Please scroll down (or click here) for RAIN's coverage and details of the Librarian of Congress's final webcasting royalty determination. You can also scroll down for details on possible legislation from Reps Inslee and Boucher (or click here).

BY KURT HANSON
The Librarian of Congress's decision on Internet radio royalty rates seems to be a decision that pleases no one (including the RIAA; see quotes in story below).

That suggests to me that it's time for record industry representatives and webcaster representatives to finally sit down and work out their differences in a non-adversarial manner.

Otherwise, virtually all broadcasters will likely pull their simulcast streams off the web, and most independent Internet-only webcasters will be forced out of business or offshore. And that will leave a tightly-consolidated Internet radio industry (e.g., AOL, MSN, Yahoo!, and perhaps one or two other players) that will be as bad for labels' needs as the tightly-consolidated broadcast radio industry is.

And without the diversity and vibrancy that is the hallmark of Internet radio today, consumers will find the medium less appealing, growth will stall (or reverse), and labels and artists will never see a significant income stream from their hard-won royalty rate.

Congress may reconsider 1998's flawed logic
Worse yet for labels, as webcasters start to pull their streams, tens of thousands of disappointed (and in some cases angry) music consumers may soon flood their Congressional representatives with requests for emergency legislation to forestall the bankruptcy of the pioneers of the industry (as proposed last night by Representatives Jay Inslee and Rick Boucher; see story below).

With the benefit of the four years of knowledge that they've gained since the DMCA was passed, Congress may realize that Internet radio has the exact same promotional value to the copyright holders that broadcast radio has and should be treated in the same manner.

Congressmen will also not be fooled by the RIAA's 1998 argument that Internet radio involves consumers receiving a "perfect digital copy" of the music that negatively impacts record sales.

Thus, looked at with a fresh eye, the "sound recordings performance royalty" for Internet radio may get taken away from labels entirely!

Or the parties could compromise...
That's why there's now a rationale for both sides to compromise:

Webcasters can't afford $.0007/performance in the current advertising environment (much less retroactively), and labels can't afford either of the two most-likely alternatives: (1) to risk having Congress take away the royalty entirely, or (2) to be left with an Internet radio industry that's as consolidated as broadcast radio is.

Am I right? Am I crazy? Feel free to use the feedback form below to express your point of view.

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We've collected various industry figures' response to yesterday's determination by the Librarian of Congress (see RAIN story below, or click here).

Cary Sherman President, Recording Industry Association of America (RIAA)

"The import of this decision is that artists and record labels will subsidize the webcasting businesses of multi-billion dollar companies like Yahoo, AOL, RealNetworks and Viacom. The rate, which cannot be squared with the decision of the arbitration panel, simply does not reflect the fair market value of the music as promised by the law. This decision will certainly reinforce the steadfast opposition of copyright owners to compulsory licensing.”

Eddie Fritts President/CEO, National Association of Broadcasters (NAB)

"The Librarian's decision places a prohibitive financial burden on radio station streaming, and will likely result in the termination of this fledgling service to listeners. It perpetuates the hoax that the Copyright Arbitration Royalty Panel process reflects marketplace reality."

Jonathan Potter Executive Director, Digital Media Association (DiMA)

"When Congress created the Internet radio compulsory license, it intended to promote Internet radio as a competitive, consumer-friendly medium and to provide a long-term royalty opportunity for creators. Today's decision by the Librarian of Congress is a step in that direction. Following the Congressional hearings of the last several weeks regarding this CARP and the process in general, we urge Congress to continue to focus on the flaws in the CARP standards and process to ensure that the 2002-03 CARPs are more equitable to all participants.”

Susan Pickering Executive Director, International Webcasting Association (IWA)

"Webcasters recognize there is a cost to do business. What they cannot accept is a fee that restricts their ability to stay in business. Without a percentage of revenue structure, there is a barrier to entry for all but the largest webcasters...The result of the rates announced today will result in an Internet broadcasting industry which is dominated by big media companies, and it may well become nothing more that a mirror image of terrestrial broadcasting. The public is not served by limited choices of Internet outlets."

