A Copyright Royalty Board decision last week chose to adopt a strict new fee structure proposed by a collection body of the RIAA for all web streams, far out of proportion to the fees paid by other media (broadcast, satellite radio) and previous paid by radio streams. Will the higher fees benefit musicians? Not if you ask the streamers; numerous arguments online suggest the cost of the new fees would actually exceed income, from everyone from small streams to enormous ones, and could threaten services like Pandora.

For additional background:
Webcast royalty rate decision announced at the Radio and Internet Newsletter, which argues this royalty alone (on top of publishing royalties) could easily exceed income for the average webcaster
Copyright Royalty Board Releases Decision – Rates are Going Up Significantly at the Broadcast Law Blog

And on the Pandora blog:
RIAA’s new royalty rates will kill online radio!! and More on the Copyright Ruling

I got the chance to follow-up a recent interview with Pandora founder Tim Westergren, also published today. His outlook, like many other streamers, is bleak, and he explains why.

CDM: We’ve heard lots of estimates and analysis about what the new fees would add in cost, proportionally. Can you quantify what the new rules would mean for Pandora?

TW: For us, tens of millions of dollars. It’s really over the top.

It impacts everybody the same way, proportionally. The smaller you are, the less you’ll pay just because you don’t stream as many songs … but it’s going to hit them just as hard.

CDM: We talked before about having a reasonable statutory rate for internet radio. What happened? And why is there suddenly this enormous cumulative rate?

TW: The real problem goes back to 1998 when the DMCA was negotiated. The RIAA was able to get a different standard inserted for Internet, for the establishment of rates for internet radio. It’s different from broadcast, different from satellite radio. There’s an underlying legal standard called willing buyer, willing seller, which is only applied to Internet radio. It laid the foundation for this kind of really disproportional ruling. That’s where this came from.

This is a fee that the broadcasters do not pay at all, and the satellite providers pay one fifth of this. So it’s this bizarre inequity that has no justification. It’s a reflection of lobbying influence.

CDM: What’s Pandora doing in terms of combating the ruling, or what can interested users do?

TW: For a company like ours, and a business like ours, which is young and relatively less powerful than the NAB or the RIAA or the satellites even, it’s going to come down to listeners — 70 million people who listen to internet radio standing up and saying we’re not going to let this happen. We’re really hoping we can educate and mobilize internet radio listeners. It’s musicians, too, hopefully. This does not help musicians. On the face of it you could say they get paid more per song, that’s good for musicians. That’s true in a complete vacuum. Shutting down internet radio is a disaster for musician — particularly indie musicians. It’s the only place they get played.

CDM: Right, and it does seem like it shuts down this channel, so that the economics only work for other distribution media.

TW: It’s saying to the public, we will not let you listen to internet radio. You will be forced back into the broadcast and satellite world exclusively. I can’t imagine a man, woman, or child who sees that as a bright future.

CDM: Some people have said this will simply drive business offshore, but you’ve noted that that’s a misconception. So no service will be able to legally broadcast over the Internet to the US without this fee structure?

TW: The DMCA is only for people who reside in the US. Pandora is only legal for US listeners. And there is no license that allows any webcaster to stream internationally, unless they have agreements with the actual labels themselves. But anyone streaming music around the world is not doing it legally, unless they have complete licenses, and to my knowledge nobody does yet. But that will be a different framework if that does happen; the DMCA won’t apply there.

CDM: Would there be a way to create just that kind of international framework?

TW: Having one statuatory rate is a good example, because that is what allows companies to be born, because no small company can sign 15,000 agreements with one company. It’s an interesting condition overseas: it’s a very expensive, time-consuming process to get rights, which is absurd. Those rights would gladly be given by labels if they could get out of there own way. I don’t think you’d meet a single musician who wouldn’t be happy to have their music played on online radio anywhere in the world, even without being paid. They just want it up there. I’m a musician myself; I can tell you definitively, I’d be happy to have my music played on any music station without being paid a nickel. I’m happy to pay something — I’m not trying in any way to shortchange musicians; those are my people. I want to do it in a way that’s consistent with reasonable business practices.

“A Lose for Everybody”

CDM: It seems like having burdensome rates for Internet radio would hurt traditional radio stations, since many of them have been launching their own streams, as well as the labels themselves since this channel gets shut down.

TW: It’s a lose for everybody. Not a single winner emerges from that. They’re all wanting to move online; broadcasters have big plans to move online. This is a terrible precedent for them.

CDM: What’s Pandora’s plan, then, in the wake of this new decision?

TW: We’re sort of taking this day by day. They may easily come a point where it’s irresponsible of us to continue streaming, because we’re accruing liability — it’s not fair to our investors. If we think it’s heading the wrong direction, I think we have to stop. We have to turn it off, shutter. At some point you have to make a reasonable calculation to cut your losses.

The problem is, no industry can survive when it’s constantly under threat of some, like, tripling of its basic costs. So any temporary thing doesn’t change the fundamental problem. This is kind of our day of reckoning. Either Congress is going to let this stand and we’re going to stop Internet radio, or they’re going to fix it so that every radio company isn’t under constant threat of bankruptcy. You’ve got a bunch of companies over the last four or five years that started building a business, and now, suddenly, because of an oligopoly, a small collection of power … their business is being turned off. And that’s not a reasonable condition to run a business.

CDM: You talked about lobbying efforts — by whom? The big broadcasting companies? The RIAA?

TW: It’s the RIAA doing it. The RIAA answers to a very small collection of large record companies. I don’t have a particular issue with large record labels, but this is so misguided and counterproductive — even for their own interests. That’s the absurdity of this whole thing. There’s no plan at all: jack it up as high as you can and let’s see what happens because we don’t really understand this ourselves.

Turning Point for Long-Tail Streaming?

CDM: There was a similar uncertainty about online radio a few years ago; is it possible we’ll find a fix now as we did then?

TW: There’s been some misleading stuff said in the press, like they’ve said “all this happened four or five years ago and everybody said they’d be going out of business and we are.” Well, it did happen five years ago, and the reason we are here is because the rates were knocked back to a reasonable level. So that’s completely disingenuous.

70% of the music that plays on Pandora comes off of albums whose sales rank is 10,000 or worse on Amazon.com. We’re playing an enormous amount of music that’s comfortably down the long tail. That music will never again be heard on radio, period. No one will play it.

The hope that I hold out is that when rubber really meets the road, all the folks involved here — the labels, and artists and songs — when they realize just the impact this will have, they’ll back away from the edge. It’s one thing to say, hey, man, I’m going to make the highest price I can — that’s an easy rhetoric. But this demonstrates a real naivety about this digital music universe, to push for that so blindly.

For the original interview with Tim, and a sense at his vision for Pandora as a way of benefiting indie music, see:

Pandora’s Founder on Decoding Taste and Promoting Indie Music