Internet radio firms say royalties limiting choices

by Hiawatha Bray, Boston Globe

For Barry Cedergren, the decision to stop broadcasting nightclub music over the Internet was a matter of simple arithmetic. Much as he enjoyed playing music online, a big increase in music performance royalties made it too expensive for him to continue operating Mobile Beat Radio.

"It was going to cost us tens and tens of thousands of dollars just in fees to play this music," he said. Cedergren launched Mobile Beat Radio from his home city of Minneapolis in January 2007, two months before a panel of federal judges approved a big increase in the performance royalty paid by Internet broadcasters every time they stream a song, prompting him to immediately shut down his site.

Cedergren's story is the nightmare scenario painted by many Internet radio companies who have claimed that the royalty hike would kill online broadcasting in its cradle. In fact, Internet radio is far from dead. Online broadcasters like Pandora and Live365 still serve millions of listeners. But the higher rates have driven away many small online broadcasters who say they can't afford to stay in business. And even industry leader Pandora says it's in trouble. "We're at the very end of our tether," founder Tim Westergren said. "There's a very good chance that we will shut down."

Critics of the royalty system say the result is decreasing musical diversity on the Internet. They warn of an online music industry dominated by the same giant media companies that presently dominate traditional radio broadcasting. And they point to CBS Broadcasting Inc.'s recent takeover of the Internet radio operations of Time Warner Inc.'s AOL as a harbinger of an Internet radio market rendered bland and predictable.

"They'll push all of us out of business," said Johnie Floater, general manager of media for Live365. "Your Internet radio is going to sound like your AM and FM."

Thousands of Internet broadcasters, ranging from traditional radio stations to individuals who want to share their favorite tunes with the world, pay Live365 to stream their programs over the Internet. Live365 pays their music royalties out of the fees paid by its subscribers.

But so far, the company hasn't begun paying the higher rate set last year. Live365 and other Internet broadcasters are in negotiations with SoundExchange Inc., the recording industry group that collects performance royalties, in hopes of settling on a lower rate. While some Internet broadcasters are paying the higher rate, Live365 has withheld payment until the negotiations are complete. A SoundExchange spokesman said his organization is entitled to the money and will collect it retroactively.

Floater said many small subscribers, afraid that these retroactive fees will bankrupt them, are shutting down their Live365 music streams. Others have cut back the number of music streams they offer or the number of Internet users who are allowed to tune in. Because they must pay a royalty every time an individual listens to a tune, some Internet stations now drive away listeners to keep their royalty bill down. As a result, Live365 now broadcasts 15 million hours of Internet audio every month, compared to 25 million hours a year ago.

One Live365 broadcaster, the Rock.com service of Laguna Hills, Calif., last year broadcast 50 different channels of rock music and attracted 150,000 listeners per month. It has since deliberately reduced the number of channels to 33, eliminating unusual channels like one devoted to reggae music and another that featured only female artists. Monthly listenership is down to 15,000 a month, which lowers the royalty bill. But chief executive Steve Newman said his business still can't make money. "With the new rate structure, it's absolutely impossible," said Newman.

Even Internet giant AOL, which broadcasts about 200 channels of Internet music, found it couldn't cope with performance royalties. On March 7, AOL said it would hand control of its Internet music operations to CBS Broadcasting Inc., which runs about 150 traditional radio stations.

Fred McIntyre, senior vice president of AOL Radio, said that even before last year's increase, royalties were too high to let his business operate at a profit. "There's no way you can build an Internet radio business, operating the way we were, with these kinds of royalties," McIntyre said.

He said CBS has a major advantage because traditional radio stations pay royalties to music publishers, but not performance royalties, which go to recording companies or musicians. Internet, cable, and satellite stations must pay both publishing and performance royalties.

The recording industry is pushing for federal legislation that would force traditional broadcasters to pay performance royalties. But for now, CBS hangs on to more of the ad revenue generated by its traditional radio stations. It can use that money to help cover royalties owed by their Internet radio streams. In addition, some CBS stations broadcast only news or talk shows, and therefore pay no music royalties, whether broadcast on the airwaves or the Internet.

As a result, say Internet radio experts, giant traditional broadcasters might end up dominating Internet radio, while higher performance royalties overwhelm smaller online players. "If Pandora can't make it, if Live365 can't make it, then . . . CBS, Clear Channel, and Entercom are going to take over Internet radio," said Jonathan Potter, executive director of the Digital Media Association in Washington.

article originally published at http://www.boston.com/business/technology/articles/2008/03/14/internet_radio_fir....

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