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Trade Press

SoundExchange Open to Bill Targeting Small Webcasters
Communications Daily/Washington Internet Daily, May 3, 2007

 The Internet Radio Equality Act (HR-2060) goes much farther than needed to keep small webcasters online, SoundExchange Exec. Dir. John Simson told a Wed. Future of Music Coalition event. His remarks are the first indication SoundExchange isn't focused solely on shielding the Copyright Royalty Board (CRB) decision raising webcasting rates (WID April 30 p1). Simson and others fought the characterization that the webcasters in the CRB proceeding were Davids to SoundExchange's Goliath, accusing some webcasters of hassling artists on the stand.

   The "tiered system" created by 2002's Small Webcasters Settlement Act could be a template for revised rates, Simson said -- "I don't have a problem with it" -- but that's a policy issue, not the CRB's legal issue. He agreed the new rates would hurt the 49 small commercial webcasters from the proceeding, vowing negotiations, but said 25% don't comply with the law and many don't even play non-mainstream music, their supposed raison d'etre. A similar percentage of the SaveNetRadio Coalition doesn't pay SoundExchange either, Simson said. The statutory license has stifled creativity, distracting artists from going directly to webcasters and likely offering lower rates than the CRB set, Simson added, pointing to Soma.fm as a niche webcaster that could benefit from private deals.

   HR-2060 by Reps. Inslee (D-Wash.) and Manzullo (R-Ill.) is a "landgrab" for large webcasters, who would get back $12 million from 2006 and a new rate 70% below those expiring, Simson said. He said the 7.5% satellite royalty cited by bill backers as appropriate for streaming "has no precedent" and was simply a transitional rate set for an industry that hadn't even started. Small webcasters account for 2% of royalties paid, he added. Platform parity may not make sense because of differing economics and regulation, Simson said. An FCC license costs more than "someone turning on servers... or launching satellites" and different platforms make more per listener, with satellite leading. Subscription webcasters will have 60-80% profit margins under the new rates even charging "very modest monthly fees," he said. "I wish we were a profitable business," joked XM Exec. Vp Eric Logan.

   The idea that webcasters were "out-litigated" at the CRB "isn't exactly the reality... Nobody got beat up on" and everyone had expensive lawyers, said Patricia Polach, assoc. gen. counsel for the American Federation of Musicians. Webcasters played "hardball" at times, requiring some artists testifying to reveal their music-related income going back 7 years for discovery purposes, she said. Live365 CEO Mark Lam spoke from the audience, complaining that both sides at the CRB required too much discovery but blamed SoundExchange for demanding "boxes and boxes [of Live365 information] they probably never looked at." He wasn't happy with his Digital Media Assn. lawyers, Lam added.

   The rate debate is "not purely a function of small versus large," said Pandora Pres. Joe Kennedy, putting his firm at 3rd or 4th in royalty payments, having grown so quickly it never paid the small-webcaster rate. "There is no exaggeration -- we will not continue to exist" under the new rates. Simson noted Pandora's intent to launch in the U.K., citing rates nearly identical to those the CRB mandated. There won't be "any appreciable increase" in payments for noncommercial webcasters, including 95% of NPR stations, Simson said, acknowledging that "a handful" of such stations with large music audiences will be in trouble. The 27 subscription services in the proceeding can "easily afford" the new rates, as can the 294 simulcasters; of the 106 commercial webcasters, "a few... may have some trouble" but SoundExchange will negotiate with them, he said.

   Panelists challenged Simson's claim that radio play has little promotional value. Nine in 10 terrestrial radio listeners are "passive," not buying music after listening, Simson said: "We don't sell 250 million CDs a week." Internet radio audiences have skyrocketed but CD sales still are falling, as listeners simply want "ear candy... The consumption is now the listen." Record labels would disagree on the promo/sales relation, Logan said. Certain markets, like country music, depend heavily on touring driven by radio play, making CD sales a misleading indicator, the Country Music Assn. board member said. Independent musician Mike Holden said his music has enjoyed a "huge increase" in iTunes downloads since last fall, when Pandora added his music, and though downloads are a small percentage of overall sales, "I know that it's coming from Pandora." If Pandora folded he would resort to "hustling" with hordes of webcasters to get his music played, Holden added.

