Thursday, April 3, 2008

Damming The Stream

originally published in the Hartford Advocate May 10, 2007

Damming the Stream

Will a new royalty structure for music kill Internet streaming radio like Pandora?

By Jennifer Abel

So are you reading this on paper or online? The Advocate’s accountants need to know: When you see this story in print they have to pay a penny, but read it on the Web and you cost them a dime.

Just kidding. Newspapers aren’t charged for articles based on the number of readings. Even if they were, there’s no reason a reading on the Internet should cost more than the land-based variety.

It’s different with songs, though. At least that’s what the government thinks, which is why on July 15 the legally mandated royalty payment rates for music will change: Internet radio stations, or Webcasters, will pay far more than terrestrial radio (the mildly ironic term for traditional stations broadcasting over the airwaves) to play the same songs.

Small Webcasters say the rate increase will drive them out of business. John Whalen’s one of them. He currently runs out of his home in East Hampton, and wonders about the station’s future if the new royalty plan kicks in.

"I play entire Grateful Dead shows from opening to encore," Whalen says. "Legal bootlegs."
The term sounds oxymoronic but it’s not. "I have a sweetheart deal with Grateful Dead Productions," Whalen said. "The Dead has an agreement: If you don’t seek financial compensation, they don’t charge." Deadheads could openly record concerts they attended back in the day, and Whalen plays such recordings on his Webcasts now. "Jerry Garcia said, ‘Once I play a note, it’s yours.’"

Though he gets a bit of money from the few ads and donation pitches on his site, for the most part Whalen’s station qualifies as a labor of love, not a source of "financial compensation" sufficient for Grateful Dead Productions to seek money from him.

Since Whalen plays recordings that idealistic hippie musicians gave away for free, why’s he even worried about the new royalty set-up? Because the Dead played some songs that Bob Dylan wrote, and under the current plan, Internet and terrestrial radio both pay songwriters’ fees for the music they play.

So Whalen currently pays about $240 a year to Sound Exchange, the performance rights organization that collects royalties for music played over digital media the way groups like ASCAP or BMI collect royalties for music broadcast on TV or terrestrial radio.

But if the rate change goes through, Whalen’s annual royalty payment will jump to $2,160, and he’ll owe another year’s royalties for the music he Webcast in 2006.

Internet and terrestrial radio stations currently pay royalties as a percentage of their revenues. After July 15, Internet radio will pay an additional fee based on the number of songs they play multiplied by the number of individual listeners they have (with a $500 annual minimum). Terrestrial radio won’t have this per-listener cost.

Why not? Practically speaking, because there’s no way to count the number of people listening to a terrestrial broadcast, the way you can count visitors to a Web site. But the official rationale is that playing a song on the radio helps promote it, and the value of that promotion to the artist offsets any loss of royalty payments.

Any Webcaster will tell you that’s a bitter irony. "A lot of Webcasters won’t be able to afford the new rates … [which] will hurt a lot of independent artists who rely on word-of-mouth to sell their music," Whalen says. And though his station focuses on a band with a long-established reputation, there are many smaller stations focusing on more obscure bands who rarely or never get mainstream radio play.

Waterbury Webcaster Joe Antonio runs OCSD Radio, which might qualify as one such station. His focuses on hip-hop and R&B, with a lot of old school or relatively obscure tunes, "in addition to the 40 songs they play on Hot 93.7."

It sounds common-sensical that a large number of small independent radio stations with relatively few listeners each can promote a more eclectic range of music than a few big radio stations who require mass appeal to stay in business. But Richard Ades, a spokesman for Sound Exchange (and thus a strong supporter of the new royalty structure), disagrees. "There is no promotional value to Internet radio," Ades emphatically says. "CD sales are way down."

Maybe for those 40 songs Antonio mentioned, but what about the lesser-known artists that small Webcasters play, but that get no airtime from corporations like Clear Channel?

A non-issue, Ades insists. "Webcasters say ‘this’ll put us out of business,’ which is not true."

The Webcasters beg to differ, saying that the new per-stream per-listener rate will cost more than their total revenues. But if they could magically transform themselves into terrestrial stations with the same number of listeners, their post-July costs would drop 90 percent.

Ades agrees that the discrepancy between Internet and terrestrial radio isn’t fair. That’s why Sound Exchange wants to see terrestrial radio pay the same rate Webcasters will.

Now consider the costs for terrestrial radio stations that also stream their broadcasts online. They already pay for songs twice, but after July their Webcasts will cost 10 times as much as their broadcasts.

Bothersome enough for radio run by wealthy media conglomerates. Worse for non-profit stations whose royalty obligations will change from "percent of revenue" to "number of songs times number of listeners."

Kim Grehn is the vice-president of radio for WNPR, Connecticut Public Radio. Currently, said Grehn, royalties for the small amount of music NPR plays are covered by "a joint agreement with the Corporation for Public Broadcasting. … It’s a blanket agreement" that covers NPR’s live Webcasts as well. But switching their Webcast payment scheme from the current agreement to a listener-times-song strategy might be more than NPR can afford. Grehn’s not sure.

"I’m depending on NPR’s legal staff to figure [the payments] out," he said.

Of course, even a non-profit organization like NPR has far, far more money and resources at its disposal than a small Webcaster like John Whelan the Deadhead or Joe Antonio the R&B fan. And Grehn sounds even more pessimistic than they do about the future of Webcasting.
"Internet radio is just getting off the ground. I think this may end up killing it."