Paying the Piper Online

Stations, labels, and musicians wrestle over new Web royalties

John Miller, who runs out of his home, sees the proposed royalty fees as a threat to small stations playing independent music, often the only outlets for small bands. If it goes too high, he says, my only option is to shut it down.
John Miller, who runs out of his home, sees the proposed royalty fees as a threat to small stations playing independent music, often the only outlets for small bands. "If it goes too high," he says, "my only option is to shut it down." (Photo By John Anderson)

In an alliance of unlikely compatriots, the current fight over Internet radio royalty payments has managed to unite in common cause the black-hooded renegades of and the corporate managers of Bob-FM. Both decry the proposed royalties, which are officially scheduled to take effect this month.

"Royalty fees, particularly for Internet stations that don't make any money, are just a big rip-off," according to an e-mail from "Beer Princess," founder of KAOS Radio, the Austin-based Internet radio station billing itself as "all that stands between you and crap." With similar verve, executives of the largest broadcasters in the country, from Clear Channel to National Public Radio, are not only condemning the new royalties as a rip-off; they are predicting the fees could "kill" the pubescent online music-streaming business.

Barring some last-minute compromise, July 15 is D-Day – the day the sweeping new royalty payments imposed for Internet radio by the federal Copyright Royalty Board are due to go into effect. If Congress doesn't intervene, Internet radio stations both big and small will owe millions in "performance" royalties to the recording industry. Executives from AOL, Yahoo!, and the other large Internet services recently sent a letter to every member of Congress warning the new rates "will cause the immediate bankruptcy of the majority of the Internet radio industry."

On the other side, the record labels say they are only demanding what's fair for artists and musicians. Record industry executives argue that Internet radio is simply another business trying to make money on the music without paying musicians – no different from a nightclub refusing to pay the band.

Caught in the middle are hundreds of outfits like KAOS, which are strenuously offended at the accusation they are anti-musician. To many bands, the stations argue, Internet radio is their only shot at getting heard. On any given day, the deejays of KAOS, with names like "the Carcass" and "DJ Dirty Boob," play anybody from Nick Cave to Weird War, from Thin Lizzy to G.G. Allin.

"On KAOS, music is chosen because somebody loves it," according to Beer Princess. "If people in the music industry are suffering from declining sales, perhaps they should consider all those $18 CDs with one good song on them instead of trying to blame the Internet."

Who's Zoomin' Who?

With millions at stake, the debate has intensified in recent weeks, as D-Day draws near. Last week, Internet radio stations around the country observed a "day of silence" to protest the proposed royalty fees. At the same time, legislation working its way through Congress calling for a rollback on the royalty rates was labeled a "cash grab by big net radio" by SoundExchange, the nominally nonprofit organization created by record labels to collect the fees (no relation to the late Austin record store of the same name). Similar rhetoric has flowed hot and heavy from both sides, each fronted by a bevy of lobbying organizations. "The big webcasters are hiding behind the little webcasters, and the big record labels are hiding behind the artists," said Jenny Toomey, executive director of the Future of Music Coalition, a Washington, D.C.-based advocate for musicians.

The new royalty rates were established in March by the Copyright Royalty Board, a three-judge panel established by the Library of Congress, after months of public testimony. The board rejected the old standards, which were based on a percentage of an Internet radio station's revenue, making an immediate distinction between big-money commercial radio stations and small operators. Instead, the board opted for a payment system based on the number of songs played and the number of listeners, charging commercial stations every time a song is played. The rates for all-music stations start at $.0008 per performance in 2006 and rise to $.0019 per performance in 2010. There's also a minimum $500 fee "per channel" – and the new fees are retroactive to 2006.

Depending on the legal definition of "channel," the $500 minimum fee alone could force big Internet radio-casters RealNetworks, Yahoo!, and Pandora – each with hundreds of thousands of personal streams set up by subscribers, which could be defined as "channels" – to cough up more than $1 billion, according to their representatives. SomaFM, a San Francisco-based Web broadcaster, predicts its annual royalty fees could jump from $20,000 a year to $600,000 a year. While SoundExchange disputes many of the doomsday scenarios – and this week offered to cap the per-channel fee at $2,500 for each company – there is no doubt that commercial services that generate listenership but not much revenue might find it difficult to survive. The proposed changes would also bring a new set of rates to noncommercial broadcasters, such as local National Public Radio affiliate KUT-FM, which has been investing heavily in its online service.

"It's really going to kill streaming," said Scott Gillmore, Austin market manager for Emmis Communications. Like most of the big radio operators, Emmis has only recently started to stream its stations, including KGSR-FM and KLBJ-FM. Plans to stream Bob-FM and Hot 93.3 are on hold, awaiting the outcome of the royalty debate. Traditional radio broadcasters see streaming as a chance to develop new revenue flow at a time when over-the-air radio audiences are shrinking. The Web will also provide an audience for their new HD channels. "I think the fees out there are ridiculous," Gillmore said, "and they will impede the media."

According to Richard Ades, spokesman for SoundExchange, the big commercial operations like Emmis, Clear Channel, and the large Internet broadcasters are the real target of the new royalty initiative, not the small operators. According to SoundExchange, 82% of 2006 royalties were paid by the 10 largest webcasters, which made up only 4% of the paying Internet stations. When royalty rates were first imposed on the Internet in 2002, Internet broadcasters said it would kill the business, and it didn't happen, Ades notes. "The CRB came up with a fair and equitable rate, and Internet radio will continue to grow," he said.

A self-portrait of the volunteer KAOS staff, posted on its website, where they say music is chosen because somebody loves it.
A self-portrait of the volunteer KAOS staff, posted on its website, where they say "music is chosen because somebody loves it."

