Internet Radio And The CRB: A View From Indie Labels

| Just a Thought

Millions of people listen to Internet based radio stations. With technologies available that make listening to Internet-based radio and services offerings like Pandora and iLike more accessible by streaming music to anywhere in your home, millions more will soon be tuning in. One would think that the Internet-based radio station are in for stellar growth.

Unless youive been totally out of touch with the news lately then you know that the Copyright Royalty Board, at the behest of the Recording Industry Association of America is looking to change the way net radio stations are charged for playing music. According to news reports, the new system would drastically increase the royalty fees Internet-based radio stations pays, by some estimates the increase would be up to 1500 percent more than what is collected now.

Many believe the effects of this rate change could be devastating to the neonate Internet-based radio industry where many small stations may be forced to close up shop, and larger stations may have to reduce staff or find other cost saving ways to stay in business.

Of course, there is always more than one side to a story. Sound Exchange, The RIAA collection agency, believes that the proposed rate change is fair and that it is goes a long way towards equitably compensating artists for the works they produce.

According to Sound Exchange, the CRBis decision only amounts to an 8 percent increase over what is normally paid by web radio stations. SaveNetRadio claims that the increase in more like 300 to 1200 percent.

Who right? Whois wrong? What, exactly, is the deal here? Will Internet-based radio essentially cease to exist if the CRB rate hike ruling is allowed to go into affect? How does the CRB ruling affect independent labels?

I thought these would be good questions to pose to someone with a stake in the game, like the CEO of an indie label. I found two: John Buckman and Ali Partovi.

John Buckman is the CEO of Magnatune, an independent music company that offers DRM-free music at reasonable prices. Iive bought several albums from Magnatune in the past, and listen to streamed music from their site often. I asked Mr. Buckman how the CRBis decision affects his company.

"Most indie labels donit run their own radio stations (so they donit have to pay the CRB), nor do they own the rights to their musicianis music (so they donit get paid for internet broadcast) so it doesnit effect them," he said.

"At Magnatune, we sign artists directly, they grant us a waiver from whatever collective rights society fees might occur with what we do. That is a legal right in the USA, and allows us to run all our shoutcast radio shows, our 50 Second Life radio stations, and our podcasts, all free of fees.

"However, part of being able to do this, is that Magnatune doesnit accept any cover songs, nor do we accept 3rd party publishers. The musician we deal with has to own all the rights to their music. This reduces our options, but it makes for legally clean music and we donit need to fear the changing winds of collective rights licensing fees."

So, at least at Magnatune, indie music will still be heard even if the CRBis proposed rates go into effect. I asked Mr. Buckman how he felt about the CRBis rate change in general.

"For indie record labels, internet broadcasting as well as podcasting, represent a way to get (independent) music heard" he told me. "Ever since Big Radio began being a pay-to-play (aka payola) system, indie labels have not had a way to reach their fans over the airwaves. And of course, fans of non-mass-media music would like diversity and quality in the radio offerings they can access. Indie labels want internet radio to survive and prosper: thatis how we reach and build a fan base.

"A few years back, when the first fees were set, I remember the RIAA saying that they preferred to only have very few players in the Internet radio space. Itis easier for them to collect from, they can ask for more money, and itis a kind of barrier-to-entry that the existing large companies donit so much mind paying because it prohibits competition from launching. This CRB decision is the same thing: keep new ideas and new companies, who always start out weak and vulnerable, out, so that commercial terrestrial radio, which has plenty of money right now, can easily move in and take over Internet radio too.

"To some extent, the CRBis decision is also a sad decision for Americans, because the Internet is global, and all this will do is push Internet radio innovation to other countries, which have more reasonable licensing agreements in their jurisdictions."

Ali Partovi, CEO of iLike, a service which assesses the music you listen to and offers suggestions to help you find new music, and GarageBand, an independent music label. I asked Mr. Partovi how he believes the policies of the CRB affects indie music.

