The increased royalties set by the Copyright Royalty Board on March 2 came with a distinct catch. Webcasters are free to ink direct licensing deals with labels for a lower rate than the one set by the board. Direct licensing allows major labels to apply economic pressure to Webcasters who were formerly concerned with playing the best music.
If Net radio stations don't win their fight, playing whatever they want will become prohibitively expensive. Playing crap, however, won't be. Under the new rules it would be economically logical for cash-strapped Webcasters to take discounted rates to play music the labels want them to play. Instead of the labels paying the Webcasters, the Webcasters pay the labels less. Dark payola.
Evidence of this practice has already appeared with the launch of Slacker.com. The Internet radio startup has stated in the press that it made direct license deals with the majors that have saved it the hassle of paying higher royalties.
John Simson, executive director of the royalty collection agency SoundExchange, says dark payola won't be a problem, because radio stations can ink cheap deals with indie labels as well. But SomaFM Webcaster Rusty Hodge says that's unlikely, given the manpower it takes to handle licensing from thousands of indie music labels.
Hodge's business partner Elise Nordling works for a company practicing a form of dark payola on the indie side of things, though. Her daytime employer, the Independent Online Distribution Agency, offers free promotional MP3s from indie bands in its network. Pimping IODA MP3s on sites like SF Weekly's music blog has become easier than trying to get permissions from whatever band such sites choose. IODA's a good service, but it illustrates the point.
Furthermore, dark payola threatens terrestrial radio as well. On June 13, the Recording Industry Association of America launched a new push to raise royalty rates on terrestrial radio stations through the nascent MusicFirst Coalition. Coalition chief Mark Kadesh former chief of staff for Sen. Dianne Feinstein said he's not sure of the coalition's stance on direct licensing. However, coalition member Simson said direct licensing will occur.
Think you love terrestrial radio now? Wait till Britney Spears really is the cheapest thing to play.