   Terrestrial radio's exemption from royalties unites everyone, Polach said. Broadcasting was "entrenched" when the sound recording right was enacted in 1972, she said: "People think the RIAA is strong... but the NAB is really strong." A separate problem is missing reciprocal rights for artists whose music is streamed abroad and who are denied royalties because the U.S. doesn't send royalties abroad, she said. Simson said that costs U.S. artists "hundreds of millions" of dollar a year. -- Greg Piper

   Future of Music Coalition Notebook...

   Rep. Doyle (D-Pa.) stopped short of endorsing the Internet Radio Equality Act (HR-2060) at a Wed. Future of Music Coalition event, but said he fears new webcasting rates by the Copyright Royalty Board "went too far." Musicians in his district worry about the new rates' effect on their craft, and Doyle believes "in the long run [too-high rates] would hurt most musicians," he said. There must be a way to pay musicians for streaming music "without killing the goose that lays the gold records," he said. There is "no way to get government out of the music and telecom industries even if we wanted to," Doyle said, proposing a broad legislative agenda addressing them. Indie musicians' success through online sales and webcasting -- where indie artists compose 40% of played music -- doesn't argue against govt. help, Doyle said: "There's limitations as to how far you can get going that route." Indie artists get exposure via ads and TV shows like Grey's Anatomy, but mainstream radio, only 10% independent, neglects them, he said. The Telecom Act prodded consolidation Doyle finds "disturbing on a number of levels," making it more likely that a Denver-based radio company won't provide local news at a Pittsburgh affiliate, he said. "New and different music" is being stifled, he said. Of the proposed XM-Sirius merger, "if both are at full capacity right now, what artists and what music is going to be cut to make room for Howard Stern at XM?" he said. Community groups and schools want to create low-power FM stations but the McCain-Cantwell bill hasn't seen House action, he said, endorsing small groups' right to run low-power digital stations if big broadcasters can do so without interference issues. College students and researchers may not get venture capital without net neutrality rules, which is a free-speech issue, Doyle said. FCC language on net neutrality in the AT&T-BellSouth merger sounds fine, and though neutrality advocates are "on the side of the angels... the devil is in the details," which he'll keep an eye on to protect consumers, Doyle said. The U.S. should consider adopting a Canada-style agency to promote music and make it easier for DJs and small musicians to "take time off day jobs" to build audiences, Doyle said. The Canadian agency has created a "vibrant cultural renaissance in Montreal," he said: "I want to explore such concepts" stateside. -- GP

   Patents and trademarks are different from copyrights for piracy purposes, CEA Pres. Gary Shapiro said at the event. He saluted deceased MPAA chief Jack Valenti, who learned from the VHS fight and welcomed the DVD format, which Valenti "hashed out" with him. Shapiro voiced hope that the RIAA would mirror the MPAA's change of heart and stop suing suspected music infringers, agreeing "we shouldn't have been so broad in our opposition." He added: "Being entitled to sue doesn't mean you should." Asked whether CEA members aggressively enforce their IP, Shapiro said they don't sue over every potential infringement: "You don't want people upset with you, or it's trivial, or whatever." Music creators don't lose their actual product if people download illegally: "Yes, maybe they lost one sale." But such downloading could stimulate more sales, if people "have any sense of ethics," Shapiro said, citing his own son, who used to illegally download "a ton" but bought a proportionate amount of music as a result of hearing new music. Shapiro said he believes in right and wrong but "give people credit. They have a sense of ethics" that shouldn't be legislated. -- GP

Copyright Office Plans to Fix 'Mess' with Clean-Slate Approach
Washington Internet Daily, May 3, 2007

Stripped of its authority on some issues and never happier, the Copyright Office (CO) plans to "take a fresh look at every issue" left unresolved in 2006 -- namely orphan works and Sec. 115 licensing reform, Assoc. Gen. Counsel David Carson told a Future of Music Coalition policy event Wed. He defended the work of the Copyright Royalty Board (CRB) on webcasting rates without endorsing its decision and encouraged aggrieved parties in the CO's ringtone/compulsory license decision last year to take up the matter with the CRB.

