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Royalties systems threaten to bury web radio alive

“We're approaching a pull-the-plug kind of decision,” says Pandora founder Tim Westergren in an interview with the Washington Post, regarding the livelihood of his online radio station living under a massive royalty hike imposed last year. “This is like a last stand for webcasting.”

The rates that Westergren refers to were placed in effect last September by the Copyright Royalty Board and performance rights organization SoundExchange, who enforce and collect payments, respectively, on behalf of song owners for public performances of their music. Westergren’s service, Pandora, is one of the internet’s largest such performers – over a million listeners tune in the service per day – and one of the few online radio stations that give listeners the ability to create their own stations on the fly.

Online broadcasters both large and small decried the royalty rates when they were announced last year. Both analysts and the stations themselves predicted a nearly certain doom if the situation didn’t change fast. By and large, it didn’t. Despite heavy opposition, the new royalty rates – which analyst Kurt Hanson of radio industry newsletter RAIN once estimated to be a fourfold increase in costs – went into effect, and the issue quietly left the spotlight.

The CRB’s decision raised a then-current 8/100 of a cent per song per listener to 19/100 of a cent under the same conditions in 2010.

It appears, then, that broadcasters such as Pandora spent their time quietly suffering, while attempting to make the most of a bad situation and working for change on a legislative level. Those efforts appear to be making little real progress, however, and Post writer Peter Whoriskey notes that both sides of the debate still “appear to be far apart.”

Democratic representative Howard L. Berman of California says he spent the last week attempting to work out a deal last-minute between SoundExchange and companies like Pandora, but that an accord – if it is even possible – is still a long ways off.

“Most of the rate issues have not been resolved,” said Berman. “If it doesn't get much more dramatic quickly, I will extricate myself from the process.”

Pandora is already losing money as it is, says Westergren: 70 percent of its projected revenue of $25 million will be spent on royalties. Such an incredibly high cost could spell doom for Pandora and similar outfits, unless something is done quickly.

DailyTech interviewed Westergren roughly a year ago, and the overall tone appears to be the same now as it was then.

“The new rates would bankrupt us, along with every other webcaster in currently in operation,” Westergren told DailyTech.

“If you increase your rates, and if it puts those rate-paying stations out of business, then you’re going to get nothing. These rates essentially don’t rely on the understanding of the economics of web radio.”

Webcasters should have spent more time monetizing their content, says SoundExchange, which notes that “artists and copyright owners deserve to be fairly compensated for the blood and sweat that forms the core product of these businesses.”

RAIN notes that 25 percent of Pandora’s approximately 120-man workforce is dedicated to ad sales, and that in addition to its current advertising and hardware deals, it is considering the addition of smaller, more subtle “This session is sponsored by…” advertising slots.

Neither satellite nor terrestrial radio stations pay the same royalties as webcasters: terrestrial radio pays nothing – a position currently under attack – and satellite broadcasters work under a far less onerous rate of 6 or 7 percent of their revenue.

Smaller broadcasters could be facing even more trouble: many such stations could face royalty payments that sit between 100 and 300 percent of their revenue.

Theorists have their own special take on the matter. Originating from a book titled “The Gridlock Economy” by Columbia law professor Michael Heller, a problem arises when a particular good becomes essential to the success of an business spawned from its use; in that case, owners will “tend to ask for an amount close to the full value of the [business].” RAIN points out that while the standard 5 percent rate employed in most other countries and industries would be a reasonable rate for webcasters, “if [SoundExchange] has a shot at 75% or even 300% of revenues, they’re motivated to go for it! Even if it’s, in the long run, against their own interests.”

Regardless of the theories and speculation, however, Pandora is facing an urgent deadline that sits squarely in the short-term: its investors expected the site’s revenue to surpass its costs for the first time in 2009, until such expectations were put in jeopardy by SoundExchange’s rate hike. Westergren hinted that his investors may be “wearied” by the “constant haggling” over royalties, and that they are possibly pushing for an end.

“I was on the bus when I get this message on my Treo,” said Westergren, referring to the CRB’s decision last year. “I thought, ‘We’re dead.’”

“We're funded by venture capital,” he said later. “[Our investors are not] going to chase a company whose business model has been broken. So if it doesn't feel like it’s headed towards a solution, we're done.”





"You can bet that Sony built a long-term business plan about being successful in Japan and that business plan is crumbling." -- Peter Moore, 24 hours before his Microsoft resignation
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