Court Ruling Could Doom Webcasters
N E W Y O R K, Aug. 13, 2001 -- The world of online music has long been the land of the free, for listeners and providers alike. But a recent court decision means Internet radio companies will have to pay up — and that could make a lot of them close shop, too.
On Aug. 1, District Court Judge Berle M. Schiller in Philadelphia upheld a decision made last December by the U.S. Copyright Office, which determined that radio stations must pay royalties to record companies on music played over the Web.
The double whammy of the Copyright Office's decision and last week's ruling has broadcasters steamed.
"Broadcasters currently pay in excess of $300 million annually in music licensing fees to compensate songwriters and music publishers," says Edward O. Fritts, president and CEO of the National Association of Broadcasters. "Any additional fee to compensate record companies would be unfair and unreasonable."
Radio stations do not currently pay fees to record labels for the songs they broadcast over the airwaves — only to music publishers and writers. But the court ruling compels broadcasters to cough up cash even if a radio station simply streams its content over the Web, as many stations do.
The same goes for Internet-only operators, like NetRadio of Minneapolis, one of the first Web music stations, and music services like AOL Time Warner's Spinner.com. As a result, Internet music outlets that can't afford the fees could quickly go out of business.
The NAB's position is that since radio stations don't pay record companies fees for songs broadcast over the air, they shouldn't for songs played on Webcasts, either. Fritts argues the broadcast exposure promotes record sales and is responsible for "generating enormous revenues" on behalf of the labels.
Record Companies: Make Us an Offer
The Recording Industry Association of America, the umbrella group for the record labels, has welcomed the ruling. It expects a decision by the Copyright Office on the size of the royalties will be announced within six months, and will be enforced by early 2002.
Additionally, the record labels and online music purveyors have different ideas about how much money the royalty fees are worth. An official with the RIAA confirms that it has made a standing offer to the companies offering music over the Internet: 0.4 cents per song, multiplied by the number of listeners; or, alternatively, 15 percent of the company's gross Internet revenues — whichever is smaller.
The RIAA has cut similar deals with 26 companies offering Internet music, including leading portal Yahoo! and independent music outlet Musicmatch.com, although it will not reveal the terms of each agreement. The remaining Internet music providers — which include large corporations like Viacom Inc., AOL Time Warner and radio giant Clear Channel Communications — are offering a smaller per-song royalty.
But the record labels feel confident that with the law behind them, they will get what they want, especially since, as the RIAA official points out, Congress has directed the Copyright Office to establish fees at a level consistent with that paid by "willing buyers and sellers" — Yahoo!, Musicmatch.com and the like — on the free market.
Additionally, the Webcasters will have to pay back royalties dating to 1998, when the Digital Millennium Copyright Act was first passed, establishing the principle upheld last week.
I Will Survive …
These developments mean a serious shakeout of the online music business could be coming by next year.
Eric Scheirer, an industry analyst for Forrester Research in Boston, says the court decision makes life "very difficult" for Webcasters because of the forthcoming royalty expenses, including those dating to 1998. "It's going to be the single largest cost they have, and they don't know what it is … It makes it very difficult to run a business this way. I have to wonder how many Webcasters have been escrowing their fees."
It's all but impossible to make a firm estimate about how many music Webcasters are in operation. Scheirer thinks there could be "tens of thousands," ranging from corporate-backed music sites to tiny amateur outlets, and concedes it's a good bet that the royalty fees will put a chunk of them out of business.
Indeed, even with record label royalties, Internet radio has not yet become a profitable medium — although it does appear to have a financial upside in the future. An Arbitron survey from September 2000 revealed that one-fifth of all Americans had tried listening to a radio Webcast.
Another Arbitron survey, from June, showed NetRadio's audience to be upscale and disposed to spending: 73 percent have at least a college degree, 19 percent live in households with an income of $100,000 or more and 72 percent spent at least $100 online in the past year.
Net Effect: Survival of the Biggest
The net effect of the royalty ruling, though, could be that only music sites run by large corporations will be serious competitors in the Webcasting arena.
"Every new cost acts as a force of consolidation," says Aram Sinnreich, an online music analyst at Jupiter Media Metrix in New York. "It's going to be the small companies that don't have economies of scale."
Clear Channel, the nation's largest owner of radio stations, has cut back the number of its stations running Webcasts, but seems likely to keep its options open by staying in the field.
Other conglomerates with a Webcasting outlet — like AOL Time Warner's Spinner.com — could keep running their sites as loss leaders. The presence of Spinner.com, for instance, could induce more customers to sign up for AOL's Internet service, especially its broadband offering.
"It's not necessary for a Web property like that to break even," says Scheirer. "It still ends up being profitable in the context of AOL as a whole. That's an option Musicmatch.com doesn't have."