Why Web radio faces another crisis

A deal with the recording industry that was supposed to enable popular services like Pandora to survive never got signed. Did Webcasters fumble a golden opportunity?

Few people know this but for a little while last year, the music-royalty rates that Web radio stations have complained about for years appeared to be behind them.

Pandora founder Tim Westergren CNET Networks

In a midtown Manhattan law office last November 6, representatives from Webcasting companies and SoundExchange, the group that collects royalties for recording artists and labels, struck a deal "in principle," said sources familiar with the negotiations. The agreement was designed to restructure the royalty rates Webcasters have long said would decimate the sector.

But a week ago, came word that a final deal was never signed. The Digital Media Association (DiMA), the group that represents most of the largest Webcasters, including Pandora, Live365 and Yahoo, announced that the parties failed to reach an agreement. How could that happen? Both sides told members of Congress in September that they were close to a deal. In November, the blog All Things Digital reported a settlement was within grasp and quoted Pandora founder Tim Westergren saying "all the hard stuff has been done."

After interviewing multiple sources on both sides of the issue, the picture that has taken shape is that Webcasters blew a golden opportunity to reach an accord that would have given them much of what they asked for. What appears to have happened is that some in Webcasting were willing to play a game of brinkmanship with SoundExchange. At the very least, the actions of some larger Webcasters undermine their claims that they can't afford to continue for much longer without a settlement.

There is still a chance the two sides can come to terms. Talks are ongoing. But as it stands, time is quickly running out and nothing has occurred to indicate a breakthrough is near, according to sources on both sides. If a settlement isn't reached, its conceivable that some Web radio stations that legitimately can't afford to pay the performance fees set by the Copyright Royalty Board (CRB) two years ago may be in jeopardy. Representatives from SoundExchange declined to comment. Westergren did not return repeated phone calls.

Did Real want a deal?
There's no doubt who the music side blames for derailing the agreement.

The November settlement only began to unravel after executives from RealNetworks reversed their position and informed SoundExchange weeks after the meeting that it no longer accepted the terms, according to music industry sources who requested anonymity because of ongoing negotiations. They say Real, the media-delivery software company, also lobbied other DiMA members, including some who didn't attend the November meeting, against accepting the agreement.

Michael King, Real's associate general counsel, denies the company stood in the way. He also noted that other Webcasters eventually rejected the terms.

"We would be happy to do a deal that is sane for the industry," King told CNET News on Friday. "We aren't willing to advocate for rates that are insane."

Insane? Maybe, but there's no arguing that at least one Real executive and other large Webcasters considered the deal sane enough to accept in November.

"If SoundExchange intends to do a deal that everyone agrees to then they have to satisfy RealNetworks. If that's the position they choose to take, then they should do deals that we will sign up to."
--Michael King, attorney for RealNetworks

If there is anything that everyone involved can agree on it's this: Web radio is popular with the public and will only continue to grow. Webcasters typically offer fewer commercials than traditional over-the-air stations. Fans can choose to listen to countless music, news, or talk shows from across the globe.

The fight over how much Webcasting should compensate the music industry goes back to 2002. The two sides failed to reach an agreement and two years later, Congress passed a law creating a three-judge panel called the Copyright Royalty Board within the U.S. Copyright Office. The CRB was created to determine rates when and if the two sides couldn't agree.

In March 2007, after 18 months of hearing testimony from both sides, the CRB decided on an escalating rate structure much like the one suggested by SoundExchange. The decision was a win for the music industry. The CRB set rates retroactively for 2006 at 0.08 cents per song, per listener and climbed each year until finally reaching 0.19 cents in 2010.

Webcasters argue the rates are far too high. They claim the fee structure is what drove AOL and Yahoo out of the business. Both companies have contracted with CBS (parent company of CNET News), to take over their Web radio services. Westergren said last year that Pandora expected royalty payments to gobble up 70 percent of the $25 million the company expected in revenue.

Here's where it gets interesting. Following the CRB's decision, Congress began pressuring the music industry to find middle ground with the Webcasters. Congress was involved because in order for a deal to get done that covered the entire industry, a statutory license was needed. This would save startups entering the business from having to negotiate separate deals with SoundExchange but would also require them to pay the negotiated fees.