By statute, after SoundExchange takes its cut, 50% of the royalty money will go to the record labels and the remaining 50% to the artists (45% to the primary artist and 5% to the background singers and musicians). In theory, that could send millions of dollars flowing to artists. However, just as big webcasters dominate the broadcast landscape, opponents of the fees argue that the vast majority of royalties will go to big artists and the big labels, while doing little to help unsigned and independent musicians. SoundExchange's detractors note that large amounts of money collected by the agency go unclaimed, primarily by small bands that don't even know they are owed money. And it's the small artists who stand to lose the most if small Internet radio stations are not around to play the music. "There's no reason broadcasters should be punished for playing their music," said John Miller, 31, who runs a site called out of his Austin home. "We're not stealing their music."

For every RealNetworks, there is a guy like Miller, who broadcasts without any aspiration of making money. A Web developer and avid skateboarder, he started broadcasting as three years ago to play what he describes as "Texas' finest New Wave, electronic, and indie music, plus other random assortments of global weird music." He regularly features groups like Crash Berlin and Birdy Nam Nam, which are little known beyond the world of MySpace. Occasionally bands will play live from a studio in his house, and he takes the show on the road; he recently deejayed from a friend's birthday party.

"I'm not trying to make a career or a company out of it," he said. "It's just me and the blog and some people who help out getting musicians." Nevertheless, he might generate, in the measurement system of the industry, 700 to 1,000 listening hours in a month. He's received feedback from listeners in Yugoslavia, China, and Russia.

"Indirectly, we're selling CDs for a lot of these musicians," said Miller, who doesn't solicit any advertising. On his channel, which is operated through, listeners are offered an opportunity to immediately buy any track, through an option available on the media player. Miller says many of the artists he plays are so small they won't see any of the royalty money to be collected by SoundExchange.

To play the music, Miller pays for server space, bandwidth, and various royalty fees to Live365, totaling between $160 and $180 a month, including $48 for songwriters' royalties. Although the precise effects remain unclear, if the current proposal goes through his fees would likely rise to at least $300 to $500 a month – backdated to 2006. "I'm going to try my hardest to pay these fees," Miller said. "If it goes too high, my only option is to shut it down."

Sending Out an SOS

In an effort to dispel the image that it wants to close down guys like Miller, SoundExchange has offered to exempt small webcasters from the new royalties and simply extend the 2002 deal. The move followed a request from the House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property, calling on the group to "initiate good faith" negotiations "with the shared goal of ensuring [small webcasters'] continued operations and viability." Under the terms of the offer, small webcasters would pay royalty fees of 10% of all gross revenue up to $250,000 and 12% for all gross revenue above that amount.

But small webcasters have balked at the offer, arguing that times have changed. SoundExchange's offer to "subsidize" small webcasters until 2010 is only a temporary reprieve, they argue. Among other contentions, they claim that a cutoff of $1.2 million a year in revenue to denote "small" webcasters is no longer appropriate for companies that hope to develop as commercial enterprises. "It imposes a cap on the ability to grow the business," said David Oxenford, an attorney representing webcasters. "You can't attract investors when the revenue potential is capped at $1.2 million."

Negotiations will almost certainly lead to a settlement, but the debate over what constitutes a "small" Internet radio operation underscores the complexities of the issues. Artist advocates note that CBS recently paid $280 million for London-based music and social networking site, which technically was still considered a small webcaster. "And none of that money will be shared with the musicians who gave them their shot," said Toomey of the Future of Music Coalition.

As a musician's group, the Future of Music Coalition supports the royalty but opposes several aspects of it, including the "one-size-fits-all approach." "If SoundExchange puts small webcasters out of business, they've lost the moral authority to be the sole collecting organization for these fees," Toomey said. The group is no fan of the main backer of the royalty push, the Recording Industry Association of America, which it says creates a conflict of interest when it positions itself as the representative of both the record companies and artists. "The RIAA simply cannot be trusted to serve two distinct masters – the record companies and the artists," the organization says in its "manifesto."

The level of discourse on the issues has ranged from lengthy debates on legal minutiae to verbal Molotov cocktails, with some charges moving to the absurd. The record labels recently trotted out a study that suggests radio doesn't really play a big role in selling music and, in fact, represents an alternative to the purchasing of music – which, of course, flies in the face of decades of payola paid by the labels to get their music on radio.

The record industry has also chosen this time to start a new push to force terrestrial radio stations to pay performance fees. Over-the-air radio stations pay American Society of Composers, Authors and Publishers; Broadcast Music Incorporated; and other songwriter royalty fees, but they have been exempt from paying performance royalties. In the past, the argument was that performers benefited from the exposure on radio, which was more valuable than the royalties. But satellite services and the Internet stations pay the fees. "Corporate radio has had a free pass for too long," says the MusicFirst Coalition, yet another industry organization. The group's members include the American Federation of Musicians, American Federation of Television and Radio Artists, the Recording Artists' Coalition, the Recording Academy, and the RIAA, and it has adopted as its slogan "Fair Pay for Air Play."

Broadcasters, renowned for their lobbying prowess, are counting on Congress to intervene on their behalf. Legislation called the Internet Radio Equality Act has been working its way through committees. If approved, it would throw out the CRB's ruling and require most commercial Internet stations to pay 7.5% of their revenue for royalties, which would likely generate less royalty fees than the system adopted in 2002.

"When you cut through the rhetoric, there is this negotiation," Toomey said. "There has to be something both sides can bear." If July 15 passes without a deal, broadcasters will likely push their case in the courts, as well as in Congress. "I think there will be a negotiated settlement," Toomey predicts. "If not, there will be tons of chaos." end story

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