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Internet radio to go offline in royalty protest

Dozens of Internet radio stations, including Yahoo!Music and Pandora, are expected to shut down Tuesday in protest of higher music royalties, which some say will are high enough to kill the industry. By CNBC's Julia Boorstin.
/ Source: CNBC

Expect dead silence Tuesday on your favorite Internet radio channels such as Pandora, Yahoo!Music and MTV Online. Music webcasters are protesting higher music royalties they’ll have to pay the recording industry starting July 15, which some say are high enough to kill the industry.

Dozens of companies are taking part — from big one such as Yahoo and MTV, to public radio stations like KCRW in Los Angeles that streams music online, to small webcasters all over cyberspace.

A panel of copyright judges ruled earlier in May that online radio stations should pay the recording industry each time a song is heard by a listener, on top of a minimum amount for each channel they operate. The ruling also requires stations to pay retroactively starting January 2006.

“Even large players like Live365 and Pandora can’t operate under these rates,” said Kurt Hanson, who runs a small online station, AccuRadio. “If it's an independent company they'd probably be bankrupted. If it's a division of a larger company like Yahoo, MTV Online, they're just likely to have the corporate parent shut the division down.”

Many Internet radio stations, especially smaller ones, are currently paying a certain percentage of their ad sales to recording companies. The new rates would raise their royalties about 30 percent this year.

Traditional over-the-air-wave radio stations don’t pay royalties to labels and artists since radio airplay is considered promoting sales of music CDs. Satellite radio stations are also paying lower rates through individually negotiated agreements with labels.

Webcasters are pushing a new bill that would bring Internet radio royalties down to only 7.5 percent of a company's revenue, in line with those of satellite radio.

Over the past five years, Internet radio listeners have doubled to over 50 million, and Internet radio ad revenue has more than tripled. The recording industry says the rates for the growing market are fair.

“We want to make sure artists and those who invest in them are fairly compensated,” said John Simpson, executive director of SoundExchange, an agency that collects and distributes the digital royalties to labels and artists. “We think the board got it right for streaming. There's evidence all over the place that this is an exploding marketplace.”

SoundExchange reportedly collected $20 million in royalties from Internet and satellite radio stations last year.

Under the pressure from some Congressmen, the agency is offering to extend the existing lower rates to small webcasters for another five years. You'd think that would end some of this debate, but that isn't enough for the webcasters. We'll see what noise the day of silence generates.

Check out Julia Boorstin's blog, Media Money.