   "We deny any responsibility" for the CRB decision, and the concurrent howls of criticism from webcasters, Carson said to laughs. The CRB's predecessor, housed under the CO, set rates in 2002, and listening to reactions to the new rates now, "it's like deja vu all over again," he said. Webcasters then claimed they would face bankruptcy and Rep. Inslee (D-Wash.) introduced a bill to change a regulatory decision. But today's CRB is "highly qualified," including judges with backgrounds in economics and bankruptcy, and even some webcasters agree judges made the right decision under the mandatory willing buyer/seller standard, Carson said. If the CRB decision "drives some webcasters out of business that doesn't necessarily mean Congress should intervene," just as webcasters don't get a regulatory break on utilities payments. But the CO agrees with webcasters that a better standard than willing buyer is "fair market value," which is endorsed in Sen. Feinstein's (D-Cal.) Perform Act, he added.

   To calm webcasters, RIAA and SoundExchange should consider asking Inslee to amend his bill to include broadcasters under the statutory license, which would "dwarf" royalties paid by webcasters, Carson said. "We think there's sympathy for this idea in Congress" -- effectively nixing the broadcast exemption from royalties -- but perhaps not enough for passage, he said.

   The CO's proposals to fix the Sec. 115 licensing "mess" have a bad track record, indicating to Carson that wise but broad changes are unlikely to pass muster with varied interests. He called its initiatives the past 6 years "futile attempts" on a statute that defies understanding. The proposal least likely to be shot down across the board is letting record labels do the sublicensing for rights that currently are handled mostly by publishers, and giving labels a safe harbor so they're not on the hook for unpaid royalties, he said. But "it's not at all clear to us whether there's the political will to do it" and the Digital Media Assn. has most of its "political capital" this year tied up in webcasting rates, he added.

   Notices of public rulemaking will probably come out in the next 2 weeks on these issues, and a June roundtable is likely, Carson said. The CO isn't likely to revisit its ruling that ringtones fall under the compulsory license, so Carson told publishers to ask the CRB for a hearing. Ringtones fetch a higher market price than full-track downloads, so it's conceivable the CRB would see them as derivative works that require separate licensing, he added. - - Greg Piper

Lack of Radio Airplay has Musicians Turning to Web
Technology Daily, May 2, 2007

Up-and-coming artists are making inroads in American culture by furnishing tracks for hit television shows like ABC's "Grey's Anatomy" and attracting fans on the Internet, but "the one place they're not getting exposure is through mainstream radio," Rep. Mike Doyle told a music policy conference Wednesday. Only about 10 percent of music on traditional radio stations is independent, while that number is closer to 40 percent on Web radio services, the Pennsylvania Democrat said at the Future of Music Coalition's annual summit. Rapidly merging media outlets add to the problem, and he finds the trend "disturbing on a number of levels."

Corporate consolidation further homogenizes what is transmitted over the airwaves and has reduced the diversity and independence of the broadcasts, he said. "We have to talk about how we make sure that innovative and aspiring musicians have potential to earn a living from their art," he added.

Doyle, vice chairman of the House Energy and Commerce Telecommunications and the Internet Subcommittee, wrote a letter to the FCC in February, urging the agency to carefully consider the unintended consequences of loosening limits on media ownership.

He said another factor that could hamper musicians' exposure is a recent ruling by the Copyright Royalty Board that would change how webcasters pay royalties to recording labels. The March decision set a uniform fee structure that applies retroactively to 2006 and rejected a percentage-of-revenue model proposed by some stakeholders.

Doyle said musicians should be paid for their work but worries that the policy shift "might cause some webcasters to turn off their music streams," silencing new and undiscovered artists. The rate changes "may have gone too far," Doyle said, but he stopped short of endorsing a bill introduced by Rep. Jay Inslee, D-Wash., that would reverse the royalty board's decision.

Congress must ensure compensation for everyone in the music creation and distribution chain without "killing the goose that lays the gold records," he said.

