Facing double-standard royalties, the Internet radio industry
Bill and Rebecca Goldsmith took a leap of faith when they started RadioParadise.com back in February of 2000. Some could even argue that it was a step down for Bill, who traded in 30 years in FM radio for an unproven industry that required only a computer and a stack of CDs.
Of course, that depends on who you ask. Bill recalls witnessing the steady decline of FM radio as it turned into the fast food of music, serving up a steady diet of bland, heat-lamped singles on shuffle. Bill and Rebecca liked the idea of creating their own playlists—hand picking songs and artists they find interesting—and not being bound to the automated system of broadcast radio.
Goldsmith had been a DJ, program director and station manager for a number of stations in the Bay Area as well as Honolulu. Known as “Wild Bill” in his days as a DJ at Santa Cruz’s KPIG in the ‘90s, he was the first to put an FM station on the Internet in 1995.
“I always wanted a station of my own—and I didn’t want to work for a sales dweeb,” he said.
Although Radio Paradise gave them the freedom to play music they wanted, Bill and Rebecca conceded early on that they’d probably have to go commercial in order to make any sort of a living.
But, aside from a few small banners and affiliate links to Amazon, the station makes it mainly from listener support—people who turn to Internet radio to be able to hear diverse artists like the Silversun Pickups, Loop Guru, King Crimson and Baka Beyond over the course of an hour.
Rebecca recalls around 36 listeners tuning in after they flipped the switch to Radio Paradise seven years ago. Now the station averages about 5,500 listeners at any given moment, with anywhere from 12,000 to 15,000 listeners during its peak time, from as far as Japan and even Antarctica. The Goldsmiths aren’t getting rich by any means, but they have been making a steady profit since 2004—receiving anywhere from $5 to $1,000 from single contributors in addition to the sale of Radio Paradise T-shirts and coffee mugs, which account for 20 percent of revenue.
Now the Goldsmiths face pulling the plug on the business they’ve poured their hearts, time and money into. And Radio Paradise isn’t the only one that might go. Webcasters large and small are up in arms over the recent decision by the Library of Congress’ Copyright Royalty Board (CRB) to increase the royalties paid to artists and record companies from Internet radio broadcasts.
Bill puts it simply: “Nobody small is making enough from Internet radio to pay these royalties.”
The March 2 ruling by the CRB came after 18 months of testimony from webcasters and SoundExchange, the nonprofit created by the Recording Industry Association of America to collect and distribute online royalties. A panel of three judges put new royalty rates in place that would force Internet radio stations to pay on a per-performance basis, or every time one listener hears one song. Prior to 2006, royalty rates were based on a percentage of a station’s gross revenue, which equaled about 10 percent for smaller webcasters.
Conglomerates like AOL and Yahoo! will likely be able to weather the storm since online broadcasting still makes up a relatively small portion of their overall business. But the increase might be the final nail for smaller online services like Radio Paradise and even Pandora.com, which averages 6 million listeners per month. Adding to their worries, Internet stations also have to fork out $500 minimum per channel and pay the new $.0008 per-performance rate for 2006. The rates will more than double to $.0019 per performance by 2010. For a site like Pandora, which allows listeners to create their own stations, the $500 minimum per channel would spell the end.
But to those at SoundExchange the new rates reflect a “fair valuation” of artists’ work—they argue that webcasters would not be in business without the music.
“A lot of artists and labels are small businesses in their own right,” says Willem Dicke, a spokeseman for SoundExchange.
Webcasters, on the other hand, say they’re turning listeners on to music they’d never hear on traditional radio. But the copyright judges didn’t buy it, explaining in their 115-page decision that webcasters presented no “persuasive evidence” showing their stations contribute to album sales, which, according to Nielson SoundScan, are already down 17 percent this year after dropping 4.9 percent in 2006.
Dicke agrees: “If there was a real profound affect on CD sales with Internet radio, you’d see different numbers.”
However, the Nielson study links those all-too-familiar statistics to illegal downloading and the declining demand for compact discs.
Along with Pandora and Radio Paradise, larger webcasters like AOL—which averages about 211,000 listeners during peak hours—are saying the decision is unfair even though it would likely survive the rate increase. The Digital Media Association (DiMA), a national trade organization made up of larger webcasters, filed an appeal asking the judges to reconsider the decision. The appeal was denied.
DiMA Executive Director Jonathan Potter stated on its Web site: “We do not believe that the Copyright Royalty Board intended to shut down the vast majority of legitimate online radio services immediately when it issued its decision, yet that is the sober reality facing many services.”
Webcasters say it doesn’t take a genius to figure out that the numbers don’t add up, and that it would be irresponsible to continue running their businesses. Bill Goldsmith said the new rates would cost him 125 percent of his income, which he describes as a “very scary big number.”
“This is a decision made by three judges who don’t have a clue how Internet radio works,” he said of the three retired judges who made the decision for CRB. “We gave them mountains of data, and they ignored us.”
When it comes to paying royalties, Internet radio is already at a bit of a disadvantage. Unlike traditional radio stations, webcasters pay two sets of royalties: one to the songwriter or publisher and one to the performer or record company.
Congress passed two laws—the Digital Performance Rights Act of 1995, and Digital Millenium Copyright Act (DMCA) in 1998—that set digital broadcasting apart from terrestrial radio. Goldsmith and others said lobbyists sold Congress on the false reality that “digital” broadcasts were of a higher quality and listeners could make perfect copies of songs.
The United States is the only country where broadcast radio doesn’t have to pay royalties to labels, since the medium has always been considered an indispensable promotional tool for record companies.
SoundExchange is looking into changing that, too.
