The Goliaths among Internet media companies just got a leg up on the Davids.
That's the conclusion of one participant in the Internet musicbusiness, following a Thursday evening ruling covering fees related to broadcasting music over the Internet.
The closely watched decision, which provides people on different sides of the issue plenty to complain about, gives artists and music labels less money than they had hoped to receive -- and previously had believed they'd be getting -- from companies that operate Internet-only radio stations.
But the fee structure announced by the Librarian of Congress Thursday is also expensive enough to pose a costly roadblock to independent startups unaffiliated with major media companies, says an executive at a top-rated Internet broadcaster.
From either perspective, though for different reasons, thebeneficiaries of Thursday's ruling appear to be the more-established Internet broadcasters, such as
AOL Time Warner's
America Online and
But the passions roused over the issue, and the money believed to be at stake, suggest that further efforts at legislation and litigation will be loosed on Thursday's ruling.
At issue before the copyright office was the amount of money that recording artists and record labels -- including AOL Time Warner's Warner Music Group,
Universal Music Group,
Sony Music Entertainment, EMI Group and Bertelsmann's BMG Entertainment -- will receive from companies thatbroadcast, or Webcast, radio stations transmitted over the Internet.
After a year and a half of work on the issue, an arbitration panel in February came up with a fee scale based on a per-song flat fee. For Webcasters who were using the Internet to simulcast an over-the-air AM or FM radio station, the fee was seven-hundredths of a cent per listener per song broadcast; for Internet-only transmissions, the fee was double that amount, or fourteen-hundredths of a cent per listener per song.
Among the numerous parties displeased by the February result was the Librarian of Congress, who at the suggestion of the Registrar of Copyrights rejected the licensing terms. The revised terms cut the Internet-only broadcast rate to the proposed AM and FM simulcast rate of $0.0007 per song.
The lower rate isn't much comfort to Live365, a privately held firm based in Foster City, Calif., that operates Live365.com -- the most-listened-to broadcast network on the Internet, according to ratings firm Arbitron.
"We're very disappointed with the ruling," says John Jeffrey, Live365's executive vice president. Like other independents, Live365 had hoped for a royalty system based not on the size of a broadcaster's audience, but on its revenue. Under the new scale -- slated to go into effect in September and be applied retroactively to 1998 -- Jeffrey calculates Live365 would have to pay artists and record companies about $100,000 per month in royalties. Meanwhile, he says, Live365's current monthly revenue is $100,000. "Any percentage revenue would have been more positive," he says.
Because access to capital is a distant memory for Internet startups, says Jeffrey, the upshot of the per-song royalty is that entry into Internet broadcasting will be limited to larger companies that can afford heavy upfront losses. "We think it gives them a head start in what will be a very valuable medium," Jeffrey says. "Those businesses without significant amounts of capital face a difficult, uphill battle to become successful."
Jeffrey says he's optimistic, though, that Live365 will overcome the added financial burden of the royalty rate. One bright side, he says, is that the company will now compete on a level playing field with
Clear Channel Communications
, the radio broadcasting giant that simulcasts its stations' signals on the Internet and thus would have paid a per-song rate half that of Live365's under the earlier scenario. But, says Jeffrey, the per-song rate "does slow us."
Record labels were as dissatisfied with Thursday's ruling as Jeffrey was because they had been hoping for a higher rate of compensation. Cary Sherman, president of the Recording Industry Association of America trade group, said in a statement Thursday, "Artists and record labels will subsidize the Webcasting businesses of multibillion-dollar companies like Yahoo, AOL, RealNetworks and Viacom. The rate ... simply does not reflect the fair market value of the music as promised by the law."