At a time when Internet radio needed it the most in light of the royalties issue and the massive launch of MySpace Music, a group of Congressmen wrote up a bill that would extend the amount of time Pandora and others would have to reach an agreement with the recording industry agencies. This is exactly what these Internet Radio providers needed, as progress has been made toward reaching deals. Pandora CEO Tim Westergren sent out emails to Pandora users like this one I received over the weekend, which was apparently geographically targeted:

Hi, it’s Tim from Pandora;

Tim

According to Dallas News, the National Association of Broadcasters (traditional radio stations) are lobbying against the Webcaster Settlement Act and threaten to impede it, so Pandora and its kind are relying on their users more than ever, which explains the aggressive campaign to call attention to the matter.

No matter how it turns out for these guys, nobody will be able to say that Pandora went down without a fight. Meanwhile MuxTape is in the process of reinventing itself.

Let’s put it this way: the RIAA and SoundExchange are not the most popular organizations right now. Someone has decided to try and stick it to them however. Their strategy? Release an open source version of what is essentially the concept behind Muxtape.

This open source program is called Opentape, and while it doesn’t have the ability to browse "mix tapes" of others (a popular feature of Muxtape), it does allow you to post your own.

Common theory indicates that whoever is behind Opentape (nobody seems to know) is not so much expecting to beat the system per se, but simply make it harder for the RIAA and SoundExchange to patrol. By making the program open source, they’re throwing the door wide open for more similar programs to appear.

If this is in fact how it plays out, it will likely turn into another P2P-style battle for the recording industry. Although this might be an easier battle for it to win, given that users are unlikely to be as persistent when it comes to this kind of program. Like Josh Catone at Sitepoint asks, "How many people will be willing to risk the RIAA’s wrath to publish a mixtape on their server?"

Muxtape’s founders as well as the rest of the Internet radio industry are probably getting a kick out of the whole thing either way.

An Industry in Peril

It appears as though the entire Internet radio industry in in jeopardy as a result of this matter. This includes not only Pandora, but  popular sites like Slacker, Jango, and others. While inevitably hurtful to the industry anyway, SoundExchange may not have thought this decision all the way through. Dan Costa at PC Magazine writes:

Don’t forget, vast illegal file-sharing networks are still operating just a few clicks away. The RIAA’s legal Whac-A-Mole has barely slowed them down. If this unfair royalty scheme kills off legal, legitimate businesses like Pandora and the recently shut-down Muxtape, those users will simply go somewhere else. And that destination is more likely to be BitTorrent than a record store. The record industry may think it is killing off Internet radio, but it’s merely opening Pandora’s box.

Costa also noted that his father, an unlikely candidate for such technology use is even getting into Internet radio, emphasizing the type of effect the industry is actually having on consumers. Troy Wolverton at Mercury News has an interesting piece noting how well the industry is doing while its very existence is threatened.

A Solution? Not Likely.

Some believe that these Internet radio sites just need to find more ways to make money so they can actually afford to pay the royalties. Costa hinted at something along the lines of selling concert tickets. Others have suggested ramping up their advertising models. Even the head of SoundExchange suggests such a tactic. According to Wired, he’s even a fan of Pandora and offered this suggestion:

Simson says Pandora and other internet radio sites need to start including audio ads — even though they could drive listeners to alternatives that pay no royalties at all — because people don’t look at the graphic ads on Pandora as things stand, and will do so even less as internet radio extends into the car. He accepts that online radio stations play better, more varied music than their over-the-air counterparts, but wants them to adopt a similar, audio ad-laced format in order to pay SoundExchange what he says it deserves.

Simson doesn’t seem to acknowledge or care that audio ads would annoy listeners and likely lead to them obtaining the music from illegal means from which SoundExchange would get nothing. Sites like Pandora have been a step forward in the battle against music piracy (perhaps a very small step, but a step nevertheless), and the people affected by the piracy the most wish to take a step back. I have to wonder how many less songs were illegally downloaded because of Internet radio.

And that means that independent web radio stations are not exempt from royalty rates, recently hiked, even if the artist never intended for there to be a royalty in the first place.

As "DJ ProFusion" at DailyKos wrote:

SoundExchange (the RIAA) considers any digital performance of a song as falling under their compulsory license. If any artist records a song, SoundExchange has the right to collect royalties for its performance on Internet radio. Artists can offer to download their music for free, but they cannot offer their songs to Internet radio for free.

Live365 reports that over 55 percent of music played over Internet channels come from independent artists (non-RIAA), compared to just 13 percent over the conventional airwaves. And though the solution was offered that webcasters only play independent music, they will not be exempt from royalty collections.

How does this happen?

TechDirt’s Mike Masnick sums it up well:

The RIAA tells people that simply listening to music without paying for it is a terrible crime that people should be punished for. Yet… the RIAA getting money for non-RIAA music and not paying the deserving artists that money is perfectly legal? Damn, the RIAA lobbyists are good.

Webcasting Reprieved At Last Minute

In punishment terms, it’s a stay of execution, not a pardon.

Encouraging news emerged from Washington at a last-minute hearing on new royalty rates to be charged to online radio websites. The proposed increases prompted a host of webcasters, like Yahoo and Pandora, to say the higher rates would shut down their webcasting efforts.

