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New royalty rate has webcasters worried

Internet music broadcasters worry that a new ruling could put many of them out of business by drastically increasing the royalty payments they have to make to record labels and artists.
/ Source: The Associated Press

Internet music broadcasters worry that a new ruling could put many of them out of business by drastically increasing the royalty payments they have to make to record labels and artists.

The new rates, which are retroactive to last year, were decided on Friday by the Copyright Royalty Board, a panel of three copyright judges, and made public Tuesday on the board's Web site.

The ruling could have the greatest impact on startup companies that make their living from broadcasting music online and selling advertising to pay for it. For large radio companies like Clear Channel Communications Inc. and CBS Corp., online broadcasting still makes up a relatively small portion of their overall business.

Kurt Hanson, who founded an online radio company five years ago called AccuRadio, said his six-employee company managed to "eke out" a profit last year under the former rate structure that called for paying royalties of 12 percent of revenues to music publishers.

Under the new rates, which charge per song and per channel regardless of how much advertising money is being generated, would put Hanson's company out of business, he said, increasing his 2006 royalty bill from $48,000 to $600,000. Hanson testified at hearings of the copyright board on behalf of smaller webcasting companies.

Hanson said he was aware of about 50 companies that paid royalties for streaming music online under provisions for small webcasters, including Digitally Imported, and a husband-and-wife company called 3WK.

Larger companies like Yahoo Inc. and Time Warner Inc.'s AOL unit also have significant Internet radio operations that would also be affected by the new copyright rates.

Jonathan Potter, the executive director of the Digital Media Association, a trade group that represents webcasters and digital music and movie companies including Yahoo Inc. and Time Warner Inc.'s AOL, said his group was disappointed in the copyright board's decision, which he said would raise the royalties by 30 percent per year for four years.

Potter said in a statement that the group's member companies were "re-evaluating the viability of the Internet radio business."

On the other side, SoundExchange, a nonprofit organization that collects royalty payments from digital music broadcasters and distributes them to rights holders, called the ruling fair and said the fears of putting webcasters out of business were overblown.

"They've been saying this since 2002, that they were going to go out of business," said Willem Dicke, a spokesman for SoundExchange. "Instead what's happened is the industry has growth tremendously."

Dicke said the advertising revenues from online music broadcasting have grown rapidly over the past few years, from about $50 million in 2003 to $500 million last year, giving webcasters enough resources to cover the new royalty rates.

The royalties in question only apply to digital broadcasts of music, such as through Web sites or satellite radio, and are separate from the royalties that terrestrial broadcasters pay to rights owners.

Under the new ruling, commercial webcasters will have to pay .08 cents per song for each song played last year, increasing to .11 cents per song in 2007, and rising to .19 cents in 2010.

The rates can still be appealed, either to another hearing of the copyright board or to federal court. It's also possible that Congress could become involved, Hanson said.

Both Clear Channel and CBS' radio unit, the No. 1 and No. 2 radio broadcasting companies in the country, declined to comment on the ruling.