Internet Radio: Reports of its Demise May Be Premature

By Carol Johnson

The wonderful diversity of Internet radio is not only a breath of fresh air for the public, it is also a tremendous benefit to thousands of artists who are being discovered online by new fans. But a ruling several months ago to increase royalty rates dramatically for online broadcasters has caused many online stations to announce that they may have to close shop because of the overwhelming financial burden of the new rate structure.

Online broadcasters and the music industry have been at war for months, fighting over the royalties that should be paid to artists and record labels for playing their music over the Internet. Settling the dispute over royalties is critical for the futures of both the music industry and radio stations. The growing use of portable listening devices such as MP3 players and iPods, and using desktop computers in place of traditional radios, have affected the industry in many ways.

Sales of CDs have plummeted as listening to radio over the Internet has become increasingly easier. High-speed Internet connections and online offerings are more sophisticated and consumers have a wider selection than ever before for choosing the music they want to listen to—almost all of which is streaming content free of advertising and interruptions. As a result, major record labels are working to adapt to changing consumer habits while maintaining revenue levels.

The conflict between Internet radio stations and the music industry has been a prolonged and difficult one, but it seems as if the legal wrangling may be nearing an end, with both sides possibly settling on an agreement soon. John Simson, the head of SoundExchange, is optimistic that an agreement will be reached soon with public radio stations. SoundExchange is a music industry group that collects royalties from digital broadcasters and distributes them to music labels and individual artists, and the group has been at the center of the controversy since it began.

"Resolving questions over royalties for online broadcasting is critical for the futures of both the music and radio industries," Simson says. "Wading through the complext issues, however, has taken longer than many had hoped." The National Association of Broadcasters, a lobbying group for the broadcast industry, has been waiting for several months for a response from SoundExchange about its proposed solutions to the impasse.

Public radio stations may be the first to reach a comprehensive agreement with music industry leaders, because they have traditionally been able to broadcast music online under better terms than commercial stations. SoundExchange’s agreements with public radio stations expired two years ago, along with similar agreements with other broadcasters. A three-judge panel of copyright judges decided in March to impose higher royalties on all stations that stream music online, and the decision made no exceptions for public radio broadcasters.

NPR is currently carrying out a wide-ranging survey of the online usage habits of public radio listeners, and NPR execs will meet with SoundExchange soon to talk about the results.

Radio stations that stream music over their Web sites, as well as Internet-only companies such as Yahoo and AOL all pay royalties to record labels and artists for the right to play their music online. But non-Internet radio stations haven’t usually paid royalties, because the labels and artists received advertising value from airplay that helped boost music sales. Last month SoundExchange reached an agreement with a group representing online radio stations to put a limit on the per-channel fees that broadcasters would have to pay in addition to royalties.

The main thing to be decided now is the larger issue—what the new royalty rates should be. According to the copyright judges’ ruling, broadcasters much pay higher royalty rates per song, per listener, for each song that is played. The ruling specified per-song rates, but online stations strongly objected, saying the rates were too prohibitive, so both sides are talking about establishing a new rate schedule.

Online radio listeners can help keep rates reasonable so that Internet radio can maintain its valuable presence. Many online stations have urged listeners to call their Senators and Representatives to ask them to co-sponsor the Internet Radio Equality Act. The SaveNetRadio Coalition website posts up-to-date news and information about the ongoing discussions and decisions in the fights to save streaming radio on the Internet.

The large commercial webcasters such as Yahoo, RealNetworks, and Pandora are somewhat optimistic about reaching a final agreement in the next few weeks. Jonathan Potter, executive director of the Digital Media Association, says that the industry is eager to get the rates issue out of the way. "We're in a holding pattern," Potter said. "This is obviously not the time for people to be launching new ventures. We've got to resolve this before the industry can get to the next level."