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The Day the Music Dies 

Internet radio stations like SomaFM have launched bands and influenced what mainstream DJs play. On July 15, they could be gone forever

Wednesday, Jun 27 2007

Page 2 of 3

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."

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."

In their written decision, the judges said they based their rate hikes on the "willing buyer/willing seller" orders from Congress. The CRB used individual deals between huge companies like RIAA and Yahoo and then applied those rates to everyone. The CRB also said percentage of revenue deals proved illogical, because royalties are about playing songs, not how much a company does or does not make off them.

Hodge says the law that the CRB judges use has to be changed because it rigs the system against the little guy. "I'm not vilifying the CRB. I'm vilifying the instructions the CRB was given by Congress," he says. "They use a 'willing buyer/willing seller' system that doesn't ask, 'Which buyer? Which seller?' They need something that takes into account the real world."

Simson says SoundExchange didn't get everything it wanted. "But we got a lot," he allows, "and I think that's one of the reasons the reaction is so dramatic."

Indeed, within weeks SoundExchange faced a frontal assault worthy of a screenplay.

Since went live on April 16, it has stoked an incredibly smart, rich, and vocal segment of the population — the biggest of which is angry 20- to 40-year-old males trapped in cubicles. Web radio stations large and small have pitched in, posting banner ads linking to the site and breaking into regularly scheduled broadcasts for SaveNetRadio announcements.

SaveNetRadio's lobbying efforts have fanned a firestorm of letters, phone calls, and e-mails to Washington, sometimes eclipsing issues like Iraq and immigration. "It's kinda sad, actually," says Hodge.

The coalition got Rep. Jay Inlsee (D-Wash.) to introduce the Internet Radio Equality Act, HR 2060, into the house of representatives on April 26, 2007. The bill would nullify the copyright royalty board decision and set royalty rates at 7.5 percent of gross revenue. The house bill has 118 co-sponsors of a needed 216. Two weeks later, U.S. senators Ron Wyden (D-Ore.) and Sam Brownback (R-Kan.) cloned the same bill and introduced it in the Senate. Net radio listeners have already blasted their representatives with more than 85,000 phone calls, and 400,000 faxes, and e-mails to their offices. According to Ward, "when the fax lines jammed, we physically walked the printed-out faxes down to their offices. You should've seen the look on staffers' faces when we came in with file boxes full of paper, saying, 'These are letters from your constituents.'"

About The Author

David Downs


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