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BY KURT HANSON
Although a group of smaller commercial webcasters including classical-formatted Beethoven.com and AAA-formatted Radioio have been in discussions recently with the RIAA and SoundExchange in an effort to negotiate a voluntary license that could help keep smaller Internet radio webcasters alive, those discussions have apparently stalled, webcasters Kevin Shively and Michael Roe tell RAIN.

The problem, they say, is that the RIAA's offer has not moved significantly from the 15%-of-revenues "sweet spot" rate that was the RIAA's starting position in discussions with webcasters three years ago.

In addition, the two sides are apparently far apart over the definition of how small a small webcaster would have to be to qualify for a "small webcaster" rate. (Sources on both sides of the negotiations have confirmed to RAIN that the definition of "small" proposed by the RIAA is currently in the range of $200-300K/year in revenues. By comparison, the Small Business Administration's definition of a "small" business is less than $6 million/year in revenues.)

A third hang-up in the negotiations, according to Roe (above right), is that the RIAA is asking for a fixed percentage of revenues from each small webcaster — even if he's obtained royalty waivers from labels for a large percentage of the music he plays.

According to Beethoven.com's Shively (left), "Right now, the only deal on the table is a bad deal for webcasters — and we're not willing to do that, not only to our own companies, but to the industry at large. We realize that any deal that's being struck would affect our entire portion of the industry, and we're not willing to do just any deal. We have to do a deal that makes sense for our industry."

Other webcasters participating in the negotiations include Onion River Radio, 3WK, Ultimate 80s, TwangCast, and Radio Paradise, with Shaw Pittman attorney David Oxenford representing the webcasting side and RIAA Sr. VP of Business and Legal Affairs Steven Marks leading the negotiations for the labels.

SoundExchange's Simson
is more optimistic
On the other hand, SoundExchange executive director John Simson (pictured below) told RAIN this morning, "We keep moving a little closer. There are still some major divides, but we hope we can cross them and get to a deal."

Simson told RAIN that, in his mind, they are not negotiating the terms of a voluntary license, but rather terms that all parties can agree to take to the Librarian of Congress to be included in the statutory license.

"I think this only works if, when we get to this deal with small webcasters, it's the kind of thing that, if you qualify, you qualify,andif you don't, you don't. There will be an effort to make this an industry-wide effort [going to the Copyright Office with a percentage-of-revenue option]."

Simson explained, "It almost HAS to happen that way, because if it doesn't, we're at a very interesting place. If it's not adopted by the Library of Congress, I can only offer it for my SoundExchange members, and the other rights holders could still demand the statutory rate."

What happens if there's no deal?
What might happen on October 20th — the date the retroactive royalty payments become due — if no deal has been cut? "I think you're going to see a large number of webcasters who cease operations October 20th," Roe said. "We know that that's so. There's at least a dozen [midsize] webcasters who plan to shut down Oct. 20th."

"They blindly don't realize that what they're doing is forcing us to look at options that would allow us to survive — and the only other options are those under which the labels and artists would be paid nothing." Roe cited playing only music for which he's received waivers from the label as one option; other webcasters have proposed moving their operations to an offshore location.

According to Shively, "At this point, it's looking more and more like appellate or legislative remedies are going to be what's necessary to save Internet radio."

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... It's good to know that the two sides are talking, but it's a shame to hear that they seem to be so far apart. As shown in a chart in the May 28th issue of RAIN (here), AM and FM broadcasters in most countries (other than the U.S.) have to pay a sound recordings performance royalty, but the rates are generally in the 2%-to-4%-of-revenues range and in any event are almost always significantly less than the composers' royalties. If the RIAA is indeed still asking for a double-digit percentage of revenues, that's triple or quadruple or quintuple both the US composers' royalty rate and what might be considered reasonable using international broadcasters' rates as comparatives. Record companies won't admit promotional value Frustratingly, Simson says that some labels still aren't convinced of the promotional value of Internet radio airplay — e.g., some label execs (or at least RIAA lawyers) are taking the position that if there was an all-Broadway Internet radio station (with "Buy it now!" links accompanying every song), that might hurt sales of Broadway cast CDs. And we're talking about the possibility of shutting down hundreds of such operations (including webcasters who specialize in indie rock, blues, classical, bluegrass, electronica, folk, world music, traditional jazz, and more) over what is, from a record label's point of view, a tiny amount of money. Potential upside is smaller than the attorneys' fees Let's do the math: Perhaps there are 300 serious, viable small commercial webcasters, currently, given that the advertising economy hasn't recovered from 9/11 yet, with average revenues of, say, $20,000 each. (Plus there are another few thousand webcasters who are music fans with almost insignificant revenues.) At, a 10% royalty rate, plus or minus 5%, with 50% of that going to labels, and generously assuming that's just split among the five majors, we're talking about a total take of $300,000 per label per year, plus or minus $150,000. In other words, the potential upside for labels for being tough negotiators...and possibly decimating the Internet radio industry...is probably less than the cost of the attorneys' fees involved! The potential upside for them is less than the cost of working one single at CHR! In a difficult time for labels, Internet radio could help! The record industry has lots of challenges right now: The demise of the cassette format with no new replacement format on the horizon...Competition for consumers' dollars from DVDs and video games...The possibly-dangerous combination of file sharing and CD burning...An artistically-stagnant moment in music in the past year or two...Clumsy online efforts... But Internet radio doesn't have to be a problem for the record industry. In fact, it could be a bright spot — if only the labels would just ask for a royalty somewhere in the ballpark of what's reasonable based on composers' rates and international rates, rather than continuing to play hardball for chump change. ... ...

