If the RIAA and its member labels continue their current aggressively adversarial approach, they risk losing a royalty right that could be worth billions of dollars to them in the long run. (Part 1 of a two-part editorial)

BY KURT HANSON
The tide of public opinion is clearly turning against the RIAA in its efforts to collect a significant "sound recordings performance rights" royalty for the music played on Internet radio.

And it's time for the RIAA — or, failing that, the record labels it represents — to take notice of this and respond intelligently. Otherwise, the record industry may win this short-term battle but lose a far bigger long-term war. And that would be a loss that could cost the music industry billions of dollars of future revenue in coming decades.

The record industry is losing
the battle for public opinion
Since May 1st's "Day of Silence," on which hundreds of Internet radio webcasters turned off their music streams to draw public attention to the issue, almost every major national news publication has done a story on this debate — and in almost every case, the coverage has been far more sympathetic to the side of webcasters.

The issue even made the editorial page of such respected publications as the Los Angeles Times and the San Jose Mercury News — again, with the editorial writers coming down on the side of webcasters.

It's not hard to understand why the webcasters' side is getting better press. Internet radio is giving valuable exposure to dozens of genres of music (e.g., folk, electronica, blues, traditional jazz, Broadway, bluegrass) and thousands of artists that don't get exposure on the AM or FM airwaves. Journalists clearly see, even if the RIAA claims not to, that a vibrant Internet radio industry should be good for the music industry.

Even more to the point is this fact: The CARP-recommended royalty rate, at $.0014 per "performance," works out to about $.02 per listener-hour. In today's advertising environment, webcasters are able to bring in, if they're lucky, about $.01 per listener-hour. Thus, the proposed size of the royalty is ludicrous on its face: Composers get a royalty of 3% of revenues, yet the CARP recommends that the performers (and labels) should get a royalty at a rate that is currently about 200% of revenues!

And when it's pointed out that the retroactive royalty obligation due under the CARP recommendation would work out to more like 500% of their revenues for the retroactive period (because revenues per listener-hour were even lower during that period) and would thus, logically, bankrupt most webcasters, all the RIAA responds with is "They're just crying wolf." That's not a credible response!

Now Congress is getting
into the act as well
Now, as you know, Congress is getting into the act as well. Two weeks ago, 20 members of the U.S. House of Representatives, led by Congressmen Jay Inslee, Chris Cannon, and Rick Boucher, sent a letter to the Librarian of Congress, urging him to consider the legislative intent behind the DMCA and its statutory royalty rate — which, they point out correctly, was to encourage the growth and diversity of the medium, not kill it.

Last week, Register of Copyrights Marybeth Peters (pictured at left) and General Counsel David Carson invited several dozen industry players (one example pictured below) to participate in what she described as a virtually unprecedented day-long roundtable discussion of the related recordkeeping requirements.

And this week, it's getting even more serious: The full Senate Judiciary Committee (chaired by Senator Patrick Leahy, pictured below) met on Wednesday to discuss issues revolving around the "right" royalty rate for Internet radio. And the House Subcommittee on Courts, the Internet, and Intellectual Property is rumored to be planning a similar set of hearings next month!

Still, the RIAA is hanging tough. "We wish we could get even more" is the position that the record industry's trade association has been, until recently, officially taking.

In her testimony, RIAA chairman Hilary Rosen downgraded that to essentially "We're happy with the CARP recommendation." Since the recommendation will, in fact, bankrupt most webcasters, that's not good enough!

(CONTINUED BELOW)

[an error occurred while processing this directive]

(FROM ABOVE)

"Call off your dogs!" It's time for the
record industry to rein in the RIAA
In the copyrighted words of a wise sage, Kenny Rogers, "You gotta know when to hold 'em, know when to fold 'em." The RIAA is taking an untenable position — and it's time for either (A) that organization to adopt a new stance or for (B) the record industry to object to the position that their trade association is taking.

Here's the heart of the problem: If the RIAA wins this battle, I believe they will lose a much bigger war, with losses that could eventually cost the record industry billions of dollars.

The San Jose Mercury News (here) highlighted the risk most vividly: "If the [Copyright] Office doesn't slash the royalty, Congress should consider rescinding it."