The ongoing debate over network neutrality, the concept of mandating equal treatment of Internet content, is another topic that interests Doyle. "Without a net neutrality fix, researchers at Pitt [the University of Pittsburgh] or kids in a dorm room at Carnegie Mellon" might not get venture capital buy-in for potentially innovate technologies, he said.

There are various ways the federal government can level the playing field, Doyle said. One good example is the concession AT&T made to win FCC approval of its merger with BellSouth. AT&T pledged not to prioritize its Web content and services or degrade the high-speed offerings of competitors using AT&T's network.

"In my opinion, net neutrality advocates are on the side of the angels in this debate," Doyle said. "But as in so many other public policy debates, the angels and devils are in the details." - By Andrew Noyes

'Rationality' Will Prevent 'Slow Death' from Webcasting Rates, Pandora Insists
Washington Internet Daily, May 2, 2007

 Between Hill lobbying Mon. and Tues. against new webcasting rates, Pandora officials asked fans to be calm and not villainize SoundExchange for fighting legislation overturning the Copyright Royalty Board (CRB) decision. The freewheeling but laid-back tone of nationwide "town halls" held by the customizable Internet radio company (WID Nov 27 p4) turned heated at a D.C. club Mon. night, as fans pressed Pandora founder Tim Westergren to talk more policy and a lawyer for indie labels criticized the company's doom & gloom forecasts.

   Webcasters and their label and artist allies met with legislators Tues. to seek support for the Internet Radio Equality Act (HR-2060) by Reps. Inslee (D-Wash.) and Manzullo (R-Ill.). It would replace the CRB's rates with "parity" -- the 7.5% revenue rate used by satellite radio. An Inslee spokeswoman told us the bill has 24 cosponsors, "and I believe [Senator] Wyden will drop a companion... later this week." SoundExchange has called the bill a $50 million giveaway to "mega-corporations" like Clear Channel and Microsoft (WID April 30 p1). The action continues today (Wed.) at the Future of Music Coalition Policy Day, featuring speakers from the Copyright Office, RIAA, SoundExchange, BMI, CEA, Pandora, XM and Microsoft.

   "We're in sort of a battle for our lives," Westergren had told a gathering of about 40 fans that doubled by night's end. The $500 per-channel requirement in the CRB rates has been misunderstood by some webcasters, he said, adding that he doubts it means separate fees for Pandora's thousands of user-created streams: The new rates themselves are the economic hurdle.

   Pandora is "solidly in the big boy camp," as the 3rd- most-popular webcaster in the U.S., Westergren told us, responding to SoundExchange's corporate-windfall argument. But it's "losing money hand over fist right now," and breaking even in 1-2 years would require better "marrying" of advertisements to listeners than the company can pull off now. Internet radio has low margins, and abiding by the CRB rates would frustrate creation of a "musician middle class" by underexposing small artists as webcasters close shop, the former musician said.

   Fans pressed the company to explain how its business model can work with the new rates and possible industry consolidation, illustrated by Viacom's rumored $450 million offer for music recommendation service Last.fm. Periodically they shouted at Westergren, asking whether he planned to put Pandora on the block. Not at all, he said: "We've got a big business to build and an industry to turn upside down." Profitable? "Far from it, but it's by design," he answered, noting that after its first VC round, the company paid back millions to employees who worked free 2-1/2 years. Have you considered partnerships with hot Web companies like Facebook? "We are all ears for any ideas you have," Westergren said. The company is working on helping bands "connect the dots," identifying places with the most listeners who have given "thumbs up" to their music on Pandora, to help plan tours. But Westergren told a fan the company hasn't created a similar mashup of listeners and congressional districts to aid lobbying. The SaveNetRadio Coalition did manage to "shut down the whole fax infrastructure" on Capitol Hill in its CRB response, he crowed.

   Pandora is hesitant to sign private deals with labels to keep streaming, Westergren said. He suspects the major labels pushed for the higher rates to spur private deals, under which webcasters would probably get lower rates but artists wouldn't get any statutorily-guaranteed payments. The DMCA gives 1/2 of royalties up front to artists: "I can't imagine why an indie musician would support" the CRB decision, he said.

