FYI, you can sign the petition to fight this here: http://capwiz.com/saveinternetradio/issues/alert/?alertid=9631541
I was surprised to find that a few of my friends were in favor of these new fees, citing that artists and labels have a right to be fairly compensated. At that point I did my due diligence in trying to better understand the fee structure. What I found is that unless you already understand a bit about copyright law, and the existing royalty fee system, it would be difficult to grasp the impact of the new fee system. So, in the simplest terms possible I’d like to explain what is happening here and why it’s probably a bad thing for consumers, and artists, but not necessarily labels (surprise).
First some terms
- Performance - in this case means anytime a piece of music is played for a public audience, whether it’s performed by live musicians, over the radio, on television, or via internet radio
- Author - I’m using this to mean the composer/copyright owner
- Performance Royalty Organization - non-profit organization that is dedicated to ensuring that authors are properly compensated for the performance of their work
A little background on performance royalty organizations
PROs provide licensing to any business that “performs” music - radio stations, television stations, nightclubs, restaurants, etc. The fees for these licenses are collected in a big pot. Then PROs do the best they can to track every song that is performed through every medium and every venue to determine what percentage of performances belong to which artists. For example they may find that based on their sample data Sheryl Crow songs account for 0.0001% of all the music performed, and Guitaronin songs account for 0.00000000000000000000000000000000000000000001% of songs performed. Then they give Sheryl Crow 0.0001% of the money from that pot (less the PROs operational costs), and they also give me my share ($1 by 2025). Seems fair enough.
Until 1995 only authors were paid royalties for the performance of their work (usually they split this w/”publishers“, but I’ll spare you the details). This means that if a recording artist made a hit out of a song that they didn’t write, the author would get paid every time it was played on the radio, but the recording artist would not. In 1995 performance royalty structures were changed to extend a new set of fees to recording artists - but only in digital mediums, not conventional radio. Weird.
Now things were a little different when it came to internet radio. Instead of charging a flat licensing fee for performance royalties, Soundexchange (the PRO for internet) fees were based on a revenue sharing model. Up to 12% of the revenue earned by an internet radio site would be paid in fees. Generally online revenue comes from either user subscriptions or advertising. The more visitors a site gets, the more valuable its advertising space becomes. So at first glance the revenue share model seems to make sense, as the amount of revenue earned should be a good indicator of the audience reach (number of listeners) a site has. But wait a minute. What if something horrible were to happen? What if some crazy person started web casting without trying to make money at it? Believe it or not, there are some communist psychos out there that don’t care about money!
Jokes aside, this really would be unfair, because artists wouldn’t have any say in whether or not they were giving away their product. And, if anyone’s going to make decisions about whether or not a product should earn revenue, it SHOULD be the person that owns that product. Also, besides that example, revenue sharing unfairly causes sites that are more business savvy to have to pay more in licensing fees than their less sophisticated competitors.
Soundexchange to the rescue
Now for the new fee structure. This new fee is based on song plays. For every song that every user listens to, the site must pay a fixed performance royalty fee. Honestly, this seems to be an okay idea to me. The only problem is the math. By my calculations (and the calculations of the internet radio stations that are preparing to close their doors) the fee amounts are unreasonably high.
Let’s be clear – internet radio stations are already paying performance royalties to authors AND performers.
First mistake: new fee structure established in March of 2007, but fees are owed retroactive to January of 2006. This means that startup companies that may not even have turned a profit in 2006 are getting slammed with an enormous immediate cost. It also means that successful, established sites like Yahoo! Radio are getting hit really hard (I think I read $23.5 million).
Second mistake: didn’t do the math. By 2009 the fees are going to be nearly 0.2 cents per song play per listener. Let me illustrate how this math doesn’t work. Advertising is generally on a CPM basis. This means that advertisers pay a specific fee to a website for every 1,000 users that see their ad. 0.2 times 1,000 users means that internet radio would have to collect $2 CPM (normal) to break even… IF each user only listened to 1 song. I don’t know what the average is, but I’m sure most users listen to more than that. If each user only listens to 10 songs per visit, the CPM goes up to $20, and there’s no way any advertiser is going to see sufficient ROI to cover that advertising cost - especially when they can get some really prime internet advertising space easily for less than $5 CPM.
Keep in mind that conventional FM radio doesn’t have to pay these types of performance royalties at all, but just for fun let’s imagine they did. FM transmission is a minimum 50 mile radius. In a major metropolitan area like Los Angeles that could potentially reach about 10 million people. But, in this example let’s imagine a smaller urban setting - a station with a listener base of 200,000. 200,000 listeners times $.002 equals $400 per song. Multiply that times 10 songs per hour and you’re radio station needs $4,000 per hour of advertising to break even, before overhead. In case you’re not sure if that works, multiply by 24 hours by 365 days and you’ll see that they’d have to generate $35,040,000 per year in revenue to break even on the cost of playing music (still not counting overhead). I don’t think too many stations with an audience of 200,000 are clearing that kind of dough. Currently I think their fee is about $1000 annually.
Oh, and one more fee I didn’t mention. There’s now a $500 annual licensing fee for each “channel” that an internet radio site offers. I guess this was designed to punish sites that offer variety to their users (more on this later). Unfortunately, Pandora (my personal favorite) allows registered users to create their own stations - up to 100 of them. That means that they’d potentially have to cover another $50,000 per user per year. Maybe they could pass the cost along to the user. But considering I could buy more CDs than I could possibly listen to in a year for that price, I don’t think I’ll be signing up if they do that.
Doomsday
Ultimately nobody can make a viable business out of internet radio with these fees. In fact, this pretty much puts webcasting into a realm of really expensive hobbies that only suits extremely eccentric, extremely wealthy people. Ergo, if these aren’t overturned, or no compromise is found, internet radio will disappear. Well, at least it will disappear from the U.S. Since these fees don’t apply to foreign entities, I guess Eastern European stations will go on business as usual.
The part that’s hard to figure out is why this is happening. Obviously this isn’t good for internet radio sites. The demise of these sites isn’t favorable to listeners, as we lose choices. It’s not beneficial to artists who lose exposure and lose the revenue they’re already earning from the old fee system. And record labels lose the revenue they’re generating now too.
Theories
One possible explanation is that the powers that lobbied for this simply don’t understand online economics, and they’ve vastly overestimated the revenue opportunity. This would not be too surprising as offline industries have a history of cluelessness when it comes to e-commerce. But my other theory is more fun. Those of you who enjoy a good conspiracy theory will like it.
What makes online radio great? Diversity. The internet is about “the tail”. niche markets, and the idea that there’s an audience out there for everything. Internet radio is a great vehicle for obscure, independent artists and their audiences to discover each other. This is good for everyone except major labels, which are totally ineffective at monetizing “the tail”. They bank on “the head” – selling a whole lot of one thing (artist). Traditional media outlets like FM radio and cable television have proven terrific vehicles for marketing “A list” artists. Seeing the old FM and television audiences rapidly migrating at an exponential rate to the niche stations of the internet, and discovering and buying albums from independent artists is surely threatening to say the least.
Conclusion
Of course, as a musician, I want to see artists get their due as much as anyone. Conceptually these fees are okay. Soundexchange just needs to back off on the pricing a bit (more than a bit… a whole friggin’ lot)! And to the major labels aiming to limit audience options… you’re going down!
If you’re with me, sign this petition: http://capwiz.com/saveinternetradio/issues/alert/?alertid=9631541