Think what that means!

The royalty right could eventually
be worth BILLIONS of dollars
Between the Digital Performance Right in Sound Recordings Act of 1995 (“DPRSRA”) and Digital Millennium Copyright Act of 1998 (“DMCA”), the record industry won the right to a royalty for music delivered via Internet radio.

However, the reasoning behind that royalty is clearly arguable: "The music is being transmitted in digital form. 'Digital' means perfect copies. Perfect copies mean that record sales are at risk." But that logic is specious! In reality, Internet radio is streamed, not captured as a copy, and the quality of most webcasters' streams is in any case nowhere close to the quality of a CD (or even FM).

Nonetheless, with virtually no webcasters even existing back when the laws were passed to object, the RIAA slipped the flawed argument past the Congress, got the laws passed, and got the royalty right established.

And this could be an extremely valuable royalty! In the next few years, as ubiquitous wireless broadband Internet access rolls out around the world, a huge percentage of radio may be delivered in this manner.

In fact, eventually, although perhaps not until later in our lifetimes, virtually all radio programming may be delivered via the Internet! (Or whatever the analogous transmission mechanism is called two or three decades from now.)

And if the labels retain the right to a sound recordings performance royalty of even a few percentage points of that future radio industry's ad revenues, and if radio evolves into primarily Internet-based delivery, that right could eventually be worth hundreds of millions of dollars per year!

The worst-case scenario:
RIAA gets what it's asking for
Now imagine what happens if the Librarian of Congress, Dr. James Billington (pictured below), announces next Tuesday that he and the Copyright Office have decided to accept the CARP recommendation or only modify it slightly.

First, thousands of webcasters will immediately go "off the air" and/or out of business, as the retroactive royalty due 45 days later would, as I pointed out earlier, bankrupt them. Additionally, most broadcasters will pull down their simulcasts from the Internet, as the razor-thin margins currently associated with streaming will flip to significant deficits.

Next, as a result, the record industry will see an avalanche of press far worse than they have ever seen before: "Tens of Thousands of Webcasters Shut Down By Greedy Record Industry!" The record industry will become cemented in public opinion as the enemy of true music fans everywhere.

Simultaneously, with Internet radio virtually silenced, consumers who want to listen to music on the Internet somehow will driven to file-sharing and CD burning more actively than ever before — now driven by an attitude of "It's payback time!"

And fourth and most importantly, Congress will probably jump in to enact a legislative response. (Congress is already, as I've learned they say in Washington DC, "teed up" on the issue.) And I believe that Congress's response is going to be bad news for the record industry: If Congress revisits the issue, I believe it's very likely that the entire "perfect copy" argument behind the royalty will be called into question — and very possibly rejected.

Congress may instead take the position it has always taken with broadcast radio — that radio airplay has promotional value to the artist and the label that sufficiently compensates them for radio's usage of said music. (Obviously there must be some truth to this viewpoint, or else record labels wouldn't spend hundreds of millions of dollars per year on radio promotion!)

In other words, if Congress looks at the issue again, I believe that the proven "Radio sells records" argument will totally trump the inaccurate "Digital means 'perfect copy'" argument.

And that would mean that an RIAA "victory" on May 21st could turn quickly backfire into a loss that lasts for decades and costs the industry billions.    (TO BE CONTINUED)

Coming first thing Monday morning: "Part Two: It's Not Too Late for Compromise and Reconciliation," including Kurt's proposed terms for the royalty rate and recordkeeping requirements, in the second half of this RAIN Editorial. (Click here to read it.)

BY PAUL MALONEY
Two industry observers representing independent artists have spoken out against artist support of the CARP-proposed webcasting royalty rate, saying the CARP rate proposal would negate many "of the victories achieved by pro-artists organizations."

They call for those groups to reexamine their stances and realize that this royalty structure would end up damaging the interests of artists they represent.

The editorial was written in response to the American Federation of Musicians (AFM) "support" of the "Day of Silence" on May 1, suggesting that silence is what would happen if musicians are not compensated. (See their open letter in Adobe Acrobat here.)

