Bad news for Web radio

An overlooked ruling by a trio of arbiters last week has cast a pall over Web radio. According to Kurt Hanson's Radio and Internet Newsletter, the copyright royalty board set rates at $0.0011 cents per listener per song this year, rising to $0.0019 in 2010. (It also retroactively set the rates at $0.0008 cents for 2006.) That's up from $0.00076 cents for large commercial stations and $0.0002 for non-commercial ones, a rate that was in effect from 1998 to 2005.

The rate poses severe problems for a number of groups. The board apparently had two main rationales for more than doubling the rate by 2010: there had been no increases since 1998, and advertising sales were burgeoning online. But the result is stunning for non-commercial stations that do not sell ads, particularly ones such as KCRW whose previous royalties were paid by the Corporation for Public Broadcasting. A spokesman for SoundExchange (the collection agency for labels and performers) argued that a song is worth what a song is worth, regardless of who's playing it online. But that ignores the realities of the radio world. Commercial stations use music to build profits. Non-commercial stations use music to attract the subscribers needed to break even. If the rate remains the same, that's akin to saying that public stations shouldn't play music online.

Not that commercial webcasters will like the increase. Hanson argues that even the 2006 rate is too rich for most online stations, given how few ads they sell. The smallest webcasters -- those who stream fewer than about 160,000 hours of music a month -- face a flat annual fee of $500 per channel, which isn't too bad (assuming they're not offering multiple stations). But for those above the cut-off, the new rate means a shift from paying a percentage of their revenue (about 12%) to a per-song fee. That's going to hurt, particularly if Hanson's calculations are correct. Finally, the pain will even be felt by advertising-rich over-the-air broadcasters who simulcast online. Online ad sales are growing, but some analysts say they're coming at the expense of over-the-air ads.

Attorney David Oxenford, who has represented some webcasting firms, offers a good analysis of the ruling here.  The question facing the music industry and performing artists, who split the receipts from webcasters, is whether they would be better off if the higher royalties lead to greater consolidation among online broadcasters. Maybe they would be; it's easy to argue that too many broadcasters (online and off) have gotten away with paying too little for music. And shuttering many online stations that weren't generating much revenue could promote subscription services such as Rhapsody and Napster, turning the latter into a richer source of royalties. On the other hand, the music industry has watched over-the-air broadcasters consolidate, leading to even narrower playlists. Does the industry really want to see the same thing happen online?