John L. Simson Executive Director, SoundExchange

From Streaming Magazine: "'Today's decision by the Librarian of Congress, which disregarded voluminous economic and business evidence supporting a significantly higher rate, means that once again artists and record companies will not receive fair value for their labors...We, as a culture, devalue artistic creation. This is just another example of that cultural discrimination. Recording artists and sound recording copyright owners should not be forced to subsidize the growth of webcasting as we've been forced to subsidize the radio industry for the past 70 years.'"

David Oxenford Shaw Pittman LLP

"While those parties who were participants in the CARP may appeal the decision to the Courts (as no doubt will RIAA, arguing that the rate should be higher), the small webcaster who could not afford to participate in the proceeding is again frozen out. "However, in numerous public forums during the last few months, RIAA and SoundExchange have repeatedly claimed a willingness to negotiate with the small webcaster to reach deals that will allow for their survival -- presumably some sort of percentage of revenue option. Small commercial webcasters have repeatedly expressed to recording industry representatives an interest in such a deal, but thus far the webcasters have had no official response. Thus, unless and until such negotiations bear fruit, the small webcaster has only one other recourse -- through Congress."

Kevin Shively Beethoven.com

"While some large, deep pocketed companies may feel that a 50% reduction is a victory, the decision by the Librarian of Congress does little or nothing to avoid the bankruptcy of the vast majority of Internet radio stations -- the stations that the majority of the Internet radio audience listens to. The absence of a percentage of revenue option in the decision creates a barrier to entry into the industry which is impermeable to all but the largest corporations. The small business webcasters spurring the vast majority of the growth and innovation in streaming media will be pushed aside creating a massive consolidation in the industry and making Internet radio virtually indistinguishable from terrestrial radio. As a result, Internet radio will lose the very distinction that caused its rapid growth in the first place creating many more losers than could ever win from this decision."

Thomas F. Lee President, American Federation of Musicians (AFM)

"All aspects of the music industry, including the new webcasters, depend upon the creativity and hard work of recording musicians and vocalists. We are concerned that the rate set by the Librarian is too low to result in fair compensation to artists that will help them to survive financially and to continue creating."

Alex Alben Vice President of Government Affairs, RealNetworks

"While we appreciate the efforts of the Librarian of Congress and Copyright Office to reevaluate the result of the arbitration panel, we do not see how the proposed rates will serve either artists or web radio. As a young industry, web radio requires a level economic playing field in order to realize its potential. While traditional radio stations do not pay any royalty to perform sound recordings, webcasters will now be subject to a significant additional 'tax' every time they transmit a song to an online listener. The Copyright Office has affirmed the CARP panel's rejection of a percentage of revenue alternative royalty, which would have allowed webcasters to scale performance payments to the revenue they receive as a result of transmitting songs."

Greg Hessinger National Executive Director, American Federation of Television and Radio Artists (AFTRA)

"We are pleased that recording artists will finally receive payment when their work is performed on the Internet. But we are concerned that the compensation they will receive will be substantially less than the value that their work brings to these corporations."

Zack Zalon General Manager, RadioFreeVirgin

"The irony of this is that the labels will be less happy in the long run with this decision, because all of the listening will be aggregated in the hands of just a few companies, limiting the number of choices available to music fans, liimiting the amount of music sold to those music fans, and continuing the decline of the music industry."

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From their press release: "U.S. Reps. Jay Inslee and Rick Boucher reacted to this evening's determination by the Librarian of Congress to cut in half royalty fees charged to webcasters. Inslee and Boucher are also considering legislative action that would more effectively ensure fair payment to music creators while continuing to maintain a diverse, innovative Internet medium for music broadcasting.

