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FAQ: Net radio's mixed signals

This Sunday, Webcasters are expected to hand over higher royalty fees to the recording industry. What does that mean for their devotees?

The saga surrounding recording industry-backed fee increases for Internet radio DJs has been raging for years, and the latest chapter surely won't end this Sunday, when contentious new rules are scheduled to take effect.

On one hand, Webcasters large and small, commercial and noncommercial, have been fighting a decision earlier this year by the U.S. Copyright Royalty Board that they argue, if left untouched, could put them out of business. They've also landed support from thousands of independent musicians who say they rely on their services to pick up listeners they wouldn't otherwise reach.

On the other hand, commercial artists and record labels allied with a recording industry royalty collection body called SoundExchange argue the changes are necessary to ensure fair compensation for their work. So far, both the CRB and federal courts haven't disagreed.

Private negotiations have been ratcheting up as the deadline for the new payments approaches, and discussions about a number of alternative offers to the CRB decision appear likely to continue into next week. Encouraged in part by a closed-door Capitol Hill meeting on Thursday, the negotiators have been expressing increasing confidence that a resolution can be reached, although it's unclear whether that will happen before Sunday.

CNET News.com has compiled a list of answers to the pertinent questions listeners may be asking.

What's this I've been hearing in the blogosphere about Webcasters being saved from complying with the July 15 deadline? Didn't a federal court just deny that request?
It's true that on Thursday, the U.S. Court of Appeals for the District of Columbia rejected a petition by large, small and noncommercial Webcasters to delay the onset of the new fees. From there, it gets more complicated.

Later that day, Webcaster, SoundExchange and recording industry representatives met with about half a dozen members of Congress on the Hill. At that meeting, SoundExchange Executive Director John Simson outlined a number of offers that his group has made to Webcasters. One of them was characterized by published reports as a pledge to delay enforcing collection of the new fees until all of the negotiations had ended, which prompted much rejoicing among the blogosphere.

The trouble is, Simson's statement was misinterpreted, SoundExchange spokesman Richard Ades told CNET News.com on Friday. What Simson really meant was that SoundExchange has already offered to freeze "small" Webcasters' required payments at historic levels through 2010.

"Assuming that those negotiations conclude successfully, then the small Webcasters would be paying the old rates, so it would not make sense for them to start paying the new rate," Ades said. But if the negotiations break down, then the new rate prevails, he added.

In short, nothing is set in stone yet, and SoundExchange is urging all Internet radio operators to "follow the law"--and perhaps to consult an attorney as well.

Then what does all of this mean for Internet radio listeners? Will I have fewer choices for music come July 15?
It's still not entirely clear.

Some who frequent smaller stations may have already noticed disruptions. According to the advocacy group SaveNetRadio, which has been lobbying for changes to the new rules, hundreds of stations have already shuttered their operations out of fear that they couldn't keep up with the new rates. Various published reports have named a year-round Christmas song station and a couple of jazz channels among the casualties.

Nothing is set in stone yet, and SoundExchange is urging all Internet radio operators to "follow the law."

Others have said they're encouraged by reports about the perceived progress being made in negotiations with SoundExchange and may rethink shutting down. But as we've already noted, small Webcasters haven't yet secured any formal immunity to the higher fees.

Representatives from some of the larger services--Yahoo's Launch, Live365 and Pandora--told CNET News.com that listeners probably will not notice any changes, at least at first. Others, like AOL Radio, still weren't exactly sure what's going to happen. National Public Radio said there won't be any immediate changes to the way its stations stream online music to their listeners, thanks to a last-minute agreement with SoundExchange. But the deal is only temporary, and negotiations are expected to continue over the next few months, NPR said.

Opponents of the new rates have warned that if they don't manage to broker a timely compromise with SoundExchange, the variety of independent Internet radio stations that consumers see today will diminish.

Back up for a second. How much are these rates going up, anyway?
The breakdown is as follows: The decision set rates for 2006 at 0.08 cents per song, per listener, which means Webcasters will have to cough up the difference between what they've already paid and what they owe under the CRB ruling. Then the rates climb to 0.11 cents in 2007, 0.14 cents in 2008, 0.18 cents in 2009 and 0.19 cents in 2010. There's also a $500 per "channel" minimum payment for each service.

Before the changes, most Internet radio companies paid about 0.076 cents per performance, according to an analysis by attorney David Oxenford at the law firm Davis Wright Tremaine, which is representing some of the smaller Webcasters that challenged the rules.

A few fractions of a cent doesn't sound like very much. Why are Webcasters so upset about this?
They contend that many smaller DJs simply don't take in enough revenue to come up with the new payments, which the advocacy group SaveNetRadio estimates at as much as 1,200 percent of their previous required payments (and up to 300 percent for larger operators).

Another problem is that the rules require a $500 minimum payment for each "channel" a Webcaster operates, regardless of the actual royalties they owe on that station. So if a Webcaster owes $250 in royalties based on the number of songs and listeners they have for a particular station, they'd still have to pay $500. But if they owed $750, that's what they'd pay.

