Webcasting Bill to Wow Congress after July 15, Inslee Says

“There’s a mindset here that we have 20 seconds left on the game clock,” but July 15 is the “beginning of the real congressional action” on the bill, Inslee said. HR-2060 would scrap CRB rates, imposing royalty parity with satellite radio. Not scheduled to testify, he spoke after an earlier panel composed of webcasters, artists and labels.

Committee leaders hesitated to intervene legislatively, especially given their role in a 2002 compromise setting lower rates for small players, they said. Chairman Nydia Velazquez, D-N.Y., fears “unintended consequences” from legislation, she said, adding that in any case her committee cannot consider Inslee’s bill. But the U.S. needs to stay a webcasting leader, she said, alluding to webcaster threats to move offshore.

“I find it somewhat troubling that we are here revisiting these issues yet again just five years later,” Chabot said. Parties should “take a step back and look for common ground so July 15 is just another day” for webcasters. But Chabot said the CRB decision “may jeopardize the mutually beneficial relationship” between artists and webcasters. Webcasts share a core principle with patents, viewed under the Constitution as promoting creativity, he said. The dispute may raise awkward questions about the adequacy of the Copyright Act Sections 112 and 114, on webcasting, Chabot said.

Inslee called the CRB ruling’s $500 per channel fee a “secret little nuclear weapon” that, after July 15, will drive out not only small players but many large webcasters with thousands of customized channels. Noting that he represents Redmond, home to Microsoft headquarters, Inslee said he knows the value of intellectual property and the need for a proper licensing payment. But Congress has a “lack of perception” of how the channel fee will affect webcasting. “We're going to lose the lion’s share of music over the Internet,” he said.

In Inslee’s district, webcaster Big R Radio says it may relocate overseas to avoid an expected 150 percent rise in its royalty fees, he said. The webcaster, which plays ads every 20 minutes, draws 15,000 daily listeners. Small webcasters in particular will be hit hard by the CRB’s mandated switch to a per-song royalty from a percentage of revenue, he said. The committee should not be fooled by a five percent rate increase for 2007, which “balloons” to 149 percent by 2010.

People already think AOL and Clear Channel, not small players, are behind the bid to cut royalties, said Rep. Hank Johnson, D-Ga. “The lights are not going to go out July 15, will they?” Johnson asked. “I do want to see further justification” for congressional intervention, he said. He asked if jail awaits webcasters that keep streaming after July 15 but do not pay the new royalties. Inslee said larger parties have less risk if they keep streaming but also keep negotiating. He compared the streaming royalty system to the first U.S. attempt at the space shuttle: “I think we're heading for a crash here.”

Is 65 Cents Per Listener Per Month Too Much?

The rate dispute divides the industry’s small businesses. One webcaster, one artist and one label on each side of the dispute fought for the tag “small business,” disagreeing over webcasts’ promotional value relative to the royalties paid artists. The main rift seems to be status in the market, with lesser-known entities opposing the CRB rates.

Small-webcaster economics are “daunting at best,” said Woxy.com General Manager Bryan Miller. His Cincinnati-based company, formerly an FM broadcaster, was bought last year by CD-swapping service Lala.com. After paying for bandwidth, hosting, royalties and rent, Woxy cannot meet its payroll, he said. Were Lala not subsidizing it, the CRB rates “would have been the end of the road for us.” Large webcasters survive only because their parent companies run them as a “loss leader for their other products,” he said. “The revenue structure is just not there.” Indie artists will lose most of their exposure without webcasters, he said.

Labels need royalties to cover the cost of bringing music to the market, Tommy Boy Records Chairman Tom Silverman said: “No one bats a thousand.” His label discovered Queen Latifah, De La Soul and other acts that became stars. But one success no longer pays for five struggling artists, and small labels depend increasingly on Internet and satellite radio for revenue, said Silverman, an American Association of Independent Music board member. Small webcasters’ campaign for Inslee’s bill was paid for by the 20 large webcasters, who pay 95 percent of the royalties that SoundExchange collects on behalf of labels and artists, he said. SoundExchange is retaining the “discount” it has given small webcasters for years. Tommy Boy “scrimps and saves” to cover many more expenses than webcasters have, Silverman said: “No small business is guaranteed success.”