BY PAUL MALONEY
Internet radio listeners value their favorite streaming channels, and by and large, they understand that the industry is threatened by overwhelming royalty obligations.

Unfortunately, that audience is eroding as webcasters fearing those royalties "blip" off the radar screen and shut down.

These findings, from Arbitron's and Edison Media Research's "Internet 9" study, presented in a webcast yesterday, seem to paint a grim picture for Internet radio's current situation. However, other findings continue to support the apparent viability and opportunity of Net radio -- and not just for webcasters.

Listeners want their Net radio
The study did find that the proportion of Americans online who have listened to Internet-only audio in the last month dropped from 12% in July 2001 to 8% in 2002. Yet among regular listeners, half are aware of the controversies surrounding copyrights, and two-thirds are upset about losing a favorite source of audio and support Congressional action to stem the silencing of streams.

And, a majority of listeners (70%) is willing to accept in-stream audio advertising to be able to listen for free. In fact, listeners would rather have streamed audio ads than banners (just 58% said these were acceptable). This is tempered somewhat by the fact that "having NO commercials during the webcast" ranked third in the "Important Factors When Choosing a Site to Listen to Internet Audio."



And while they are still in the minority (22%), listeners willing to pay a small subscription fee to hear their favorite station has gone up from 14% in January 2002. This represents 16 million potential Internet radio subscribers.

Interestingly, while 60% say they listen to Net radio for "content they cannot find on local stations" (under 25% said they listen because of local over-the-air reception problems), almost half (48%) of audio Streamies favor local stations when listening online.

(Since the report indicated that the other choices were "stations from other parts of the US" and "stations from other countries," it's unclear how a respondent who listens to an "Internet-only" station, especially if he or she is not aware of their geographical location, would answer.)

Also interesting is the disparity in familiarity among Net radio listeners of different major sources of audio (see graph immediately below). Do note though that for all six brands, close to half of those that have tried the service return on at least a monthly basis (as indicated by the final column).



Streaming could help record labels too
Based on other results of the research, Arbitron and Edison recommend that the record industry should take a more cooperative approach with Internet audio.

The record industry, as a way to justify its insistence on high royalties for Internet radio's use of copyrighted sound recordings, has contended that there is no evidence that webcasting (and file-trading for that matter) has positive "promotional value" that spurs record sales.

But "Internet 9" found not only that half of weekly Net radio listeners say they've purchased music they heard on the Internet, but that heavy streaming users buy the most CDs! While the average American bought 13 CDs in the past year, streaming audio users' purchase rate is higher, and increases as their listening increases (see the graphic).

Webcasters, record industry
would both benefit from cooperation
At home high-speed connectivity has doubled to 28% since January of 2001. A significant (and growing) segment of the listening audience is willing to accept streaming ads or subscription fees. And streaming fans buy music.

Yet, according to the authors, "the digital-rights fees being collected by the record labels are overwhelming the marketing channels the record company should be embracing." The report concludes with a "Recommendations" section of which one item implores the record industry to take advantage of the promotional opportunities presented by streaming audio.

Arbitron and Edison have recommendations for webcasters too. With the growing saturation of high-speed Internet access in the home, and the apparent existence of willing subscribers, the authors encourage webcasters to develop the "HBO model" of unique and compelling content to spur subscriptions and grow audience.

Moreover, webcasters need to develop the means for advertisers to more easily reach their growing and attractive audience, say the researchers. The webcasting audience represents 40 million largely upscale and educated Americans, many of whom it has been shown are willing to accept advertising. "The streaming media advertising industry needs to develop methods to reach a significant portion of that valuable audience easily and effectively," the report concludes.

Yet the Internet radio industry remains embattled and its near-term survival in jeopardy. However, if these findings are to be believed, it appears that demand is high enough that Net radio has the potential to survive and grow -- based on (or perhaps in spite of) the actions of those to whom the industry poses opportunity.

From CNet News.com: "Internet radio sites may have to shut their doors or become music-free zones under the new royalty plan, according to a research report.

"Jupiter Research said royalty fees could bankrupt Web radio stations by forcing them to pay more to play songs than they could ever make up in advertising revenue -- a prediction that's already come true for dozens of stations that have ceased their Webcasts because of the payments...

"Researchers said the only viable Web radio formats over the next 18 months to 24 months appear to be talk and sports radio...

"Jupiter researchers said a central rights clearinghouse, which would allow Webcasters to go through a middleman rather than paying each label and artist for each song on a per listener basis, could help to alleviate the problem. The record labels already have created a clearinghouse called SoundExchange, which is designed to help collect and distribute the Webcasting fees, but some critics are highly skeptical of the industry-backed plan."

Read this entire article from CNet News here.