The idea behind the minimum fee is to offset SoundExchange's administrative costs. But large Webcasters argue fulfilling the requirement would cost more than $1 billion in the first year alone for the three largest Net radio operators--Yahoo, Pandora and RealNetworks--because their services allow users to set up thousands of distinct "stations." To put it into perspective, the entire industry grossed less than $200 million last year, according to SaveNetRadio, an advocacy group opposed to the changes.

Webcasters have also argued that the rates amount to far more than what is expected of their digital broadcasting counterparts, such as satellite radio. Satellite is required to pay 7.5 percent of its total revenues, and Webcasters say they'd be content with the same arrangement. (A couple of bills in Congress would make that so.)

How does the music industry feel about those complaints?
SoundExchange, for its part, says the rates are entirely fair, particularly because the rate has already remained unchanged for seven years.

The group estimated that even when the rates creep to their highest levels in 2010, each user would only owe $1.12 per month, based on 15 songs streamed per hour and about 40 listening hours. Between 1998 and 2005, the same listening habits cost each user 47 cents per month.

"A dollar and change is not too much to pay hardworking musicians," the group said in a statement last month.

You said the negotiators may be edging closer to an agreement. How would that agreement differ from the mandate Webcasters face now?
As we mentioned earlier, SoundExchange has offered to cap the fees required of small Webcasters at their 1998 levels through 2010. The details remain murky, but in May, the group said Webcasters that fall in the small category would be required to pay 10 percent of all gross revenue up to $250,000 and 12 percent for all gross revenue above that amount.

To SoundExchange, the rates are considered "below-market" and a significant reprieve. But the initial offer drew resistance from SaveNetRadio, which argued that offering privileges to companies that keep their revenue below a certain level could keep smaller Net radio broadcasters from flourishing.

Another offer pertains to concerns raised by larger Webcasters. The Digital Media Association, whose members include Yahoo, AOL, Pandora, Live365, RealNetworks and other major Webcasters, has reportedly asked SoundExchange to consider imposing a $50,000 annual cap on the minimum "per channel" fees. That would mean those services would only have to pay those fees on 100 of their channels, as opposed to all of the thousands that they operate.

SoundExchange issued a statement saying the group is prepared to accept that offer, provided the Webcasters subject to the cap "agree to provide more detailed reporting of the music that they play and work to stop users from engaging in "streamripping"--that is, turning digital music streams into more lasting copies.

I seem to remember hearing all this talk of Internet radio gloom and doom a few years ago. Has a similar conflict come up in the past?
That's right. Back in 2002, the recording industry and Webcasters were also butting heads over royalty rate increases set by a federal arbitration panel after bitter negotiations.

A campaign called "Save Internet Radio" even sprang up, and, as they did a few weeks ago, some Webcasters protested the changes with a day of silence.

The ultimate savior for shallower-pocketed Webcasters at that time was the enactment of a bill called the Small Webcaster Settlement Act, a compromise piece of legislation that allowed small and noncommercial outfits to renegotiate lower rates with the music industry.

So how did we get to this point again?
Between 1998 and 2002, an arbitration panel appointed by the U.S. Copyright Office was charged with setting the royalty rates for Internet radio services. That changed in 2004; Congress passed a law creating a slightly different three-"judge" panel called the Copyright Royalty Board within the U.S. Copyright Office. That panel was charged with setting new rates for 2006 to 2010 if Webcasters and record labels couldn't reach an agreement on their own.

After 18 months of extensive written and oral testimony from a number of interested parties, the CRB issued its decision in March. It opted to adopt a rate similar to what SoundExchange had suggested.

What if the negotiations among the Webcasters and the record industry break down this time around? Could Congress or a court step in?
So far, as we mentioned earlier, a federal appeals court has denied an emergency request that it block the CRB decision. But Oxenford, the attorney representing some of those Webcasters in that dispute, said the case is expected to proceed through its normal course, with both sides fully briefing the judges on their perspectives. There's no timeline, however, for that process yet.

The issue has, indeed, also attracted quite a bit of attention from certain members of Congress. The House of Representatives Small Business Committee recently held a hearing on the topic, and Rep. Edward Markey (D-Mass.) organized Thursday's closed-door roundtable with the stakeholders.

There are also now three Internet radio-related bills on the table, which groups like SaveNetRadio would like to see passed.

Two of them--one in the House and one in the Senate--would overturn the CRB decision and replace it with a requirement that Webcasters pay the same royalty rate currently required of satellite radio broadcasters, which is 7.5 percent of their revenues. Webcasters argue that's a fairer solution than the one currently in place.

Another bill, just introduced late on Thursday by the Small Business Committee heads, would simply buy more time for hashing out a compromise. It proposes delaying the onset of the fees by 60 days after July 15.

So, it's not over yet?
Exactly, although I'll spare you the Yogi Berra cliche.

After Thursday's meeting on Capitol Hill, representatives from various sides of the debate who attended the meeting told CNET News.com that they found the latest talks encouraging and were still working actively to reach common ground.

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