The .14 Cent Solution

New royalties proposed by the music industry threaten to kill independent Internet radio

The solution Lehman proposed found its way into 1998's "Digital Millennium Copyright Act" (DMCA), a sweeping piece of legislation that imposed stiff penalties for copyright infringement. The bill was lauded by the entertainment industry as a victory for artists' rights (it became the basis for the record industry's successful suit against Napster). Others complained that it was draconian (it was also the justification for the jailing of Dmitry Sklyarov, a Russian programmer charged with distributing a program that enabled users to circumvent Adobe's eBook encryption).

Schaumann explains that the primary effect of the DMCA was to give more power to copyright holders. "At one time, there was an understanding that holding a copyright didn't give you undifferentiated ownership," he says. "You'd get a right to certain things, and the public had rights to certain things. That bargain has shifted in a major way."

For Net radio broadcasters, though, the most important consequence of the DMCA was this: Unlike traditional radio, Congress reasoned, Web radio was giving its listeners permanent copies of songs--in theory, at least. Therefore, unlike traditional radio, Web radio stations ought to pay royalties to the holders of the songs' copyrights (i.e., recording artists and record companies). It was a legal distinction long sought by the music industry's aggressively litigious trade group, the Recording Industry Association of America (RIAA), who feared that listeners would use Net radio the same way they were using Napster--to bypass the record companies.

In long-accepted practice, traditional radio stations pay nothing to record companies to play music over the public airwaves, by the logic that commercial radio is essentially a promotional vehicle for records. Performers, too, get nothing. Radio stations do pay royalties, amounting to about three percent of revenue, to the composers of the music they broadcast (through the music-publishing companies ASCAP and BMI). So, for instance, when a radio station plays Alicia Keys's "How Come U Don't Call Me Anymore?" Prince would get a small payment, while Keys got squat. Among its many changes, the DMCA marked the first time Congress had ever awarded so-called performance rights to musicians.

When the time came to determine how much Web radio stations ought to pay to play, the RIAA and Internet broadcasters, represented by a group of large companies like Clear Channel and Infinity Broadcasting, were miles apart. Webcasters proposed to pay 3 percent of their annual revenue; record companies asked for 15 percent. Then the Webcasters struck upon an idea: Instead of paying a fixed rate--called a statutory license--they would pay record companies a fraction of a cent in royalties for each song they played. It would turn out to be a ruinous miscalculation.

Bill Goldsmith, a Net-radio advocate who runs the listener-supported Radio Paradise in California (www.radioparadise.com), says that the Webcasters--media conglomerates or startups rolling in venture capital--were dazzled by the medium's potential as a cash cow. "They had their heads in the clouds with where they were going," he says. "They thought they were going to be minting money by streaming radio on the Web. They thought millions in advertising was going to roll in, and they wanted to protect that flow of cash at all costs. Now most of those companies are out of business." Goldsmith also notes that because the participants had to pay for the proceedings, small Webcasters were priced out of the negotiations from the start.

When negotiations stalled last year, the Library of Congress--which oversees copyright and patent issues--empowered a triumvirate called a Copyright Arbitration Royalty Panel (CARP) to resolve the impasse. (Schaumann points out that the group would be more accurately called a "Copyright Royalty Arbitration Panel" if not for the unfortunate acronym.) In a peculiarity of the process, the CARP was required to base the royalty terms on an existing example. They chose the deal that Yahoo had made with the RIAA after acquiring the streaming service Broadcast.com for $5.7 billion at the height of the speculative tech boom--hardly a representative model, it would seem.

In February, after months of testimony from major Webcasters and record companies, the CARP proposed a solution. Web radio broadcasters, the panel recommended, should pay record companies 14 one-hundredths of a cent (or $.0014) per song per listener. Traditional stations that also stream their broadcasts on the Web were to pay seven one-hundredths of a cent ($.0007), while noncommercial stations would pay two one-hundredths of a cent ($.0002) per song. As mandated by Congress, that money would then be evenly split between the labels and musicians.

In addition, the RIAA proposed that Webcasters keep detailed logs of the music they played--ostensibly so that royalties could be accurately tallied. Among the two-dozen pieces of data Webcasters would have to provide were detailed logs of when their listeners were tuning in and from where--a worrisome prospect for privacy advocates, to say the least.

Certainly, a sliver of a cent doesn't seem like anything to get exercised about. But for Webcasters, who generally bring in little to no advertising revenue, it could be enough to break the bank. Take, for instance, Eric Iverson's Zoetek, which goes out over the for-profit Live365.com service: If the station played 15 songs an hour, 24 hours a day to an audience of one, he would still owe only 50 cents a day. Say, however, that Zoetek had 1,000 listeners---a reasonable expectation for a successful Webcast. Suddenly, Iverson would be paying $500 in royalties each day--or more than $180,000 a year. With revenue of approximately $0, Zoetek would, to put it mildly, be facing tough times.

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