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Summary:

UPDATED: If you are an Internet broadcaster (webcaster is the politically correct phrase), then the recent changes in the music royalty regime could seriously impact your business – causing you to pay more, and make fewer profits. It is not just the small webcasters who are […]

UPDATED: If you are an Internet broadcaster (webcaster is the politically correct phrase), then the recent changes in the music royalty regime could seriously impact your business – causing you to pay more, and make fewer profits.

It is not just the small webcasters who are going to be impacted by this attack on one of Broadband’s killer apps. Some music start-ups like Last.fm and Pandora – could find themselves facing higher tabs and tough times ahead.

“Left unchanged, it’s over for us and every other internet radio service, period. Makes it un-viable,” Pandora co-founder Tim Westergren wrote in an email. “We’re staying online because we’re hopeful that sanity will eventually win out. This is a ludicrous ruling.”

Till recently, the royalty rate was about 7/100th of a penny per performance, allowing many small webcasters to thrive and build sizeable audiences. At 14-15 songs per hour, it worked out to about penny an hour – one of the main reasons why Yahoo could offer music-streaming services at affordable prices.

However, now the equation has changed – the royalty rates will increase every year through 2010 when it is going to cost about $0.0019 per performance. While not much when taken as a single performance, the amount does add up if you are a company that streams millions of performances per day. (The details of the new arrangement are very well explained on this website.)

What’s good the goose is good for the gander, right! (#)

That means start-ups like Last.fm and Pandora that match your musical preferences with artists/albums on their giant social nets music tastes and then stream music to your desktop, might be at risk as well. P2P Radio start-ups like Mercora might be facing some static in coming months as well.

Raghav Gupta, who in his past life had worked at Yahoo Live 365, has some interesting thoughts on his blog. He points out that the royalty changes could impact any MA activity, such as the rumored Last.fm/Viacom deal.

Some services that allow a greater form of interactivity, like Last.fm or Pandora, may well be subject to higher rates keyed off the statutory ones based on any deals they’ve negotiated directly with the labels.

I have emailed folks at some music 2.0 start-ups including Last.fm and Pandora, but have not heard back from them just yet. I will update the post to reflect their thoughts and reactions. Meanwhile, Mike Masnick sums it up nicely when he writes:

…this is utterly backwards and damaging to the industry itself. A webcaster (especially the smaller, independent ones) is a great means of promotion for artists. It tends to attract more loyal and well-targeted audiences….

Originally published at 7 pm on Monday, updated at 11.10 pm

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  1. Am I missing something? If it costs webcasters
    24 cents a day presently to play music, and this proposed increase would raise their costs to about 65 cents per day, it doesn’t seem that significant. That difference works out to
    just over 100$ a year. Will that really affect anyone’s business model?

  2. Stan Miller Monday, March 5, 2007

    Radioparadise.com says the change in fees could shut them down.

    See the story on the main page. Too bad. I really like their format, which ranges from alt-country and classic rock to postmodern.

  3. Om, thanks for the link. Btw, I was at Live365, not Yahoo365. ;-)

    Harry L, you are missing something. The performance rate is per song per listener. So, if you stream 15 songs in an hour to 100 listeners that listened for that hour, it equals 1,500 performances. Doesn’t sound like much but it adds up.

  4. Harry L: You are indeed “missing something”.

    That’s $100/year/user. We’re talking millions of dollars when it is aggregated up. These businesses aren’t making hundreds of dollars per user. They are making (if anything) pennies per user. The new rates make this margin disappear.

  5. david hyman Monday, March 5, 2007

    the worst part is, most or all of the terrestrial guys were either grandfather claused in or cut deals to pay drastically reduced fees. you can bet they lobbied hard for this. creates a real chasm between the have and the have nots. not sure whether mtv is already blanketed and could protect last.fm in an acquisition.

    but this is precisely why mog has stayed clear. making money from online radio has always been a no man’s’ land. media planners after years can barely grasp the banner. terrestrial radio guys can’t grasp online. hence, no man’s land.

  6. What I never understood was, how does the actions made by the RIAA differ from that of a cartel? Isn’t this the equivalent of a group of producers price-fixing and essentially acting as a collective monopoly?

  7. Hmmm… this is not mentionned anywhere in the post, but I would assume that you are speaking about US regulations here.
    I know for sure that French companies are subject to a different calculation of fees. And I’m wondering: since last.fm is based in London, wouldn’t they rather be subject to a UK fee system? Aren’t companies subject to the regulations of their country of origin?

  8. Hank Williams Tuesday, March 6, 2007

    Part of the problem is that an advertising based business model for audio does not exist – or lets just say it is so small that its not workable. So the question is whether it is fair to ask the record industry to take 20% of nothing. The problem is that audio advertising has almost exclusively been a local business. There is almost no national audio advertising – internet or otherwise.

    To NatC

    Actually on the internet for most of this stuff the royalties for american created content are the same world wide although some of the issues are being worked out since recording copyrights (not song copyrights) are a new revenue stream for american record companies. SoundExchange – the relevant royalty collector on behalf of the performance copyright holders (as opposed to ascap, bmi and sesac for song copyrights) is only a few years old and still figuring some of this out. But just to be clear, a french only rights grant doesnt give you the right to broadcast content into america or do business in america – like selling ads. Given the somewhat borderless nature of the internet this is a difficult concept, but is legally well established.

    to david

    The grandfathering of terrestrial broadcasting does suck. If they had to pay this they too would be significantly damaged. But I dont think any gradfathering would apply to last.fm if viacom acquired since it is a digital service, but more importantly since it is an interactive service, so in truth these rates dont apply. They are required to negotiate rates with individual labels, which in fact they have recently done with EMI and Warner.

    To Ted

    These rates are not being set by the RIAA, but by the US Copyright Office. The government listens to all the arguments (at least in theory) and sets a rate. So this has nothing to do with monopolies or cartels or anything like that.

  9. I wonder how this effects Last.fm since they are partnering with Warner Music (http://www.downloadsquad.com/2007/02/08/last-fms-music-library-is-about-to-get-a-lot-bigger/).

    If Warner is willing to make their entire catalog available then it will be in their best interest to keep the site going.

  10. This latest news is bad news of course, for everyone. I recently read that MTV doesn’t even pay royalties on the videos they play. If the royalty rates were reasonable that would be one thing…if they can find a formula that doesn’t overwhelm webcasters that’s fine, but the royalties they want are extreme, unfair, and help destroy what’s left of the music “business”. One guy just posted on Digg that he worked at a terrestrial radio station that had to pay $400/song played, simply outrageous! No wonder there’s so damn many commercials…and no wonder I no longer listen to radio anymore!!! Anyways, the RIAA should focus on eliminating middlemen and lowering CD prices…and they better enjoy their lawsuits while they can, because lots of file-sharers are making the switch to encrypted file-sharing solutions like GigaTribe, which keep people out of the radar ( http://www.gigatribe.com ).

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