Wired reported on the change of heart from SoundExchange during a closed door meeting in Washington:

The SoundExchange executive [Jon Simson, executive director] promised — in front of Congress — that SoundExchange will not enforce the new royalty rates. Webcasters will stay online, as new rates are hammered out.

The amazing turnaround comes shortly after the DC District Court of Appeals declined to act on a petition for delay for the July 15th deadline to enforce the higher royalty rates. SoundExchange and webcasters now have the groundwork for negotiating a more equitable rate schedule.

Until that happens, the threat to online radio has not ended. Pandora founder Tim Westergren told Wired that public efforts to bring the matter to the attention of members of Congress evidently worked, and credited the change in circumstance to web radio listeners who contacted their representatives in DC.

DC To Webcasters: Drop Dead

If the SaveNetRadio coalition had hopes a Democratic majority might help it stave off a crippling royalty increase, they can probably pack those hopes in a sack, add a couple of bricks, and drop it into the Potomac.

BusinessWeek said the result of a recent House Small Business Committee hearing resulted in only an affirmation of Congress’ inertia on the issue. Congress isn’t going to get involved.

Two Democratic Representatives from New York, Nydia Velazquez and Yvette Clarke, commented on their lack of action in the report. Velazquez doesn’t "Congress would be the best type of vehicle to resolve this type of issue.:

Clarke hasn’t heard "what the win-win is" with the issue. Gosh, Congressperson, haven’t you ever heard of a compromise?

A number of Representatives have backed a bill, referred to as the Internet Radio Equality Act, and a similar measure is making the rounds of the Senate. Negotiations may still bear fruit, too.

"We might now be at the beginning of real negotiations with SoundExchange," Ian Rogers, general manager of Yahoo Music, said in the report. He commented on the issue of webcast royalties this week, saying, "the new royalty rates are higher than the revenues anyone can hope to make from related advertising."

As far as Internet users are concerned, it’s been a crummy week. The FTC shrugged at net neutrality in counseling a wait and see attitude to legislation for it. Congress wants nothing to do with the webcasting royalties issue.

At least it was a bipartisan non-effort.

Under their proposal webcasters making less than $1.2 million a year would pay 10 percent of all gross revenue, up to $250,000, and 12 percent of all gross revenue above that amount.

SoundExchange’s announcement has been met with sharp criticism. "The proposal made by SoundExchange today would throw ‘large webcasters’ under the bus and end any ‘small’ webcaster’s hopes of one day becoming big," SaveNetRadio spokesperson Jake Ward said.

"Under government-set revenue caps, webcasters will invest less, innovate less and promote less. Under this proposal, Internet radio would become a lousy long-term business, unable to compete effectively against big broadcast and big satellite radio — artists, webcasters, and listeners be damned."

The rates would be in effect through 2010, said SoundExchange, which splintered off from the Recording Industry Association of America (RIAA) in 2000.

"There’s a sense in the music community and in Congress that small webcasters need more time to develop their businesses," Executive Director John Simson said. "We look at it as artists and labels doing their part to help small operators get a stronger foothold."

Unfortunately for Internet radio providers, and for music lovers around the world, the judges at the CRB denied the appeal headed up by NPR and joined by several online radio stations.

Now, the only music that’s coming from streaming online providers is that of the funeral march.

Olga Kharif at Business Week discusses the implications of the CRB’s ruling:

The stations will have to cough up these royalty payments – 300% to 1,200% higher than the fees they are used to paying — retroactively. Unless Congress gets involved, that will mean the death of many Web radio stations, whose revenues will fall short of these royalty payments.

Previously, streaming audio providers were only responsible for a paying percentage of their gross revenues in royalties to artists and record labels. Now, any station that serves up online music content will have to pay an initial $500 inclusion fee, along with royalties that are calculated on a ‘per song’ basis and are retroactive for all of 2006 as well.

Eric Bangeman of Ars Technica talks more about the drastic change in royalty payment structure:

The ruling is a huge blow to online broadcasters, and the new royalty structure could knock a large number of them off the ‘Net entirely. Under the previous setup, radio stations would have to pay an annual fee plus 12 percent of their profits to the music industry’s royalty collection organization, SoundExchange. It was a good setup for the webcasters, most of whom are either nonprofits or very small organizations.

In a statement, SoundExchange Executive Director John Simson anticipates “working with the Internet Radio Industry” to ensure mutual success. As Bangeman continues in his article, however, he points out that the organization’s comments seem less than sincere given the consequences of their royalty hikes:

[A]fter today’s ruling—which will take effect on May 15 unless the US Court of Appeals for the District of Columbia Circuit agrees to hear an appeal—there probably won’t be much of an Internet radio industry left for SoundExchange to work with.

An online coalition, SaveNetRadio, has launched a last ditch campaign in an attempt to save Internet radio. 

SoundExchange, the royalty collecting division of the Recording Industry Association of America (RIAA), will seek to retroactively charge webcasters for streaming content delivered throughout 2006 to users, a decision that could send the sites packing for good.

The new rates will require webcasters to pay for each song streamed to each user, and will increase yearly according to these figures:

2006: $0.0008 to stream one song to one listener

2007: $.0011

2008: $.0014

2009: $.0018

2010: $.0019

Eliot Van Buskirk and Sean Michaels of Wired lament the financial implications of the U.S. Copyright Royalty Board