New Net radio rules draw fire on Capitol Hill

Rep. Edward Markey (D-Mass.) had harsh words for a ruling released Tuesday by the U.S. Copyright Royalty Board. It proposes raising the amount that commercial Internet radio services pay to record companies by 30 percent retroactively to 2006 and in each of the next three years through 2009. Each station would have to hand over a minimum $500 royalty payment.

The pricing inquiries arose in part because Mel Karmazin, CEO of Sirius Satellite Radio, whose proposed merger with XM Satellite Radio is being scrutinized by House members, seemed to indicate at a House hearing last week that prices would never increase, even on the combined service.

"This represents a body blow to many nascent Internet radio broadcasters and further exacerbates the marketplace imbalance between what different industries pay," Markey said at a hearing here titled "The Future of Radio". The hearing was convened by the House panel on telecommunications and the Internet, of which Markey is chairman. "It makes little sense to me for the smallest players to pay proportionately the largest royalty fee."

Before the CRB's new rules (PDF), which are subject to appeal, most Webcasters calculated their requisite royalty rates based on a percentage of their revenue. According to calculations by the Radio and Internet Newsletter, an advocate for Net radio services, the new retroactive 2006 rate would require Webcasters to pay approximately 1.28 cents per listener per hour--enough to cripple some smaller services, the group argued.

The CRB's decision has imperiled Webcasters by widening the gap between what Internet radio and satellite radio services must pay, RealNetworks general counsel Robert Kimball told politicians. He was also speaking for the Digital Media Association, whose members include Amazon.com, Apple, Microsoft and MP3.com, a property of CNET Networks, publisher of News.com.

If the decision is not overturned, "one can easily imagine Web radio looking more and more homogenized," Kimball said. That's because the higher rates may force Internet radio operators to reduce the number of songs they carry or increase their advertising prices and frequency, which could make it a less desirable place for advertisers to invest, he said.

Kimball suggested the proposed merger between XM and Sirius should be put on hold until Congress "corrects the Copyright Act's bias against the Internet," thereby allowing Internet radio companies to compete more fully with satellite firms.

For instance, the Copyright Act prohibits Internet radio from offering its own recording devices and portable radio devices, but it does not levy the same restrictions on other radio services, Kimball said. (A recording industry-backed effort is under way in Congress, however, to impose new restrictions on satellite radio devices.)

Copyright law also places a number of programming restrictions exclusively on Webcasters, Kimball said, including forbidding them from announcing upcoming songs and playing more than two songs consecutively or four songs over a three-hour period by the same artist.

Rep. Anna Eshoo (D-Calif.) said she believes Internet radio could face threats from another source: "broadband providers who have the ability and incentive to limit consumers' access to the content of their choice." She called for passage of Net neutrality legislation, which failed to pass Congress last year, that would prohibit such a practice.

Questions about XM-Sirius
Although Internet radio played some role in the hearing, many politicians continued to focus their questions about the proposed $13 billion merger between satellite radio players XM and Sirius.

Just a week after a House panel that oversees antitrust issues grilled him, Sirius CEO Karmazin agreed to field similar questions from Markey's committee.

Several politicians on the committee, including Markey, said they planned to scrutinize the proposed deal for potential conflicts with the public interest. Some voiced outright reservations about approval of the deal.

"It's hard to see how prices of satellite radio will go down" as a result of the merger, said Rep. Gene Green (D-Texas).

The broadcast industry opposes the deal on the grounds that combining the two companies would amount to a government-sanctioned monopoly. Consumer groups also have voiced fears that the merged entity would result in higher prices for satellite subscribers.

Karmazin again argued the combined companies would give more programming choices to listeners and would not result in raised prices--at least on the individual services. He reiterated that the same receiver would be able to get content from both services, eliminating the need for customers to purchase another device if the deal goes through.

"You will not pay more than $12.95 for that service after the merger," he told the committee. He added that the combined company plans to offer the option of purchasing smaller batches of channels for a lower price.

Pressed by Markey on the combined company's pricing plans, Karmazin acknowledged that customers who want to receive content from both XM's and Sirius's previous offerings may have to pay more than $12.95. He declined to give an exact figure but estimated that price would be "closer to $10" less than the $25.90 it would currently cost to subscribe to both services.

It will ultimately be up to the Federal Communications Commission and the U.S. Department of Justice to decide whether the merger favors consumers or would hinder competition. FCC Chairman Kevin Martin made it clear as recently as an interview published Wednesday in The New York Times that the companies have high hurdles to jump. The Senate Judiciary Committee also has scheduled its own hearing on the matter for March 20.

CNET News.com's Desiree Everts contributed to this report.