   The company isn't worried about a "slow death" and hasn't crunched numbers to figure its life expectancy under the new rates, Pandora Pres. Joe Kennedy told us, because "we continue to believe that rationality will prevail" and Congress will reverse the CRB. SoundExchange's advice to webcasters that they seek new revenue streams to afford the higher rates -- presumably through more aggressive advertising on-site and in-stream -- is patronizing, he said. Internet radio is a "completely different context" than satellite or terrestrial, "as close as you can find to perfectly competitive" because of conflicting online demands for users' attention, much of it illegal in the form of P2P. "In that environment you can't jam in 15 minutes of commercials" and expect the audience to stay, Kennedy said. Internet radio has no lack of federal obligations compared with satellite and terrestrial radio, such as the Web-only Sec. 114 limitations on song play, he added, dismissing arguments that the 2 competing formats face indecency and diversity rules that Internet radio doesn't.

   Webcasting Crucial to Artist Market Share?

   D.C. lawyer Nancy Prager, who represents indie labels and artists, emerged as SoundExchange's biggest defender at the gathering. Initially telling Westergren to "stop beating around the bush" and explain the rate predicament to the uninformed, periodically she challenged his characterizations of the ruling's effect on webcasters and artists: "You skirt very close" to false statements. It takes artists 2-3 years to make money touring, and webcasting royalties are essential to staying afloat, Prager said, adding she's "not a big fan of the RIAA" and favors "tiered" rates -- lower for small webcasters. The May 15 effective date of the new rates isn't Armageddon, she said: "Just wait" for "last minute deals" between webcasters and labels that fall below CRB rates. Westergren said Pandora isn't in royalty negotiations with any labels but agreed that fans shouldn't cast SoundExchange as the enemy.

   Artist representative Terry Irons challenged Prager's sunny predictions. Several webcasters shut down during the 6-month gap between 2002's webcasting rates and passage of the Small Webcasters Settlement Act, and "we don't want to see another lag" if the rates aren't scrapped by Congress, she said: "If they're not in existence [artists] won't be paid." Irons told us later her artists' marketing budgets would rise sixfold if several webcasters again went out of business, and "retroactive royalties don't make up for loss of market... I don't want my artists misled" by SoundExchange.

   Prager told us later she didn't object to webcasters' seeking lower rates, but "I just want them to be genuine" about their 2002 victory and make realistic predictions for the fallout this time. Her clients are concerned about falling rates, but they "don't want to be Metallica" -- earning a reputation as "anti-technology" because they're vocal about payment for their work, just as Metallica was criticized for its early anti-P2P advocacy.

   Md. indie artist SONiA told us she was scheduled to visit Md. delegation members -- Sens. Cardin (D) and Mikulski (D) -- to seek their support for the Inslee bill and a Senate companion. She attended a Rayburn Bldg. briefing with webcasters in the morning and performed after Westergren's talk Mon. night. "The Internet has been excellent for me," garnering fans worldwide who listen to her work through NPR's stream and see her on world tours, SONiA said. Artists in the U.S. suffer more from lack of statutory payment for live performances -- the international standard -- than low webcasting royalties, she added.

   Live365 CEO Mark Lam said webcasters secured as least a dozen new co-sponsors for the Inslee bill in roughly 80 Hill visits Tues. organized by the Digital Media Assn. He visited 7 House offices including Va., N.Y., Hawaii, Ore. and Mich. and plans to keep lobbying through the week. The "sole survivor" among webcasters from the dot-com bust, Live365 carries streams by independent artists and DJs, and could lose 80% of its customers if the rates stick, he said. Under current rates, it has been "very difficult to make a profit," Lam said, estimating Live365 pays 1/4 of revenue in royalties now and would pay 70%.

   "We have busted our chops" to secure advertising, joining with Yahoo, AOL and Microsoft to pay for a 3rd-party agency to sell ads, Lam said, responding to SoundExchange's business arguments. "We stay up nights thinking of how to get more advertisers," and even in the burgeoning online ad market, Live365's half-year financial results were only slightly better than the previous period's, he said. "We should be laughing all the way to the bank" if improving ad revenue were as simple as SoundExchange implies. -- Greg Piper