"Following the Librarian's decision, Inslee [right] and Boucher [below] made the following statement:

"'We are moderately encouraged that the Librarian of Congress reduced the rates for Internet-only webcasters to the same level AM/FM radio Internet broadcasters. We remain very concerned, however, that this rate will lead to the elimination of hundreds of small businesses and does not provide a viable model to serve both the Internet radio industry and recording artists.

"'Unfortunately, these rates are a direct result of the flawed "willing-buyer/willing-seller" standard that Congress mandated the Librarian of Congress use in determining these rates. Instead of assessing a fair rate, the flawed standard instead requires the arbitrators to try to replicate willing buyers and willing sellers in an already flawed marketplace.

"'While the Librarian of Congress clearly went to great lengths to change the burdensome Copyright Arbitration Royalty Panel (CARP) ruling, we believe that such a contorted process and poor outcome can be avoided by changing the standard guiding the Librarian's decision-making and removing other obstacles in current copyright law that were identified by the Librarian.

"We will be considering legislation to change the standard from "willing-buyer/willing-seller" for Internet radio to the traditional fair market formula used by other Carps In addition, we want to ensure that all future Carps must take into consideration small business concerns and allow effective participation of small, niche and noncommercial entities. We believe these standards will allow for the development of a viable Internet radio industry and ensure that artists, writers, and record labels are fairly compensated.'

"The 'willing-buyer/willing-seller' standard requires that the CARP establish royalty rates for Internet radio based on market transactions between the record labels and the Internet broadcasters. There has only been one such transaction in the marketplace since the law was passed, and that contract was terminated prematurely by the webcaster. Therefore, the CARP did not have enough information on viable contracts from which to make a rate determination."

From Wired.com: "Webcasters worried that Internet radio would be wiped out by outrageously high royalty rates found little solace on Thursday despite a ruling that slashed a controversial licensing fee in half...

"The rates, while lower than previous recommendations, did little to soothe webcasters who continue to claim that such high rates will force fees that can't be recouped...

"Anticipating the worst back in February, Live365 -- the largest Internet broadcaster according to Arbitron with 8.4 million broadcast hours per month -- put together a plan to pay its $1.5 million in past fees along with a monthly charge of $200,000, said executive vice president John Jeffrey [left].

"Those amounts drastically affected the future of the business, forcing executives to prepare a new business model.

"'We've spent a lot of our investors' money over three years and we're either turning towards profitability or we're going to change the fundamental direction of the business,' Jeffrey said. 'Every other cost of doing business has been decreasing, except this royalty rate and that has put a wrench into turning this from a startup to a profitable business. We were headed for profitability this year, but the rate set in February changed all that.'

"Even with the rate lowered, Jeffrey said amateur webcasters who paid as little as $6.95 to broadcast each month would face new fees. Noncommercial broadcasters will need to purchase a $500 license and could be subjected to other fees from Live365...

"It's not completely unprecedented for a royalty rate to be overturned. Congress trumped the CARP's rate for satellite television rebroadcasts. That type of legislation would take time and likely not bode well for Live365 and other webcasters.

"There have been questions regarding the RIAA's stomach for such a fight. Reports have said the recording industry split into two camps during the CARP proceedings: those who believe the royalty rate was set too high and those who believe the rate wasn't high enough. Such a division would weaken the position of the music labels.

"However, Jon Simson [right], the head of SoundExchange, an RIAA incubated agency that would collect webcasting royalties, denied the rift.

"'We felt that (February's royalty rate) could be sustainable for webcasting businesses at higher levels,' Simson said. 'Do we want to have a protracted battle? No. We'd like to find a common ground and move ahead together. That would be favored over millions of dollars in litigation. The notion of battling through Congress isn't what we want, but we want to make sure that we are getting paid.'"

See this entire article in Wired here.

Want to re-read Kurt's May 17 & 20 essay, "RIAA may win the battle but lose the war"? Part 1 is here. Part 2 is here.