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June 2002

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The Hijacking of Internet Radio

by Glen Emerson Morris

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The fate of Internet radio may be decided May 21, 2002, when the Librarian of Congress announces whether they will accept or reject the royalty rate a Copyright Office arbitration panel has determined Internet radio stations must pay for playing songs on the Internet. Currently, it looks like the rate will be so high it will bankrupt most stations, and effectively stop Internet radio in its tracks.

The math tells it all. Under the proposed rate, a 24-7 Internet radio station playing 15 songs per hour to an average of 1,000 listeners would owe the record companies $21 per hour in royalties. This is $183,960.00 per year, and the rates will be retroactive to October 1, 1998.

Another way to put it is that the cost per thousand for Internet radio audiences is being jacked up by $21, just to pay for content that commercial broadcasters get free.

The problem behind this crisis is the 1998 Digital Millennium Copyright Act, which left it to the record companies and Internet radio stations to work out the royalty rate between themselves. The RIAA wanted about 15% of gross revenues, and the Internet radio stations wanted to pay 3% to 4%, or about the same as the royalty rate to composers. When they couldn't reach an agreement, the issue went to an arbitration panel set up the Copyright Office. For reasons not entirely clear, that arbitration panel rejected the percentage of revenue approach both sides had been working on, and instead came up with a fixed rate per song.

Even if the Librarian of Congress rejects the proposed rate and eventually imposes a lower one, it is still possible that the rate will be so high that Internet radio will never be a cost effective media for advertisers. It fact that may even be likely, given how Internet radio is treated by the DMCA.

Under American copyright law, broadcast radio stations don't have to pay royalties to the record companies, just to the composers of the songs they play. The DMCA established a new principle, making stations liable for royalties to the record companies on the grounds that the Internet is delivering a perfect copy of the original. In retrospect, this is a seriously flawed argument, for several reasons.

Among other things, the Internet is nowhere near being able to deliver CD quality music to the average listener, and it will be years before it will be. In addition, Internet radio stations are not posting songs for download. Instead, the songs are streamed, which makes it far more difficult for listeners to make copies of them.

Even worse, however, is the effect this DMCA provision will have on the growth of Internet radio as an alternative to the relatively limited and overpriced broadcast radio industry.

Advertisers have watched while station after station became part of some huge corporate chain. Increasingly, the money advertisers have paid stations has gone to cover the massive debts behind the consolidations. The money certainly hasn't been going for talent, or for news; or for anything else that would improve the quality of the programming.

Broadcast radio has become like fast food restaurants, there are just a few different formats in each market, and they're all the same no matter where you go. In contrast, Internet radio offers hundreds of formats, many of them completely unique. Some of the most popular formats on Internet radio, like Celtic, are rarely, if ever, broadcast on a 24/7 basis in any market in the country. Internet radio isn't really competing with broadcast radio, it's complementing it.

Internet radio may not be much of a market now, but it's growing by 100% per year. If this growth rate is maintained, the audience could exceed 100 million by 2007. By then, there could be thousands of different formats available, and all at reasonable rates. But that's not likely to happen under current law.

There are several things the advertising industry can do if the proposed royalty rate is upheld. When a situation like this occurred some 60 years, and ASCAP stonewalled on high rates, the broadcasters got together and formed their own licensing agency, BMI.

In some ways, the advertising industry is well on the way to doing this already. A few years ago, the advertising industry started using unsigned bands to provide the background music for commercials. Established acts and their record companies wanted small fortunes to license their music, but unsigned bands were happy to take far less payment in exchange for the publicity they received.

The advertising industry ought to take the next logical step and sponsor a licensing agency especially designed for Internet radio. The record industry has been making itself vulnerable to this approach for years by cutting back on the "B" acts they signed to concentrate on "A" acts. As a result, there are hundreds of "B' acts, ready to license their music to someone.

It would also be possible to pressure congress to reconsider the DMCA. The record industry is a multi-billion dollar industry with a great deal of clout in Washington, but it's small change compared to the advertising industry. According to the 2001 Statistical Abstract the record industry only nets about $10 billion a year. Advertisers spend over $200 billion a year, half of which is wasted due to inaccurate targeting. Internet radio could reduce that waste by billions of dollars a year. Congress should have considered that, but didn't.

The DMCA was passed at the height of campaign contributions during the tech boom. It is becoming increasingly clear that the advertising industry was not well represented when the DMCA was passed, and neither was the public. In fact, at the royalty arbitration hearings, the advertising industry and the public weren't represented at all.

The arbitration panel only allowed testimony from members of the music and Internet radio industries. No one from the advertising industry was allowed to testify, even though our industry finances the commercial radio industry completely, broadcast and Internet, and in the process, provides hundreds of millions of dollars in free publicity for the record industry.

It seems reasonable that the American advertising industry should be allowed to testify at any hearing that may cost it billions of dollars a year. Our industry has the clout to demand it, and we'd better.

Internet radio could become the most cost effective media ever available to advertisers. Whether it will, or won't, may depend on what the advertising industry does over the next few months.

Note: For more information on this issue, visit

Copyright 1994 - 2010 by Glen Emerson Morris All Rights Reserved

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