Well That's Just Unreasonable

For as long as the technology has existed, webcasters have been (un)regulated the same way as terrestrial radio stations – specifically, most were not required to pay royalties for the music they played. This system was originally established a half-century ago to allow for labels to have free advertising at the hands of the stations, and for the stations to use the music to both entice listeners and deliver advertising content. It was a symbiotic relationship that lasted for decades, and until recently it was never questioned.

In early 2007, Federal courts ruled in favor of a then-unknown entity called SoundExchange in its bid to increase (create) streaming media royalties on the internet. The company managed to push through its legislation ahead of the strong push-back by consumers and webcasters, and with the royalties raised remained stalwart in their assertion that the labels deserve this revenue.

Immediately after the ruling, it became apparent that the effects on radio broadcasters would be akin to genocide. NPR and KCRW quickly filed complaints and warnings about what this would do to the industry with the Copyright Royalty Board (CRB), virtually all of which went unheeded in the months following. With the ruling in the public spotlight, there was little doubt that the only entities in favor of this type of legislation were the large labels and SoundExchange, which would be allowed to skim off the top of the revenue. Unfortunately, efforts to curtail the fees or allow for certain types of safeharbor remain unrecognized.

The most insulting aspect of the law is the consolidation of wealth that it allows. SoundExchange collects revenue for each hour each listener is “tuned” to a station – regardless of the content of the station, or from which label the artists originate. This means that SoundExchange collects revenue for not only major label artists, but also for any other artists that any webcast or satellite radio plays, ever.

According to the company, this is a service for all labels. In order for a label to collect revenue from SoundExchange for the play its artists receive, it must sign up with SoundExchange and pay the annual fee associated with being a part of the behemoth. Unfortunately, in many cases the fee required for membership is much higher than the potential revenue for a small independent label. This means that in practice, SoundExchange, and thus the large labels, receive payment not only for their artists but for every independent artist played on a webcast station. They would argue that labels are free to sign up with SoundExchange and receive their portion of the royalties, but with annual fees higher than their potential revenue it is not worth it to pay more out than you receive. The money thus stays within SoundExchange, and is siphoned to the large labels in their ratio-based royalty payments.

And you’ve probably heard of Pandora and the extremely interesting and innovative Music Genome Project. For some background, Pandora is one of the largest webcasters on the internet with close to 1 million active listeners – daily. According to the Washington Post and founder Tim Westergren, the webcaster probably will not make it past their first royalty payment because of the high fees:

“We’re approaching a pull-the-plug kind of decision,” said Tim Westergren, who founded Pandora. “This is like a last stand for webcasting.”

…

Last year, an obscure federal panel ordered a doubling of the per-song performance royalty that Web radio stations pay to performers and record companies.

Traditional radio, by contrast, pays no such fee. Satellite radio pays a fee but at a less onerous rate, at least by some measures.

As for Pandora, its royalty fees this year will amount to 70 percent of its projected revenue of $25 million, Westergren said, a level that could doom it and other Web radio outfits.

And an insightful elaboration with additional background from ArsTechnica:

Buckling under the weight of the Internet radio royalty hike that SoundExchange pushed through last July, Pandora may pull its own plug soon. Despite being one of the most popular Internet radio services, the company still isn’t making money, and its founder, Tim Westergren, says it can’t last beyond its first payment of the higher royalties.

SoundExchange offered a potential reprieve from the royalty hikes, but that turned out to be a red herring to sneak DRM onto web radio. In the end, SoundExchange was able to initiate a massive (and retroactive) royalty hike on Internet radio stations, imposing per-user fees for each song. Adding insult to injury, the royalties on Internet radio will double for big stations by 2010, to an estimated 2.91 cents per hour per listener—far higher than the 1.6 cents that satellite stations would pay. Radio stations don’t pay fees like these yet, but don’t worry. SoundExchange is working on fixing that problem.

Besides the obvious fallacy that these royalty payments actually make their way back to the artists who deserve them, this war of attrition on what amounts to incredible amounts of free advertising makes very little sense. That is, unless you view it as a way to regulate how your consumers can experience musical culture. Much like Digital Rights Management software, this move simply limits consumers’ ability to consume the media they wish to pay for by limiting them to concerts and album purchases – neither of which will be helped by limiting the ability of innovative, tasteful djs to expand their listeners musical horizons.

Labels and SoundExchange would argue that they are entitled to this revenue, and that just because music exists doesn’t mean it should be free. That may be true, but I don’t pay the city of San Francisco and its residents royalties so I can walk down the street and experience the culture there. And while I’m more than willing to stop in a local shop and buy lunch, or records, or clothes, I am by no means required to do so. Just as music flows through the air, I’m more willing to buy bread I can smell on the street than bread in a black airtight bag with the baker hovering over me making sure that I’m getting any information about what I’m buying before I buy it.

As a staunch music consumer who spends not hundreds, but likely thousands, of dollars on music each year, I have been and remain outraged by this and every other effort the larger industry has made to more effectively vertically integrate and squeeze out the currently more agile and thus more successful independent labels. I haven’t purchased a CD from an artist on a major label in almost seven years now, and I don’t intend to start any time soon.

But to the issue at hand: How do we save Pandora from its seemingly imminent fate?

Click that advertisement.

Everyone click the advertisements on their main page and maybe, just maybe, they’ll have enough money to last through their second payment. So do it. And tell your friends and colleuges – tell everyone who listens to Pandora that if they don’t chip in for their favorite passtime at work that it’s going to disappear.

And if you’re feeling generous, make a donation. Do the same for NPR. $25 or $50 is less than many people spend on coffee in a given month, and it can make a real difference to the bottom line of companies and orginizations like this.

So do it. We all know that this is immoral, but the only way we can have an effect is to take action. So click. Donate. You could even write a letter to your congressman or the CRB telling them how you feel about this type of media and market consolidation. You’re a consumer, you’re the one whose dollars they are after. Write a letter to the big labels telling them that you’re so outraged by this that they’ve lost a customer.

But most importantly, do SOMETHING.  Passivity is why this war is being lost.