While agreeing that artists scored victories with the 50% royalty split with labels, and the fact that webcasters won't get the "free ride" on sound recording royalties enjoyed by broadcasters for so long, brothers Eric and Sounni de Fontenay contend that the real benefactors of this CARP proposal would be broadcasters and major artists only. That victory, they hold, would come at the expense of Internet-only webcasters and most other artists.

Eric de Fontenay (color photo) is founder of Mi2N, a music news site. Sounni (B&W photo) is founder of MusicDish , a web publication dealing with the business side of online music, where the editorial was published last week.

Since broadcasters simulcasting their streams on the Internet stand to owe royalties at a rate half of that of pure webcasters, the de Fontenays' logic goes, the stage is set for companies like Clear Channel (which the editorial names in particular) to dominate Internet radio outlets. The company clear is already the big dog on the broadcast side, owning six times the number of stations as its largest competitor.

RIAA label members would also stand to benefit, according to the editorial. By shutting out webcasters who exposure music and artists outside of the mainstream, the royalty structure "ensures that major artists continue to receive significant exposure," and "will also inhibit independent artists and labels ability to compete with RIAA member labels."

The authors call for artist rights groups like AFM, the Recording Artists' Coalition (RAC), and AFTRA, to "vigorously fight aspects that will further polarize the major/indie divisions and rob the average artists of the best opportunity they've had in decades."

Read the full editorial here.

From ISP-Planet: "If Americans think the Copyright Arbitration Royalty Panel (CARP) ruling expected May 21 is overreaching, they should feel some sympathy for their brothers and sisters north of the border, who face a similar Internet-based music distribution nightmare.

"The Society of Composers, Authors and Music Publishers of Canada (SOCAN) is winning a courtroom brawl against providers ranging from incumbent telephone carriers to mom-and-pop ISPs over Tariff 22, a piece of legislation that would charge service providers for music stored in caching servers and open the door for even more fees down the road by other industry organizations.

"In the US, only content providers (i.e., Internet radio stations) would be charged royalty fees to distribute music files, butin Canada, they're thinking of a 'caching clause' to rope in the companies storing music files on back office servers...

"SOCAN, an industry organization representing music composers, wants to charge ISPs 25 cents per subscriber per month or 3.2 percent of each ISP's yearly revenues for every song or other copyrighted material found in caching servers, retroactive to 1996, when the organization originally filed Tariff 22 with the Canadian copyright board. Tariff 22 sets the standards for the distribution of copyrighted material over the Internet...

"For small-town ISPs, the enforcement of that law would be a death knell—forcing them to pay thousands, if not millions, in royalty rates..."

Read this entire piece in ISP-Planet here.



From The New York Times: "In the United States, the recording industry has dealt with music copying mostly through legal action and the development of anti-copying technology. In Canada, however, the industry is going after cash.

"If a group representing musicians, composers and record companies has its way, Canadian buyers of MP3 music players will be in for an unwanted surprise next year. The group, the Canadian Private Copying Collective, has asked the Copyright Board of Canada to impose a fee that would add to the cost of storage media and devices.

"The fee, based on storage capacity, would add $132 (210 Canadian dollars) to the $500 price of a 10-gigabyte Apple iPod, for example. The collective is also asking the board to introduce a $1.43 copying fee on recordable DVD's and to triple, to 39 cents, a fee imposed two years ago on recordable CD's. The fees are intended to compensate members of the music industry for the use of recordings...

"The Canadian system for compensating musicians and recording companies differs from that of the United States, where the federal Copyright Office collects fees based on the manufactured or imported cost of a recording medium or device — 3 percent for recording media like blank tapes, for example, and 2 percent for recording devices like MiniDisc players and tape decks (with a maximum fee of $12). The United States fee does not apply to common recordable CD's but is imposed on rarely used "audio CD's" — CD-R's with special formatting to prevent further copying of the disc.

"In Canada, fees are based on the storage capacity of a medium and are adjusted to reflect, at least by the Copyright Board's estimate, how often a particular medium is used to record music as well as the overall rate of private music copying."

Read this entire article from yesterday's New York Times here.