Webcasters fear royalty rates will kill online radio

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Posted 6:32AM on Friday, February 22, 2002

SAN JOSE, Calif. - Internet broadcasters are viewing with caution a proposed royalty rate that could make them pay fractions of a cent each time they play a song online. But the ultimate cost could be their businesses. "Certainly, we would have to take a serious look at the business going forward if this were to remain the rate," said John Jeffrey, executive vice president of Web broadcaster Live365 Inc. If approved by the librarian of Congress, the expense could lead to the end of another free Internet service. Web radio would be dominated by subscription services and stations operated by companies with deep pockets, wealthy parents or multiple revenue streams, analysts say. The proposed rate by the Copyright Arbitration Royalty Panel is .14 cents per song streamed -- about 10 times higher than a plan submitted by Webcasters to base the rate on hourly usage or a percentage of revenue. "What that means is that there is no real cost savings that accrues from volume," said Aram Sinnreich, a senior analyst at Jupiter Media Metrix. "It makes it much more difficult to create a business model that would yield profitability over the long term." Many standalone Internet radio stations hoped to generate revenue through advertising. But, as with other dot-coms, the advertising market has mostly disappeared. Because the fees would be retroactive, existing companies that have attracted users will be even harder hit, said Jonathan Potter, executive director of the Digital Media Association. "The question now becomes how do you pay for all the customers you acquired at a royalty rate that is this high," he said. "Everybody was figuring ... this was going to be an advertising-supported media." If 1,000 people use their computers to listen to a song through a standalone service, the Webcaster would have to pay $1.40. Live365 Inc. streamed 6.5 million listening hours in January at a rate of about 15 songs per hour, Jeffrey said. Under the proposal, it would owe about $2 million a year plus retroactive fees since 1998. MusicMatch, another online broadcaster, offers subscription and free services. It has a separate license with the recording industry and would not be immediately affected by the rates, but in the future it could be. In that case, the free radio streaming would vanish, said Bob Ohlweiler, MusicMatch's senior vice president of business development. "It's definitely going to hurt the free radio industry in general," he said. "If and when MusicMatch is affected by the rates, we certainly couldn't afford to keep free radio up and running." Companies that are able to attract subscribers through added services are more likely to survive than the free services. But it won't be easy. "(The fee) is within the realm of what we had projected and prepared for," said Matt Graves, spokesman for Listen.com. "It makes it tough. It makes it tough for everybody." The proposal does finally resolve a long-standing issue in the Internet radio business -- how much it costs to operate. "If we get through the initial devastation that may hit the small Webcast industry ... at least there's clarity for investors and financial planners to understand what their costs are going to be," Potter said. The proposed rates also would create an extremely high barrier for companies looking to enter the Internet radio business. Capital, once readily available for dot-coms, has all but dried up. "It's questionable whether any new series will be able to get off the ground now," said P.J. McNealy, research director of Gartner G2. The Recording Industry Association of America said it was pleased, though the Copyright Arbitration Royalty Panel's recommendation was 35 percent smaller than the industry's proposal. The music and Internet industries will have 60 days to comment on the recommendations.