On the Front Lines of the Customer Revolution: Part 2

The Internet Radio Royalties Battlefield

April 18, 2002

We call your attention to an easy-to-miss skirmish being waged in the U.S.—the battle over Internet Radio royalties. The existing broadcast radio and music label cartel is trying to put Internet radio out of business, depriving customers of a great deal of diversity on the airwaves.

Will Customers Win?

There are a number of battles being waged on the front lines of the Customer Revolution in the Spring of 2002. Be alert! The outcome of these skirmishes may impact your future--both as a consumer and as a business.

We predict that customers will win each of these battles eventually. But it's possible that we may see some setbacks along the way. The customer revolution is being waged on many fronts simultaneously. Last week, I addressed the issue of cell phone number portability(1). Here is the second encounter that I see taking place in the U.S. this Spring:

Will Internet Radio broadcasters get to play by the same rules as traditional broadcasters, thus preserving diversity while enabling interactivity?


Those of you who have read my book, The Customer Revolution, may recall the discussion about the explosive growth of Internet radio. From its inception in 1998/1999, Internet Radio--the broadcasting of music and other special-interest programs via the Internet--has grown exponentially. The traditional broadcasting network had taken 80 years to reach the number of stations that exploded on the 'Net in the first nine months of 1999!

Of course, the number of listeners to Internet radio is a tiny percentage of those who listen every day to conventional radio. But what's healthy and customer-friendly about Internet radio is the incredible diversity that it engenders. While commercial (and even public) radio programming is becoming more and more homogenized, Internet radio provides a lavish smorgasbord of niche stations, each catering to very particular tastes and to micro-audiences. But, now, that diversity is in serious danger.

Why Should Internet Radio Stations Pay Higher Royalties than Conventional Radio Stations?

As I explained in The Customer Revolution, radio stations pay lower royalties on the music they air than do record labels that sell music. Why? Because playing a song on the air isn't deemed to "replace" a sale (rather, it's thought of as a form of publicity). And radio stations don't publish their playlists ahead of time in sufficient detail for consumers to routinely record specific tracks or pieces of music. Both Webcasters and Radio broadcasters currently pay a royalty of 4 percent of their revenue to the rights management organizations (such as ASCAP and RMI) that represent the composers and music publishers. Radio broadcasters have not been required to pay an additional royalty to the record labels for the "use of sound recordings" because the record label owners recognize that radio airplay is a form of publicity, not piracy. Yet, those same record labels are arguing that Webcasters--Internet radio channels--should pay a per-performance royalty of 15 percent of revenue or a comparable fee (for those stations with minimal or no revenues). This would bankrupt Internet radio stations. And it's not in consumers' best interests.

Why are Internet radio stations required to pay royalties to record companies when broadcast radio stations don't have to? According to the Digital Millenium Copyright Act, record companies are entitled to a royalty when their music is played over Internet radio because the digital music can be more easily copied and pirated than would be the case if you recorded an analog broadcast on tape.

According to an article by Amy Harmon, published in the New York Times on April 1, 2002, ("Royalties Proposal Casts Shadow over Thousands of Webcasters"), "the U.S. copyright office has until May 21st to revise or approve" a proposal that has been under arbitration for several months. The Webcasters countered the record labels' 15 percent royalty demand by offering to pay a royalty of 5 percent of revenues for use of the recordings. "In February," Harmon reports, "the arbitration panel proposed a formula of 0.0014 cent per song, per listener. Conventional broadcasters who stream simultaneously on the Internet would pay half that rate. The rate falls between what the two sides asked for. But, because there is no option to pay a percentage of revenue, and because so few Webcasters are making money on advertising, it works out in some cases to far more than a station's total revenue."

This proposed settlement appears to me to be highly leveraged in favor of the current power structure in the music industry--the record labels and the broadcast radio stations who rely on them for advertising, promotions, and free music. This is an incestuous, closed, and increasingly homogenized industry, with many radio stations being owned by the record labels themselves.

Internet radio offers a wonderful alternative for musicians to gain airplay and to reach fans. And it offers consumers the ability to find the music they prefer. Internet radio stations tend to have very small, niche audiences. So a per-listener form of remuneration probably does make sense as long as it's applied equally to both the broadcasters and the Webcasters. I believe that a formula that is also pegged to revenues makes sense. Royalties computed based on number of listeners and revenues would be the most equitable approach. That way, the thousands of hobbyist sites that are providing a public service by providing niche programming would be able to continue operation, as long as they are hosted on Webcasting service providers, like Live365.com, who will pay the required royalties as they do today.

But if Webcasters have to pay royalties to music labels, than Broadcasters should too--in proportion to the size of their audience and their advertising revenues.

If the current proposed settlement goes through, it will mean the death of niche Internet radio stations. Instead, the Internet airwaves will be overtaken by the same homogenized behemoths that already rule our conventional airwaves. Instead of diversity and community, we'll get more of the same.


Next, I will bring to your attention another battle being waged on the Customer Revolution front. Stay tuned.

Royalties Proposal Casts Shadow over Thousands of Webcasters , Amy Harmon, The New York Times, April 1, 2002.

1) See " On the Front Lines of the Customer Revolution: Part 1: The Phone Number Portability Skirmish, " April 11, 2002.
" On the Front Lines of the Customer Revolution: Part 3: The Potential of Broadband Wireless, " April 25, 2002.

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