Setting the price for online radio

Record companies and Internet radio broadcasters will start a long-awaited round of hearings on Monday aimed at setting the ground rules for the burgeoning online radio business.
Written by John Borland, Contributor
Record companies and Internet radio broadcasters will start a long-awaited round of hearings on Monday aimed at setting the ground rules for the burgeoning online radio business.

At stake is whether the free music services that have drawn millions of listeners during the past few years--including such sites as AOL Time Warner's Spinner.com, MTVi's SonicNet and MSN's music service--can remain free.

For the past several years, the companies have operated their online stations without a clear idea of how much money they would ultimately have to pay for the music they broadcast 24 hours a day. Now that price tag will finally be set, and with it the fate of one of the only commercial features of the online music landscape that has demonstrated significant popular support.

"We've been asking Webcasters to run their businesses for years without knowing what their basic costs are," said Eric Sheirer, an analyst with Forrester Research. "It's still far from clear that the way we've been thinking about Webcasting over the past few years will actually produce a sustainable business."

Traditional radio stations that put their broadcasts online are also covered by the upcoming hearings, although big radio conglomerates such as Clear Channel Communications are challenging that status in courts. They say that because they're just putting their ordinary stream online, they shouldn't have to pay new royalties.

The US Copyright Office ruled otherwise late last year, however. A decision in the broadcasters' appeal is expected sometime in the next several months.

In the meantime, many radio stations have shut off their online components, also citing a royalty dispute relating to payments for actors in commercials.

A business still in the making
In the menagerie of online music services, Webcasting is a many-headed beast. The term covers companies such as AOL's Spinner, which provides access to a huge number of preprogrammed music streams; services like Launch.com and MTVi, which allow listeners a little more control in choosing which artists they want to hear and when; and even traditional radio stations that have decided to broadcast simultaneously online.

Their services are catching on, despite troubles on the business side. According to audience measurement firm Arbitron, 20 percent of people in the United States had listened to Internet radio stations by September 2000, the last date for which audio-only figures were available.

Although many of these companies are itching to experiment with new kinds of personalization features and custom stations, they are hemmed in by a set of laws and regulations passed by Congress in 1995 and 1998. These dictate that the companies can have access to all the music in the world without asking for permission from record companies and artists, but that they can't provide much in the way of interactive, music-on-demand services.

These same rules, passed as part of 1998's controversial Digital Millennium Copyright Act, also set down basic guidelines that require Webcasters to pay record companies and artists for the right to play music online. This so-called performance right was a relatively new creation because radio stations in the United States do not have the same obligation when they broadcast music over the airwaves.

But because Congress didn't set the actual price for these royalties, noting only that it should be a market rate, the two sides have been tussling ever since. Webcasters have agreed that they will pay retroactive fees dating back to October 1998, but many of the largest have been operating without paying any royalties since then.

"These companies are starting up new businesses," said Hilary Rosen, CEO of the Recording Industry Association of America, the group that has led negotiations for the record companies. "We just want them to pay for the supplies for their businesses."

The last few months leading up to next week's hearing have only gotten more bitter. The RIAA sued a handful of the leading Webcasters last month, charging that they weren't playing by the rules set out by Congress. Two of these companies have settled, while suits remain outstanding against the rest, muddying the legal waters even further.

Even now, several years into the negotiating process, a vast gulf separates the two sides' proposed price tags.

Webcasters, represented by the Digital Media Association (DiMA), and led most notably by AOL Time Warner and Viacom's MTVi, are offering to pay 0.15 cents per listener, per hour, to the labels and artists.

They say that's comparable to what radio stations pay songwriters for the rights to broadcast music, which is the best analogy for what's happening on the Web.

The RIAA and artists' groups want Webcasters to pay 0.4 cents per song streamed, per person listening, or else 15 percent of company revenue. They say this is based on fair market prices arrived at between "willing" buyers and sellers--the standard set by Congress--with the prices derived from deals already made privately with 26 companies.

With the exception of Yahoo and MusicMatch, which cut its deal with the RIAA only after being sued last month, few of these companies are household names. Many are business-to-business sites aiming to license their services to others. Several have gone out of business. Only a few are Webcasters dealing directly with the public that and are still in operation.

Rosen noted that it wasn't license fees that drove the companies that have disappeared out of business, and it is true that online music companies in general have had a poor survival rate in recent months. "Bandwidth fees cost far more than the licenses," Rosen said.

But the Webcasters say the fees outlined by the record companies would make it all but impossible for small companies, or those who are independent from the record companies themselves, to operate.

"If they get the prices they're asking for, there's not an economic business model here unless you own the (copy)rights," said Jon Potter, executive director of DiMA.

The actual aggregate dollar figures associated with these numbers are hard to get at, since many of the largest companies don't break out how many listeners they have or what their audio revenues are. But some sense of the scale can be gained by looking at AOL, probably the largest service, which serves up about 160 million songs per month.

Under the recording industry's proposal, that means that AOL would have costs of about US$640,000 a month, or US$7.68 million a year, even before it pays for the relatively more expensive bandwidth costs. Under the DiMA proposal, that figure would be closer to US$21,000 a month, or about US$256,000 a year.

Monday's hearing will be the beginning of a process that could last another six months. The record companies, Webcasters, artists and radio stations will meet in front of a three-member panel of independent arbitrators assigned by the Copyright Office.

Those hearings are expected to last several months, and then the arbitrators must make their decision by six months from Monday. The Copyright Office then has another 60 days to certify the final price tag. Either side could then appeal the decision, although courts are generally reluctant to overturn the results of this type of arbitration procedure.

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