The Day the Music Dies

"To some this may sound crazy, but I sincerely am starting to hate the Internet," SoundExchange board member Jay Rosenthal wrote recently in the Los Angeles Times. "I know you see the Internet as some incredible invention that has opened the door to unlimited distribution of music — and your lofty goal is to bring music to as many as possible. But all I see is a tidal wave of artist abuse."

Reps for SaveNetRadio, however, say they're not abusing artists — they've even got more than 6,000 in their camp. Net radio launches artists, says Ted from Bagel Radio. He points to Silversun Pickups, an alternative rock four-piece from Silver Lake, Los Angeles, that was his band of the year in 2005. "I saw them play to like 16 people at Bottom of the Hill in 2005. They were almost the house band at Café Du Nord. This year I saw them play to a crowd of 30,000 at Coachella."

Lead singer Brian Aubert's voice can be heard on Bagel Radio promos, and Aubert credits Seattle Webcaster KEXP with the buzz that landed them on terrestrial radio.

"That they're charging these people more money is crazy," says Stephen Rodriguez of S.F. band the Otherside. "Record labels should be paying them."

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Major labels continue to hemorrhage cash from their ill-placed bet on the irrelevance of the Internet. CD sales will never return to pre-Napster days, and digital sales aren't offsetting the losses.

The labels are pushing hard into merchandise and live shows, but royalties seem like the low-hanging fruit. The new unit of consumption is no longer the CD, says John Simson, executive director at SoundExchange, it's the "listen," and listens need to make more money for labels and artists. Royalty hikes are the first step.

"When you have services that are feature-rich like Pandora or Rhapsody, Yahoo or SomaFM, places where people spend a lot of time listening, that time that cuts into listening to CDs — that time's moved to listens instead of purchasing CDs."

Furthermore, content owners like the big four record labels are still smart from giving away the farm in the 20th century to Big Radio and Big MTV, both of who built billion-dollar empires on the backs of RIAA's content, and then creamed the content owners in court and on Capitol Hill with all the money they made.

The content owners appear determined to prevent a repeat on the Internet and would rather kill Net radio than let Yahoo or AOL take home serious gains without paying them 10 times the rates that terrestrial radio was paying. That's right — homegrown mom-and-pop operations like SomaFM will have to pay a higher percentage in royalties than, say, KFOG, which is owned by broadcasting giant Cumulus.

Consider this: The percentage of gross revenue paid out as royalties by the industry for terrestrial radio is 2 to 5 percent; satellite radio pays 3 to 7 percent. But thanks to the rate hike, Internet radio must pay between 50 and 1,000 percent of its gross revenue, effectively killing it. Additional administrative fees alone paid to SoundExchange will balloon their budget from $5.5 million in 2005 to $1.15 billion in 2006, for a staff of 28.

Politically, the origins of the current battle go back to 1995. Back then Congress made an unprecedented decision to add performance royalties to existing composer royalties for Webcasting, satellite radio, and music on services like DirectTV. But who would set the rates and collect the money? Several years later, Congress spun off an arm of RIAA — which represents the interests of the big four music labels — called SoundExchange to collect the performance royalties.

Then in 2004, Congress wanted a permanent body to set rates, and created the Copyright Royalty Board. The CRB is composed of six people housed in the Library of Congress: three judges — only one with substantial copyright experience — and three staffers.

Webcasting royalty rates became the CRB's first case.

Over the course of 18 months between 2005 and 2007, the judges heard evidence and testimony from two main parties: SoundExchange, on behalf of the content owners, and the Digital Media Association on behalf of the Webcasters.

SoundExchange asked for at least 30 percent of gross revenue and/or a similarly increased rate for each song played per listener. DiMA went the other way and for a decrease in royalties from 10.9 to 5.5 percent of gross revenues. Testimony and documents numbered in the tens of thousands. Lawyers for both sides called dozens of economists, industry spokespeople, and artists. Rebuttals occurred. The two sides played a game of negotiation chicken, each making ridiculous demands and refusing to budge.

On March 2, 2007, the CRB handed down its ruling and SoundExchange got nearly everything it asked for. The CRB threw out any percentage of revenue plan in favor of a hiked per-song-per-listener approach, and included a $500 yearly administration fee per "channel."