Rock Radio 2.0

Myths and Facts about The Costs Involved with Internet Radio


A recent decision by the Copyright Royalty Board (CRB) that increases
the royalties owed by Internet webcasters pay to play music by between
300 and 1200% has jeopardized the future of Internet Radio. This
decision will affect millions of Americans who enjoy the unparalleled
radio diversity that is only available on the Internet; and hundreds
of thousands of artists who depend on Net radio to reach new fans, and
thousands of webcasters whose livelihood depends on their ability to
play music for their listeners.

MYTH: Broadcast radio, satellite radio and Internet Radio pay the
same amount of royalties to creators of music, or pay proportionate
relative to the size of their businesses.

FACT: The smallest medium – Internet radio – pays the most royalties;
and under the new CRB royalty scheme the smallest webcasters will pay
the highest relative royalties in amounts shockingly disproportionate
to their revenue.

* Broadcast radio, an industry with $20 billion in annual revenue,
is exempt and pays no performance royalties to record companies or
recording artists.
* Satellite radio, which has approximately $2 billion in annual
revenue pays between 3 and 7% of revenue in sound recording
performance royalties.
* The six largest Internet-only radio services anticipate combined
revenue of only $37.5 million in 2006, but will pay a whopping 47% (or
$17.6 million) in sound recording performance royalties under the new
CRB ruling. In 2008 combined revenues will total only $73.6 million,
but royalties will be 58% or $42.4 million.
* Small Internet radio services are essentially bankrupted by the
CRB ruling, with most anticipating royalty obligations equaling or
exceeding total revenue.

MYTH: Internet Radio isn’t really that big anyway. Most people still
listen to traditional FM radio.

FACT: At some point every day more than 7 million Americans are
listening to Internet radio. Studies by Arbitron and Bridge Ratings
conclude that between 50 and 70 million Americans listen to Internet
radio every month, and about 20 percent of 18-34 year olds listen to
Internet radio every week.

MYTH: If Internet Radio is so big the higher royalty rates should be

FACT: Internet radio is a relatively new industry with advertising
models still developing. Some services rely on banner ads; others are
selling traditional audio ads; and still others rely on sponsorships.
The vast majority of Webcasters will not be able to generate enough
advertising revenue to pay their new, higher royalty fees.

MYTH: The webcasters’ previous royalty rate was too low and needed to
be increased to ensure that artists and record companies are paid fairly.

FACT: Bankrupting the Internet radio industry will not benefit
artists or record companies, as total industry royalties will
diminish. Moreover, the demise of Internet radio will be particularly
harmful to independent artists and record labels whose music is rarely
played on broadcast radio. The American Association of Independent
Music reports that less than 10% of terrestrial radio performances are
independent music but more than 37% of non-terrestrial radio is
independent music. This benefits artists, labels and music fans.

When Congress provided webcasters a guaranteed “statutory license” to
perform sound recordings, Congress intended that Internet radio would
flourish as a competitive medium offering diverse programming and
paying a royalty. Tripling webcasters royalties undermines all these

MYTH: Big webcasters can afford these royalties and they will each
offer hundreds or thousands of channels, so what’s the big deal?

FACT: The CRB royalty is so high that even the biggest Internet-only
radio services – including Yahoo, AOL, MTV and RealNetworks – will pay
a combined 50+ percent of their revenue for only this single royalty.
The only way to make a profitable, scalable business will be to
attract the largest audience and advertisers while reducing overhead
and innovation. The result will be “mass appeal” Internet radio
programming that will look much more like today’s broadcast radio,
rather than the diverse programming that exemplifies today’s Internet

MYTH: The rate is only increasing from 7/100 of a penny per song
streamed to 19/100 of a penny per song streamed over a 5-year period.

FACT: Nearly tripling the per-song royalty rate is only the first

* No Revenue-based Royalty Option. Prior to this decision all
small webcasters and some large webcasters had the choice of paying
royalties based on a percentage of their revenue that typically
equaled 10-12%. But the CRB decision did not offer a revenue-based
royalty option for any webcasters.
* Retroactive Impact. The CRB decision is effective as of January
2006, so if it actually becomes effective for only one day its impact
will be immediate as the past due royalties alone will be enough to
bankrupt virtually all small and mid-sized webcasters.
* Per Station Minimum. The CRB piled on even more, by imposing a
$500 per channel minimum royalty that for many services will far
exceed the annual royalties that would otherwise be due even after the
CRB decision. One advantage of Internet radio is that it is not
limited by spectrum capacity or bandwidth capacity, which enables
several services literally to offer 10,000 or 100,000 stations and
more. By penalizing this innovation and creativity the CRB further
ensures that Internet radio will become less creative, less dynamic,
less of an opportunity for non-mainstream artists and genres, and will
look more like broadcast radio in the future.