“Classic” country singer Joey Allcorn broke out through Internet radio, reaching fans of Hank Williams and cohort with scant mainstream radio play, he said. His CDs sell briskly through links at Pandora and Last.fm, but Allcorn got little promotional value from his paltry over-the-air radio play, he said. “This isn’t about greed or pointing figures” but about some artists’ livelihoods, he said. Internet radio sells far more music than over-the-air or satellite, said Kieran Kelly, Stunning Models on Display Records co-owner. The format draws listeners by playing more and better music with fewer ads, leaving a “very thin bottom line” but also engendering competition unprecedented in radio, he said.

Her “modest” Internet radio royalties at best pay her instrument insurance premiums, Grammy-winning children’s music artist Cathy Fink said. Despite the $40,000 she put into a home studio Fink still must rent studio time at $100 hourly. Citing her 2006 CRB testimony on behalf of higher rates, Fink said under the new rates webcasters would pay 65 cents per listener per month. Since acquired by CBS for $280 million, Last.fm last year paid only $5,000 in royalties, she said. Fink likened webcasters’ demands for lower royalties to her asking Congress to suppress guitar prices. “World fame and vast fortune are very much the exception” for artists, who average less than $18 per hour, according to the Bureau of Labor Statistics, said American Federation of Musicians President Thomas Lee. If the two members of Congress who play in Washington bands could earn enough in music, “they probably wouldn’t have to be moonlighting” on the Hill, Lee said to laughter.

The CRB decision will subject public radio to “dizzyingly complex reporting requirements” better suited to commercial stations, Cincinnati Public Radio President Richard Eiswerth said. The noncommercial threshold for paying the $500 flat fee is “arbitrary” and too near the commercial threshold, he said. To avoid paying higher royalties, stations may use technology that cuts off online listenership once it reaches a certain number. The Corporation for Public Broadcasting is supposed to pay for royalties “and other fees” that include infrastructure and training, meaning that higher royalty obligations will cut into other non-negotiable costs for public radio, he said.

Getting the ‘Lemonade’ to Consumers

Legislators leaned heavily on witnesses, urging them back to the negotiating table. “I really don’t think Congress should be the best vehicle” to set rates, Velazquez said. Most negotiation has been through “press releases,” Miller said. Silverman said he is willing to define “small” through a combination of listeners, time spent listening and company revenue, so small webcasters need not pay burdensome rates. Kelly seconded that idea, suggesting a “contingency plan” in negotiations that accounts for sudden traffic bumps at small webcasters who are at risk of being driven out of business by a spike in royalty obligation.

Woxy cannot accept the SoundExchange offer for small webcasters due to its acquisition by Lala, Miller said. He agreed with Velazquez that raising the revenue cap in the definition of “small” would help, perhaps to $6 million in contrast to SoundExchange’s offer to companies under $1.2 million. Asked by Chabot for examples of common ground, Fink said the CRB creation itself was the common ground. But the CRB “completely overlooked the basic mission difference” between commercial and public radio, Eiswerth said.

Johnson compared music to “lemonade on a hot day,” noting his beverage. The container maker must pay the lemonade maker for the right to package the lemonade, he said. “They don’t have a business if we haven’t made lemonade,” Fink said. “What if the cup costs more than the lemonade?” Allcorn said. “Some people want beer” instead, Eiswerth said, noting public radio’s statutory obligation to “underserved” audiences.

Rep. Dean Heller, R-Nev., seemed the most concerned among committee members over the new rates. In his district several towns only get radio via Internet and satellite broadband. Webcasters with solid business plans who take SoundExchange’s offer will survive, Fink said. That’s not true for niche stations like “gothic country,” Kelly said. “We went out of business twice” after dropping the FM station, Miller said, and so would AOL Radio and its four employees but for AOL’s corporate largesse.

The new rates could trigger “the ultimate outsourcing” as Internet radio stations relocate in Mexico and Canada, said Eiswerth. SoundExchange is still working on a compromise with small and noncommercial webcasters, Silverman said. Though NPR has not paid royalties since 2004 when its agreement expired with SoundExchange, negotiations continue, Lee said: “We're not attempting to do a huge takeover.”