Royalties: A Royal Pain for Net Radio

Webcasters' fate could depend on a complex and often-illogical case that will set the fees that they have to pay

By Stephen H. Wildstrom

James H. Billington has spent most of his career in academia as one of the world's leading scholars of Russian history. So how did he end up responsible for deciding whether Internet Webcasters should pay royalties to record companies from which broadcasters are exempt, or for royalty purposes whether new satellite radio services are "business establishment services" (like Muzak) or broadcasters?

The answers are found in one of the most complex and important pieces of legislation passed by Congress in recent years, the Digital Millennium Copyright Act of 1998 (DMCA). The law stemmed from Congress' recognition that existing copyright statutes were not up to the challenges posed by the explosion of digital information in the 1990s. But other than dramatically tilting the balance of copyright protection toward rights owners at the expense of consumers, lawmakers could not actually resolve many of the problems raised by new media such as Internet "radio," where music and other content is streamed to listeners, either by repeating the material of existing broadcast stations or in competition with them.

Instead, the DMCA left it up to the parties to resolve the disputes. If they failed to find a mutually satisfactory solution, the issues go to a proceeding known as a Copyright Arbitration Royalty Panel (the word order was twisted to avoid an unfortunate acronym, though CARP isn't much better), with Librarian of Congress Billington acting as the ultimate authority. To the surprise of just about no one, agreements have been very hard to come by, so the CARP process has been quite busy.


  The most important pending case involves the royalties to be paid by Webcasters when they stream music over the Net. To begin to understand it, you have to know a little about the different types of music royalties. Normally, copyrighted works can be used only by permission of the rights holder. If you want to distribute a copy of this article, you'll need BusinessWeek Online's permission, and we'll probably charge a fee for the privilege.

Radio stations couldn't function if they needed permission every time they played a song, so Congress created a "compulsory license." This means broadcasters can play music without explicit permission, provided they have made an arrangement to pay royalties. Congress extended compulsory licensing to Webcasters in 1995. However, no compulsory license exists for services, such as PressPlay or MusicNet, that allow consumers to pick individual songs to be streamed, which is why these services can offer only the music made available to them by record companies.

Three types of royalties are relevant to the case: Artist performance royalties, which are fees paid to songwriters and music publishers. Sound recording performance royalties, which are paid to record companies for the use of their recordings. And ephemeral rights royalties, which cover the making of a temporary digital copy of a recording.


  Artist royalties aren't in dispute. Everyone agrees that all parties should pay these fees to the American Society of Composers, Authors & Publishers, Broadcast Music Inc., and other designated representatives. But sound recording and ephemeral fees for Webcasters and business establishment services are the subject of a CARP that has so far generated a 15,000-page case record and a 135-page arbitration panel report.

Under long-standing copyright law, broadcasters don't pay sound recording royalties. The principle is that the publicity value of airplay is adequate compensation to the record companies, that is, radio sells recordings. The same might be said for Webcasts, but the Library of Congress Copyright Office ruled last year that the exemption applies neither to broadcast station content distributed over the Web nor to Internet-only Webcasters. The National Association of Broadcasters tried to overturn the ruling in court, but lost.

That left only the size of the royalty to be determined, but this proved to be a horribly complex process. The initial proposals by Webcasters and by the Recording Industry Association of America, which represents the record companies, were literally orders of magnitude apart. The RIAA proposed royalties of 0.4 cents to 0.6 cents per song, plus a 10% surcharge on the total amount to license temporary copies. Webcasters offered 0.014 cents per song plus 0.21 cents per hour. Alternatively, they proposed a fee of 3% of gross revenues. Either way, they argued that there should be no ephemeral royalties.


  The arbitrators ended up calling for a royalty of 0.07 cents per song for Webcasts that retransmit broadcasts and 0.14 cents for Internet-only streaming, plus a 9% surcharge for ephemeral copies. The arbitrators based their decision on 26 agreements that had been successfully negotiated between individual Webcasters and the RIAA.

Unfortunately, their logic is almost impossible to follow. For one thing, only 1 of the 26 -- Yahoo! ( -- is still a going concern. And the RIAA insisted that details of the agreements be kept secret, so vast amounts of the text, including virtually all information on the critical Yahoo! deal, have been blacked out in the copies of the report available to the public.

Webcasters are asking Billington to reject the CARP recommendation, but there's no indication of how he will act. Although the per-song royalties seem very small, they add up for Webcasters operating many channels 24 hours a day. And the threat of large retroactive royalty payments, ranging from thousands of dollars for an essentially amateur independent Webcaster to millions for a large-scale operation like AOL Time Warner's Spinner, could jeopardize the future of Internet radio.


  Next up will be an arbitration of royalties for satellite broadcasters such as XM Satellite Radio and Sirius Satellite Radio. These outfits were no more than a gleam in their founders' eyes when Congress drafted the DMCA, and it's not at all clear how they should be treated. They broadcast over the air on licensed spectrum, like conventional radio stations, but they offer a huge number of narrowly focused channels, like Webcasters. And they're available only to subscribers, like business establishment services, which are treated completely differently from either conventional or Webcast services.

The Library of Congress has gotten a lot of flack from the Internet community for its handling of the royalty cases, but the real problem is laws that are both unbalanced and sometimes nonsensical. If radio stations are exempt from sound recording royalties because they promote the sale of records, why shouldn't Webcasters get the same treatment? Because that's what the law says, however illogical. And the prospects of the law changing any time soon are slim.

Wildstrom is Technology & You columnist for BusinessWeek

Before it's here, it's on the Bloomberg Terminal.