Saving Web Radio: The 5% Solution

Paying music companies a slice of revenues instead of onerous per-song fees would let Net stations flourish and boost broadband usage

By Jane Black

Bill Goldsmith's lifelong dream was to have a radio station all his own. So in February, 2000, he started Radio Paradise, an Internet radio station named after his hometown of Paradise, Calif. He plays what Goldsmith calls "eclectic, intelligent rock," including Genesis, Radiohead, and Boston folk rocker Ellis Paul. Unlike on traditional FM, Radio Paradise listeners almost never hear the same song twice.

"Radio Paradise could never exist on FM radio because it's not predictable," says Goldsmith. "We're for people with broad tastes who aren't interested in hearing the same thing over and over again."

Goldsmith's dream could be short-lived, however. On Feb. 20, the Copyright Arbitration Royalty Panel (CARP), a body appointed by the U.S. Copyright Office, ruled that under the Digital Millennium Copyright Act (DMCA), Internet radio stations must pay the record labels a fee of 0.14 cents per song, per listener. Traditional radio stations would pay 0.07 cents per song, per listener. Worst of all, the stations will owe back royalties from October, 1998.


  For Goldsmith, that would mean $55,000 in back royalties, plus about $6,000 to $7,000 per month going forward -- about twice his current revenue. "The only way this works is if you have no audience at all or if you sell lots of ads," Goldsmith says. On May 21, Librarian of Congress James H. Billington will issue a final ruling on whether the rates are fair. If he accepts them, Goldsmith says, Radio Paradise will go radio silent (see BW Online, 3/29/02, Royalties: A Royal Pain for Web Radio).

Two years after the dot-com bubble burst, stories of Net entrepreneurs' shattered dreams don't elicit much surprise or sympathy anymore. But Internet radio operators aren't misguided twenty-something entrepreneurs with dollar signs in their eyes. Their downfall, if it comes, will be the direct result of a misguided government policy.

These new rates would stifle innovation and diversity, dooming the Net to become just another outlet for FM drivel. Worse, they could drive frustrated music lovers into the arms of shadowy file-sharing services such as KaZaA, Morpheus, and Grokster.


  This is wrong. And what's most frustrating is that the problem has an easy fix that the copyright panel rejected. Consumers want access to good music online, and Web radio provides it. On Radio Paradise, listeners can tune in to Tracy Chapman, Bob Marley, and trip-hop band Thievery Corporation one hour, and Queen, Nirvana, and David Bowie the next. Startup 3WK plays largely unknown bands such as Soul Coughing, Mighty Flashlight, and Superchunk. And where else but can classical music lovers hear Mendelssohn and Hayden back-to-back on their PCs?

Certainly not at the major labels' music-subscription services. Both MusicNet, backed by Warner Music, BMG, and EMI, and pressplay, backed by Sony and Universal, have failed spectacularly to deliver what consumers want. Both offer a simple way to manage digital-music files and discover new artists and tracks for less than $10 per month. But that's hardly sufficient enticement to convince customers to pay (see BW Online, 12/28/01, "Pay-to-Play Music: A Lot of Missed Notes"). If Napster taught the music industry anything, it was that consumers want more choice, not less.

Killing Net radio would also damage the burgeoning broadband industry that Congress is working so hard to ignite. After all, without innovative offerings like Radio Paradise, consumers have little reason to fork over $49 a month for broadband.


  Finally, implementing the proposed royalty rates would undermine the spirit of the federal copyright law which, at least in theory, aimed to spur the growth of new technology. "These rates will diminish the number of voices and the diversity of programming in the marketplace. That's the opposite of what copyright law is supposed to do," says Paul Maloney, editor of the Radio and Internet Newsletter.

So what's the solution? Billington should reject CARP's recommended royalty rates. Instead, he should require Webcasters to pay a percent of revenues, say 5%, to the record labels. That's what small Webcasters and huge radio conglomerates such as ClearChannel were clamoring for during the comment period, which ended Mar. 20.

Too bad only members of CARP were allowed to comment. The Recording Industry Association of America requested higher rates, extra surcharges for songs longer than five minutes and a minimum fee of $5,000 per station, according to a report filed with the Copyright Office on Mar 6. Small Webcasters were forced to lobby Congress and hope their representatives would then lobby on their behalf.


  A percentage deal would permit Net broadcasters large and small to flourish and still reward music companies for their copyrights. Take Jim and Wanda Atkinson, who scraped together $300,000 in savings in 1997 to invest in startup station 3WK. It now has 500,000 unique listeners and was rated the Web's seventh most popular radio station in 2001, according to ratings firm MeasureCast. If the rates pass as is, the couple says it faces a $600,000 bankruptcy.

"A percent of revenues is something we can afford while we continue to grow our audience," says 3WK's Jim Atkinson. "In the long run, the RIAA could get a good amount of money." At 5% of revenues, 3WK would owe the RIAA just more than $5,000 per year. That's far short of the $110,000 it would owe under the current proposal. But isn't something better than nothing?

The RIAA doesn't think so. "We don't buy that Webcasters are going to go out of business by paying for the music they play," says Steven Marks, the RIAA's senior vice-president for business and legal affairs. Marks argues that the shakeout in the Webcasting business would be a natural step toward a more mature industry, not a result of onerous royalty rates.


  Marks has a point. Even with lower royalty rates, Web radio stations still face an uphill battle. Some 75% to 85% of radio advertisements come from local businesses that don't benefit from the scattershot exposure Internet broadcasting provides. Moreover, unlike traditional radio stations, which use a blanket signal to cover an area, online radio stations send an individual stream to each listener. The result: The more popular the station, the higher the costs to run it (see BW Online, 6/21/01, "Web Radio Pioneers Sing the Blues").

Still, those challenges don't negate the fact that the proposed royalty rates would single-handedly crush Internet radio. "Without us, Net radio will be just like broadcast FM," says Radio Paradise's Goldsmith. "The cost of entry will be so high that the only programming that makes sense is stuff that appeals to the lowest common denominator." And that would create eternal purgatory for Webcasters and listeners alike. Why let that happen when an easy fix is just waiting to be applied?

Black covers the music industry for BusinessWeek Online

Edited by Alex Salkever

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