The .14 Cent Solution

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

According to Goldsmith, just keeping track of these fees would put most small independent Webcasters out of business. (Recall that Iverson is almost totally oblivious to the size of his audience, much less when and how his listeners log in.) Combined with the fees themselves, Goldsmith says, the CARP proposal virtually assures the death of Net radio in its current form. His own Radio Paradise, which has 90,000 listeners a month, could end up paying $9,000 each month in royalties, or roughly three times his gross income. And, because the fees are retroactive to 1998, he could presumably already owe nearly $250,000. "And I'm more successful than the average," Goldsmith adds.

To put the issue in perspective, the ratings-tracking firm Arbitron estimates that if record companies were to collect the same fees from a successful New York City radio station, they would amount to $15 million a year. In other words, the fees proposed by the CARP would be high enough to derail even the $20 billion advertising juggernaut that commercial radio has become.

¬ For its part, the record industry maintains that Lilliputians like Iverson and Goldsmith are merely pawns of larger commercial Webcasters hoping to ride for free on the backs of starving musicians. On its Web site the RIAA characterizes the anti-CARP campaign--which included a "day of silence" on Internet-radio stations earlier this month--as "an intense misinformation and propaganda campaign (so called 'grassroots' but really ginned up by sophisticated lobbyists in D.C.)." (Reached in Washington, an RIAA spokesperson declined to comment for this story.) The anti-CARP carping, the RIAA continues, is meant "to scare noncommercial Webcasters--including college radio stations and so-called hobbyists--and their members of Congress into thinking that CARP rates are going to drive noncommercial Webcasters out of business."

The problem, according to the RIAA, is that anti-CARP agitators are using fuzzy algebra to distort the effect of the new royalty fees. Because Webcasters' calculations have erroneously assumed that every listener is logged on for 24 hours a day, the RIAA contends, the total royalty fees are vastly inflated. Again using Zoetek as a hypothetical test case, if Iverson's broadcast had the same 1,000 listeners per day, but those listeners only logged on for an hour each, his royalty payments would be closer to $8,000 per year. It's worth noting, though, that even such a relatively small payment would be enough to drive nearly all hobbyist Webcasters off the Net. In the cases of independents and college-radio stations with a small listenership, the annual royalty fee could be even less than the $500 minimum set by the DMCA. And record companies, the RIAA adds, are eager to broach a compromise with noncommercial independents--perhaps, for instance, going back to the model of setting royalty fees as a percentage of a station's annual revenue.

Small Webcasters aren't mollified by the RIAA's assurances or convinced by its math. Kurt Hanson, editor of the Chicago-based Radio and Internet Newsletter and a co-founder of the Web site, says that, while royalties may be lower than forecasted, they will still be prohibitive for smaller Webcasters. "What it is is a barrier to entry," he says. "If CARP is approved, I can't imagine most normal people would want to be their own Webcasters."

Like many Webcasters, Hanson argues that the rationale behind paying royalties is fundamentally flawed. Because the songs broadcast on Net radio stations are compressed to accommodate lower connection speeds, the sound quality is rarely better than that of AM radio. Moreover, unlike Gnutella or KaZaA, Net radio doesn't provide users with permanent copies of songs. In other words, listeners currently couldn't pirate copyrighted music from Internet radio even if they wanted to.

And, Hanson and other Webcasters point out, the RIAA's claim that the Web is taking money out of artists' pockets doesn't hold water. A recent study by marketing company Jupiter Research found that people who swap music files on the Internet actually spent more on records than they had before embracing the new technology. With the consolidation of the commercial radio industry after 1996's Telecommunications Act, it follows that Net radio is one of the last conduits available for listeners to encounter artists whom Clear Channel hasn't decided to "break." For both artists and record companies, then, the CARP may prove a zero-sum game: If Net radio disappears because of royalty fees, there won't be any royalty fees to collect.

Already, the looming specter of the CARP decision--combined with a disastrous Copyright Office decision last year that forced radio stations to stop running broadcast advertisements online--has silenced an estimated 20 percent of the stations that simulcast on the Net. It isn't just independents who are feeling the crunch, either. In May of last year, radio-industry heavyweight Clear Channel, which owns seven radio stations in the Twin Cities, halted Web simulcasting at 318 of its stations.

While some local commercial simulcasters will likely be forced to follow suit, nonprofit stations may fare better. Andy Marlow, station manager at Radio K, explains that, because the college station is partly funded by the Corporation for Public Broadcasting, they would be exempt from the CARP royalties. (The CPB negotiated its own terms with the record industry, which, at the RIAA's insistence, remain secret.) Marlow notes, though, that Radio K is an anomaly among college stations. "We're in a strange little circumstance," he says. "My guess would be that unless Congress acts to stem the tide, most [college] stations are going to have to stop Webcasting."

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