"In theory, iall music is equali in the eyes of US law. All music is copyrighted, and statutory rates apply to all music, whether itis iindiei or controlled by major labels. In practice, there are two significant differences for indie music:

" a) The collection of statutory royalties has historically been limited or non-existent for unsigned musicians (not just for the new digital royalties, but also for long-standing performance royalties, i.e. ASCAP/etc). In theory, entities such as ASCAP collect statutory royalties on behalf of composers and then make pro-rata payouts, but in practice the little guys have often complained of getting screwed. A major publisher can afford the time (and legal leverage!) to extract from ASCAP the proper fees owed to their artists whereas an unsigned artist without a publisher can easily get nothing. This has been the state of affairs for decades and I wonit be surprised if it also applies to the newer idigital performancei royalties; the end result being that indie artists donit get paid whatis legally owed to them.

"? b) Almost all indie artists feel that the benefit of getting exposure, i.e. getting their music heard, is more valuable than receiving paltry royalty checks. This is why the vast majority of indie artists make at least a few of their songs available as free MP3 downloads. In the same vein, many indie artists are willing to explicitly waive the idigital performancei royalties in return for a chance at idigital airplay.i On www.GarageBand.com (owned and operated by www.iLike.com), this is true for ALL the several hundred thousand artists who have posted music; part of our standard terms & conditions is that the artist authorizes us to waive the digital performance royalties on their behalf. This puts us in a unique position to offer webcasters a reprieve from the new CRB rates, because weive not only collected the necessary legal rights to waive the fees, but we also operate a massive icollaborative filteri to identify the music thatis most likely to succeed on radio. Since 2002 weive offered our entire catalog to webcasters free of iCRB fees,i and each webcaster gets a iprivate feedi of music fit for their station. You can see at the GarageBand Web site that hundreds of small webcasters have joined our radio network."

I asked Mr. Partovi how the CRBis proposed changes affects him and his companies.

"As a musician and a consumer, Iim displeased because this gives the record labels immense leverage to make direct deals with webcasters. The result will be not only that some webcasting operations will simply shut down (potentially even major webcasters like Clear Channel); but also that some webcasters may have no choice but to undertake bizarre changes in return for isweethearti deals from the labels. For example, Iive heard that the major labels are offering Pandora a break on royalties if Pandora agrees, among other things, to switch from MP3-streaming to a DRM-protected format (this would require Pandora to completely rebuild their technology and force users to download software like RealPlayer or Windows MediaPlayer). On a smaller scale, there is a more ibenigni example of this ileveragei: My company (iLike.com / GarageBand.com), because of the rights weive collected, can waive CRB fees for webcasters who play music by our unsigned artists, creating an incentive for webcasters to play more unsigned music (a rare case where the new rates might create a igoodi outcome for musicians and consumers!).

"As an internet entrepreneur, Iim displeased to see the major labels creating such an unlevel playing field, where ioutlawi businesses that operate in grey areas of the law are greatly rewarded while those that try to play by the rules are punished. Witness that Pandora, which has paid millions in royalties to the labels, is being taxed out of business, while various services that offer on-demand streaming and playlist capabilities are sneaking by with impunity without paying a cent of royalties. The major labels have created a legal environment that tells entrepreneurs, iIf you try to follow the rules and pay royalties, weill tax you to death, if instead you find clever loopholes and grey areas and push the boundaries of the law, you could be the next Youtube.i This is an unpleasant environment for entrepreneurs, and itis not good for the labels either. I believe the long-term result of this environment is that labels will retreat over time before the onslaught of legal challenges from startups following in the steps of Myspace or Youtube. Along the way, label-fearing companies like Pandora get screwed, but over time the consumer wins."

Of course, there are independent music labels who subscribe to the RIAAis policies so the artists they represent will be directly affected by the CRBis ruling. If an Internet-based station plays music produced by artists on larger record labels, like those listed as affiliated with the RIAA, then the station is in for a rough ride unless Congress can find a solution.

On the other hand, if a station plays music from an independent record label that had the foresight to have its artists wave play-fees then things are not so dire. There no telling how many indie labels have done what Magnatune and GarageBand have done, so things could get pretty quiet on the virtual airwaves, but it wonit be completely silent either.

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