• by Ken Liebeskind , March 28, 2002

The future of Internet radio is currently being determined by the Copyright Arbitration Royalty Panel (CARP), a division of the U.S. Copyright Office that is setting the fees webcasters will have to pay to the recording industry (record labels and performers) for the songs they play online.

The Digital Millennium Copyright Act, passed by Congress in 1998, grants record companies the right to collect royalties on music that is played online. Terrestrial radio stations don't pay such fees, but Internet radio will have to, according to the DMCA, because of the possibility of music on the Internet being illegally recorded, which deprives labels and artists of revenue.

The issue has been pending for over a year, with webcasters and the Recording Industry Association of America unable to agree on the amount that should be paid. CARP, which was formed last year to adjudicate the issue, released a royalty rate proposal in late February that calls for Internet only webcasters to pay $0.14 per song streamed, while terrestrial radio stations would pay half that amount. This rate would be paid for every stream, i.e. every single listener.

The proposed fees, although lower than RIAA requested, are far higher than many webcasters can afford, with talk of them being the "death knell" of Internet radio. But RIAA and its allies, including the American Federation for Television and Radio Artistry (AFTRA) disagree, seeing the fees as justifiable payment for the webcasters' product, recorded music, which they have yet to pay for.

Webcasters envision fees that will force the smaller ones out of business. One observer estimated that if a station plays 20 songs an hour to 1,000 listeners, it will owe $672 a day, $20,000 a month and a quarter of a million dollars a year. The figure dwarfs the amount of revenue many streamers bring in, with advertising revenue currently low.

"It's a gross distortion of copyright policy," says Jonathan Potter, executive director of the Digital Media Association, which represents streamers. Potter argues that the amount is too high, saying it's seven times what composers are paid in royalty fees when their songs are played on terrestrial radio. He also says CARP is charging royalties per song, instead of charging a gross percentage of a station's revenue. "For 50 years, royalties have been calculated on a percent of revenue basis. That was proposed to these arbitrators but they rejected it in favor of per song royalty. A percent of revenue wouldn't bankrupt stations."

But Steve Marks, senior vice president of business and legal affairs at RIAA, has a different story to tell. "We originally proposed a percent of revenue rate, but webcasters proposed a per song fee," he says. "At the 11th hour they came in and proposed a percent of revenue and the arbitrators found it untimely." He explains that a percent of revenue rate might not work because some webcasters have no revenue. Those webcasters might have to pay nothing for streaming a song that a successful webcaster would have to pay for.

Although Marks' side seems to be the winner in this battle, since CARP has proposed fees, he's not entirely happy since the amount isn't as high as RIAA wanted. "They're closer to the their proposed rates than ours," he says. "We negotiated individual license agreements with webcasters and those deals supported a higher rate," he says. He mentions Yahoo as one of the webcasters that made a deal with RIAA.

Arbitron has intervened on behalf of radio stations, calling for a five-year moratorium on fees, so that the industry can get off the ground and become profitable before it must pay fees. "I don't foresee there will be enough revenue in the near future to support the fees," says Bill Rose, vice president general manager of Arbitron Webcast Services.

But Ann Chaitowitz, AFTRA's national director of sound recording, scoffs at this idea. "A five year moratorium? They've already had four years," she says, since DMCA was signed in 1998. Indeed, CARP has proposed that webcasters will pay royalties retroactively to October, 1998.

CARP's decision is currently on appeal, with parties that participated in the negotiations appealing to CARP and the librarian of Congress, with all other parties prohibited from doing that. They are writing to Congress at the rate of thousands of letters, according to Potter. A CARP spokeswoman told MediaPost that CARP will issue its final ruling within 30 to 60 days.