Back slapping and congratulations
Last fall, the road to a settlement seemed clear. The two sides had worked together on getting legislation passed that handed them the authority to negotiate a statutory licensing agreement while Congress was adjourned. They also joined forces to fend off an attempt to kill the legislation by the National Association of Broadcasters, the trade group representing traditional broadcast stations. These efforts show, say the music sources, that SoundExchange is negotiating with Webcasters in good faith. Otherwise, why would it bother riding shotgun for the legislation? Had the bill failed to pass, attempts to reduce CRB rates would have died there.

Leading up to the November meetings, there were scant signs of trouble, according to some of the attendees. Prior to the meeting, all the companies agreed to send decision makers so a final deal could be approved there and then. Most of the major stakeholders were represented. After two days, the meeting broke up on Nov. 7 with much back slapping and congratulations. The group had succeeded in forging an agreement that everyone in attendance indicated they could live with, according to the music sources.

The sources said that all that good cheer went out the window weeks later when Real informed SoundExchange that a mistake was made. Real told SoundExchange managers the person who attended the meeting on its behalf was without the authority to make a deal. The attorney who was supposed to attend was unable to appear because his wife had gone into labor. The bottomline was Real no longer accepted the terms.

"(The music guys) are bitching and moaning about process and now they're pointing fingers. The deal didn't get done because of substantive issues. That's the way it is."
--Jonathan Potter, DiMA's executive director

Real's excuse didn't satisfy many on the music side. They argue that the Real exec who attended wasn't isolated. Throughout the meeting, the executive was on the phone with other Real managers, according to the music sources, some who were in attendance. Managers on the music team suspected something was wrong.

As more time went by, the music representatives sensed the November agreement was coming apart and many blamed Real.

In January, the DiMA board, whose members include representatives from Apple, Real, Yahoo, AOL, Live365, and Pandora, voted against accepting the agreement, according to Jonathan Potter, DiMA's executive director.

Potter defended Real. He said majority rules on the board and no one company killed the agreement. "(The music guys) are disappointed," said Potter. "It's hard and frustrating when this stuff happens but they're bitching and moaning about process, and now they're pointing fingers. The deal didn't get done because of substantive issues. That's the way it is."

The talks didn't end with the DiMA vote.

With weeks left to go before the Feb. 15 deadline, Potter wrote an e-mail to Washington lawmakers informing them that there was a stalemate. That was crucial. That indicated to the music side that DiMA, which struggled to get its members to agree amongst themselves on terms, was no longer a factor in the discussions. SoundExchange then began meeting with DiMA members to try and reach an agreement, one company at a time.

All or nothing
What's important to note is that the music industry was focused on signing all the major players or none at all. Unless everyone came aboard, SoundExchange faced expensive arbitrations with each company that declined to settle. Also, the terms of any agreements SoundExchange made could be used against it in arbitration hearings with companies that didn't sign.

On Sunday, with the deadline looming, talks again heated up. According to sources in the music sector, SoundExchange representatives again thought they had a deal. Again, Real appeared to backtrack at the last second.

King, one of Real's lawyers, denies that Real ever agreed to a deal on Sunday and makes no apologies for looking out for the best interest of his company and Webcasting. He said there is nothing to stop SoundExchange from striking one-off deals with other Webcasting companies. He said it isn't Real's fault that SoundExchange has chosen an "all-or-nothing" approach.

"If SoundExchange intends to do a deal that everyone agrees to then they have to satisfy RealNetworks," King said. "If that's the position they choose to take, then they should do deals that we will sign up for."

Regardless of who is at fault, Webcasting finds itself in a tenuous position.

SoundExchange has managed to cut deals with National Public Radio and the NAB. One of the ironies of the situation is that SoundExhange has an acrimonious relationship with the NAB, and was working closely with the Webcasters to thwart the NAB's attempt to stall their negotiations. Yet, NAB has a new rate deal and the Webcasters don't.

If things continue going the way they are, royalty rates for Webcasters will once again be set by the CRB and that hasn't worked out too well for them--or so they say.

While bigger companies like Real may be able to afford CRB rates, the question left unanswered is whether Pandora and similar players can afford them as well.

 

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