that the radio experience would be as good if we said every five minutes, "By the way, I'm not really here and I taped this 20 minutes ago." But that's all part of the magic of creating entertainment.'"

This article is in today's issue of The Wall Street Journal. If you're registered, you can read it online here.