“Most people don’t realize that performers have never received on-air royalties, and still don’t to this day,” Dicke said. “We hope Congress extends performance royalties to terrestrial radio to level the playing field.”
Although Internet radio is still a relatively new industry, it has grown considerably in the past few years. A February 2007 study from Bridge Ratings & Research reports the number of monthly Internet radio listeners nationwide has jumped 26 percent over last year and there are now about 72 million monthly listeners.
Webcasters contend that they are exposing real music lovers to artists who would never get airplay on traditional radio.
“We provide such a unique niche,” said Matt Kiser, general manger of Chico State’s Internet-only radio station KCSC.
Even though the judgment doesn’t include stations like KCSC, which is small and noncommercial (KCSC will only pay an annual per channel or per station fee of $500 a year through 2010), Kiser has been doing his part to get the word out, setting up a link to the online petition to Congress on the station’s Web site, kcscradio.com.
One of the more innovative music sites to enter the fray in the past couple of years, Pandora.com, allows listeners to create their own personal radio stations based on artists or songs they search for.
Pandora founder Tim Westergren says the CRB’s decision will only hurt artists, explaining that 40 percent of his site’s listeners say they’re buying new music after hearing an artist on the site.
“Artists have written in saying their band was found on Pandora,” said Westergren, a musician himself who played in San Francisco band Yellow Wood Junction. “The real travesty here is that SoundExchange is supposed to help musicians, and they’re not doing that.”
He says it’s not the job of Internet radio to push record sales, but that webcasters certainly aren’t hurting the industry.
“We’re bringing the horse to water,” Westergren said. “We’re doing all we can to promote music, plain and simple.”
One of the most outspoken people on the new rate increase has been Kurt Hanson, founder and CEO of AccuRadio, which houses more than 300 channels. AccuRadio lures its 1 million listeners every month with stations such as A Flock of Eighties, Latin Jazz and Twang. Like most online outlets, AccuRadio also provides links to Amazon.com and iTunes for those who wish to purchase something from an artist they hear.
Hanson also runs the Radio and Internet Newsletter (RAIN), in which industry experts sound off on industry news.
When the royalty rate hike was announced, Hanson was one of the first to respond. He says that in 2006 AccuRadio brought in $400,000 in total revenue. Under the previous royalty system, he would have paid 12 percent of the gross income in royalties, or about $48,000. Under the new rate, he’s looking to pay out $600,000. “That clearly bankrupts us,” he said.
Hanson has already thrown the idea of organizing a “Day of Silence” on May 8, when webcasters would go off the air for one day in an effort to change the rate increase one week before they are scheduled to kick in May 15. It worked in 2002 when the CRB (then the Copyright Arbitration Royalty Panel) tried to raise the royalties to a per-performance rate. Hundreds of stations shut down for a day, and within weeks the rates were cut in half.
Webcasters are lobbying Congress and collecting signatures through SaveNetRadio, a coalition of artists, labels, listeners and webcasters trying to keep Internet radio from dying.
“I am very optimistic that Congress will step in,” Hanson said. “It wasn’t their intention for the royalty rates to be anywhere near this.”
Scott Hervey, an entertainment and technology lawyer for Sacramento firm Weintraub Genshlea Chediak, says there’s nothing evil about the Copyright Royalty Board’s decision.
“Someone’s always going to be unhappy,” said Hervey, whose practice deals mainly with issues of intellectual property and the Internet. “There’s always a winner and there’s always a loser.”
But there is a way for webcasters to cut out the middle-man.
New Jersey’s WFMU-FM, the longest-running free-form radio station in the United States, doesn’t pay royalty rates through SoundExchange.
Aside from its traditional radio broadcast, WFMU also streams online, including 15 hours of Internet-only programming a week. The station, which has been dubbed one of the best by magazines like Rolling Stone and The Village Voice, instead goes through artists and indie labels directly.
General manager Ken Freedman says that over the past five years WFMU has made an effort to collect waivers and licenses from artists and indie labels. He said there’s plenty of music out there not controlled by the RIAA.
Radio Paradise’s Bill Goldsmith said that while dealing directly with artists might be good in theory, it’s too much of a process to pursue direct licensing. For a business of his size, it would be too time- and lawyer-intensive—"it would totally cripple our operation.”
The hole left by Internet radio stations would be huge for the thousands of independent artists and labels that won’t see their music played on traditional radio. At the same time SoundExchange certainly doesn’t want to see Internet radio die.
“We’ve made it pretty clear that we’d like to sit down with webcasters,” said John Simson, executive director of SoundExchange. “We don’t want them to go anywhere.”
Many webcasters say the attempt at discussion has been half-hearted, and they are already looking at other alternatives. The SaveNetRadio coalition game plan involves a coordinated effort to get legislative relief from Congress. The online petition to Congress, which appears on most Internet radio sites, has brought in 60,000 signatures so far. And with the looming May 15 date approaching, Congress might be the only answer.
In the meantime, all webcasters can do is play the waiting game.
Bill and Rebecca Goldsmith continue to operate their station from a small bedroom in their home up the hill in Paradise. It’s the couple’s only source of income. Since 2000, they have built their catalog up to some 17,000 songs that Rebecca culls down for their playlists. Bill says even if someone doesn’t like a song, they’ll at least find it interesting.
Meanwhile, AccuRadio’s Kurt Hanson continues his newsletter, and remains cautiously optimistic himself, and has taken on the voice of many webcasters—hopeful, yet cynical.
“The standard record-label holder’s behavior is to get all the money they can,” Hanson said. “So he’s [Simson] just following their modus operandi.”