Web Music Broadcasters Fight Huge Royalty Increase

Rusty Hodge got into Internet broadcasting seven years ago after becoming frustrated with the FM radio stations in San Francisco, where he worked as a Web engineer.

His brainchild, SomaFM, started off as a jumble of computers in his garage, streaming music to fans who would send in contributions to support his efforts.

Today, Hodge and others like him are caught in the middle of a battle over how much artists and record labels should be compensated for music streamed over the Internet.

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A recent ruling by a panel of copyright judges, they say, could put them out of business and squelch a key form of innovation just as radio and music companies race to adapt to the rapid changes in the ways people listen to music.

"We had the whole the business model worked out, and hoped that I'd be able to support myself on this," Hodge said. "But then the royalty ruling totally broke our business model."

That ruling on March 2 came from a panel of copyright judges after webcasters and SoundExchange, a group that collects royalties on behalf of artists and record labels, couldn't reach an agreement on a new royalty structure after a previous set of agreements expired at the end of 2005.

Several of those previous agreements provided accommodating rates for small webcasters and public radio stations. Smaller webcasters, for example, could pay a flat fee of about 12 percent of their revenue in royalties instead of a per-listener, per-hour fee paid by others.

Hodge said that he took in roughly $200,000 last year from listener contributions and was getting close to covering his costs and making the business self-supporting. After several years of expansion, he quit other jobs to focus on SomaFM last fall.

Hodge said he paid about $22,000 in royalties to SoundExchange in 2006.

Under the new system that requires payments for each song streamed to each listener and does away with the old percentage-based formula for small companies, he would have been on the hook for about $600,000 in royalties last year.

In the weeks since the Copyright Royalty Board's decision, various parties affected by the new framework have filed objections and asked for a rehearing on certain issues.

Besides a group of small webcasters, a coalition of Web companies including Yahoo Inc. (YHOO) also objected, as did public and other radio stations that would be covered by the new rates.

In the meantime, time pressure is building on the webcasters.

Under the ruling, monthly payments under the new rates start coming due May 15, something that Kurt Hanson, founder of the Internet radio company AccuRadio, said would "would wipe out almost everybody" among the small webcasters.

Webcasters are trying to hold off the implementation of the new rates while the appeals process goes ahead. David Oxenford, a lawyer representing a number of parties affected, said he expects the board to act within the next month or so.

On Monday, a group of webcasters is launching a campaign against the new rates in hopes of building public awareness about the issue and potentially getting it considered in Congress.

The announcement will be made at a conference of Internet Radio companies in Las Vegas, which is running concurrently with an annual conference of the National Association of Broadcasters, a national television and radio industry group.

With many members of the NAB also affected by the royalty ruling, NAB spokesman Dennis Wharton said it was sure to be a topic at the conference, which runs through Thursday.

Wharton called the royalty decision "disappointing" and said it has "the potential to cripple a fledgling new technology."

The royalties in question only apply to digital broadcasts of music, such as over the Internet. If a traditional radio station streams music from its Web site, it must pay the online rate in addition to a royalty paid to music composers.

John Simson, the executive director of SoundExchange, said that the judges' ruling was "based on a lot of evidence that was presented to them, and everybody had a chance to be heard."

Simson also said that artists and record labels have made it "very clear" that they want to see webcasting thrive, an understandable position given that music companies are faced with slumping CD sales and widespread online piracy.

Simson said the group was open to discussing an agreement with the webcasters that would make both sides happy, but he said that his group was still concerned about compliance with rules requiring webcasters to report what songs were played. Hanson said the requirements are "extremely difficult" and webcasters are "trying their best to comply, given their resources."

The issue is also on the radar for Wall Street, coming as commercial radio stations look for ways to supplement stagnating advertising revenues, which edged up just 1 percent across the industry in 2006, according to the Radio Advertising Bureau.

In a report issued April 4, JPMorgan analyst John Blackledge said that the newly issued royalties could "potentially shutter smaller Internet radio companies" and hurt the profitability of larger operators as well.

Public radio stations had been able to stream music under lower rates than commercial stations, something that could end under the new ruling.

Ken Stern, chief executive of National Public Radio, said that would reverse decades of precedent in treating public radio differently from commercial radio. He said the new rates would leave public radio stations "with a draconian choice of cutting services or raising money that we don't have."