A Look at Radio Silence: When Copyright Law Reform Goes Terribly Wrong

This Tuesday, June 26, is a "day of silence" on which webcasters will protest the hike in Internet radio royalty rates, scheduled to become effective July 15, and to apply retroactively to January 1, 2006. Webcasters have also asked the U.S. Court of Appeals for the D.C. Circuit for an emergency stay of the rates ruling.

The webcasters have an excellent point: Instead of increasing rates enough to properly compensate rights holders and encourage creation, the new rates are so unreasonably high that they are threatening the survival of an entire industry. Unless the new regulations are successfully repealed, the new rates will result in true perpetual "radio silence" for thousands of online radio stations - a loss for rights holders, distributors and consumers alike.

Background: How the Current Rates Came To Be

In 1998, Internet radio was added into the copyright law, via inclusion in the Digital Millennium Copyright Act (DMCA). Currently, webcasters running music-based radio stations pay an annual fee, plus 12 percent of the stations' profits, to the music industry's royalty collection organization, SoundExchange. These rates are applied evenly throughout the industry: Media giants such as Yahoo! pay the same organization, pursuant to the same calculation, as the smaller independent webcasters serving a tiny niche audience.

The rates are not only manageable, but they have enabled phenomenal growth in a relatively new industry. An estimated 70 million people regularly consume Internet radio - and this number has been growing steadily. To serve this audience, there are literally tens of thousands of online radio stations available in the U.S. alone.

What changed, and why? The answer is that the Recording Industry Association of America (RIAA) naturally sought to be better compensated from the revenues of this booming industry. Webcasters and others with an interest in keeping the rates low strongly opposed the change. Nevertheless, the RIAA successfully lobbied for a rate hike.

On March 2 of this year, the Copyright Royalty Board (CRB) issued its ruling on the matter. (The CRB is a panel of three retired judges established in May 2005 and empowered by Congress to determine royalty rates for broadcast material.) The ruling said that public broadcasters must pay webcasting royalties in the same manner as commercial broadcasters do. The panel also declared that royalty rates will increase by approximately 30% in each of the next two years. In addition, each station must now pay an annual per station "administrative fee" of $500. Further, as noted above, the new rates, though effective on July 15 of this year, will be applied retroactively to January 1, 2006. All in all, this translates to what is, at a minimum, a whopping 300-1200% royalty rate increase.

As a result, not only must every public radio webcaster pay crippling royalty rates, each must also endure the burden of increased record-keeping and reporting requirements and carefully consider whether to participate in expensive copyright tribunals and CRB hearings to challenge the ratings policy.

The Consequences of the Revised Royalty Rates for Webcasters of Various Sizes

The result of the rate hike will vary, depending on the size of the webcaster. Nevertheless, regardless of size, virtually all parties with a stake in this industry stand to lose.

Unsurprisingly, smaller webcasters will suffer most. Indeed, due to the rates' retroactivity, an estimated 90 percent of online radio stations will be bankrupted on July 15 -- when the rates go into effect.

To illustrate, a relatively small webcaster may currently struggle to pay its $10,000-per-year bill to SoundExchange. Under the new regulations, that annual fee will go up to close to $700,000. This harms all parties, as the station will be forced to shut down, the consumer will no longer be able to enjoy the service, and the artists whose music is played will no longer be able to collect any royalties at all for distribution, as a previous distribution channel now no longer exists.

Larger webcasters, in contrast, may not be driven out of business, but they too will suffer. Not only are these companies now responsible for exorbitant royalty rates for services delivered since the beginning of 2006, but the quality of the service they deliver will suffer for lack of diversity, and as a result, consumers may pursue their music via alternative (and often pirated) sources.

To illustrate, numerous large media and technology companies such as Yahoo!, RealNetworks, AOL, and Live365 offer Internet radio to their consumers. Many of these companies distribute "personalized" radio services, in addition to their pre-programmed stations. This means that a user can create their own station based on a few select artists. As a result of offering personalized stations, companies such as RealNetworks can easily offer over 400,000 stations in a year. Now, however, such companies will be charged a $500 administrative fee per station, plus per play rates. The annual administrative fee alone will thus come to about $200 million per company - and again, retroactivity will raise the fee even higher.

The upshot: Say goodbye to personalized radio stations. With little or no revenue tied to this service, these companies are sure to remove them. Again, the webcaster, the artist and the consumer all lose out. And again, illegal online music sources may fill the gap, providing services that once were legally offered, but now are prohibitively expensive to offer legally.

How can this lose-lose-lose situation be explained? One answer may be the law often lags perilously behind technological and creative innovation. In a perfect world, our intellectual property laws would support and encourage invention, innovation and creativity, while sufficiently protecting intellectual property and adequately rewarding the creator.

There are, of course, numerous examples of where this goes terribly wrong - and this is one of them. This is clearly a case where the law failed to serve its purpose.

When an effort to obtain more revenue from a channel legitimately threatens simply to eliminate the channel in its entirety, something has gone terribly wrong.

What Will Happen Next?

Protesting webcasters now hope to benefit from the public outcry on the issue, and also, as noted above, hope they will obtain at least a temporary reprieve with a stay from the Court of Appeals.

From tiny garage-based radio stations to publicly traded multinational corporations, there has been widespread opposition to the rate hikes. As a result, there are two bi-partisan bills making their way through Congress. If either bill is enacted into law, it would better align Internet radio royalty fees with those applied to the satellite radio industry, saving at least some webcasters from having to shut down.

Regardless of what happens in coming weeks, let's hope that we have all learned from an obvious and painful mistake this time around. The current rate hike is untenable, and was foolish. Now, we need to work hard to figure out a livable compromise.