Recording Industry Fees Will Stunt Growth of Webcasting Industry

By Reed Bunzel

Early in September, the Radio Advertising Bureau (RAB) released its industry-wide revenue figures for the second quarter and first half of 2007. There were no real surprises, as both local and national ad dollars declined, with network radio suffering the same fate.

The only bright spot continued to be non-spot radio, which increased 16 percent in the second quarter and 12 percent in the first half, compared with the same periods last year. Most of this is attributable to Internet-oriented initiatives, and in fact, RAB predicts this trend to accelerate as more and more stations expand their online offerings. And it's not just "terrestrial radio" that stands to gain from streaming audio content on the Internet. Thousands of online radio companies ("webcasters") are poised to significantly alter the way content is distributed to music consumers.

WHO'S LISTENING ON THE INTERNET?
According to Bridge Ratings, approximately 77 million people listen to Internet radio every month. Bridge estimates that by the start of 2020, terrestrial radio will reach 258 million Americans every month, while Internet radio will reach just under 197 million.

That is, of course, unless the music industry is successful in imposing the per-performance royalty fees that were set on March 2 by the Copyright Royalty Board (CRB). Essentially, the record labels were able to convince the three-member CRB panel that webcasters of all sorts--small, large, non-commercial, commercial and non-profit--should be saddled with fees that not only stand to put many of them out of business this year, but that also will virtually double by 2010.

Their justification is that, for years, artists and musicians have created music that radio stations played over the air for free, while the artists enjoy no financial reward. They may have received millions of dollars in compensation for record sales and concert appearances, but not a dime from the radio industry. The Recording Industry Association of America (RIAA) says it's time for that to stop, which is why Internet broadcasters today must pay royalty fees for the music they stream--even though this streaming is responsible for billions of dollars worth of CD sales and legal downloads.

What's interesting here is that the radio and recording industries for decades have maintained a friendly quid pro quo, whereby radio stations served as promotional vehicles, generating listener enthusiasm and record sales. In fact, over the past 40 years, the recording industry spent upward of 10 figures on in-house and independent promotion simply to entice radio stations to add records to their playlists.

When the CRB established its fee structure back in March, it essentially gave the RIAA and SoundExchange, its "collection agency," carte blanche to extract as much money from the online radio community as possible. SoundExchange holds all the cards and has negotiated minor financial concessions to certain groups of webcasters, while arbitrarily ignoring most webcasters' calls for fiscal relief. In fact, the recording industry has made it quite clear in recent weeks that it has no intention of negotiating a realistic royalty rate with terrestrial broadcasters that stream their programming over the Internet because the labels intend to vigorously pursue a new royalty fee--what the National Association of Broadcasters has dubbed a "performance tax"--for all music played over the air.

CLINGING TO A BYGONE MODEL
Twenty years ago, the record label bean-counters were salivating over all the money pouring in as music lovers replaced their old vinyl records with CDs that were rumored to have near-perfect digital audio. They never dreamed that one day it would be possible for consumers to make copies of CDs--or specific music tracks--right on their laptops, because even laptops didn't exist!

Napster came along and changed all that. The ease in which consumers were able to swap music files, thus bypassing the record store, clearly caught the music industry by surprise. Although they were successful in shutting down these "freeloader" sites, it was clear to the public that they didn't need to buy an entire album if they only wanted two songs.

Today, as music sales slump and consumers bypass traditional retail avenues, the industry's leaders are exploring every way they can to wring dollars out of the existing paradigm rather than shifting to a new model. One way to do this is to levy a heavy fee on the thousands of terrestrial radio broadcasters and, more recently, Internet broadcasters that combined have done more than any other industry to promote and sell records.

The bright spot is that music consumers are letting their elected representatives know how dissatisfied they are with how the music industry is treating webcasters. As a result, many are pushing for a legislative remedy, something that the recording industry definitely wants to prevent. And so they have taken small steps to resolve issues while waiting for the introduction of legislation that would impose a royalty fee on over-the-air broadcasts, as well.

Meanwhile, the Internet radio industry waits to see whether the record labels will be able to price webcasters out of business and effectively stunt what otherwise would be near-exponential growth over the next several decades.

Reed Bunzel is president and CEO of American Media Services-Internet, a Charleston, S.C.-based company that helps radio stations and other businesses stream audio content on the Internet. He can be reached at (843) 972-2200.