Internet Radio Organizes Fight for Lower Web Royalties

Pandora, Clear Channel among founding members

Internet radio services like Pandora may be popular, but they haven't been profitable, largely because of crippling music royalties. Hoping to turn around a lousy business model, Pandora and Clear Channel—along with 11 other Internet radio companies and trade associations—have formed the Internet Radio Fairness Coalition.

The group is putting its muscle behind a new law introduced last month that would reset rates for streaming music on the Internet. Introduced by Reps. Jason Chaffetz (R-Utah), Jared Polis (D-Co.), Darrell Issa (R-Calif.) and Zoe Lofgren (D-Calif.) in the House and Sen. Ron Wyden (D-Ore.) in the Senate, the Internet Radio Fairness Act of 2012 would require the government's Copyright Royalty Board to set the royalty rates per song for Internet radio equal to the lower rates paid by cable and satellite services.

Pandora has led the fight for the bill. Because of the current fee structure, Pandora shells out 50 percent of its revenue to performance fees for artists and labels. In comparison, Sirius XM pays less than 10 percent of its total revenue in royalties.

“Congress has made decisions about radio and copyright law in a piecemeal and isolated manner; as each new form of radio transmission was invented, new legislation was passed, but only to address the new form,” Pandora's founder Tim Westergren told the House Subcommittee on Communications and Technology in a June hearing on the future of audio. “The effect has been to penalize new media and advantage old media when setting the rules for music royalties.”

Able to leverage its terrestrial radio stations to negotiate a better deal with two labels for its iHeartRadio digital service, Clear Channel earlier this year became the first terrestrial radio group to pay music royalties. For Clear Channel, a company that sees its future in digital, the deal was worth it.

"We believe that market-based solutions are the way to go. But in the absence of these agreements, the CRB needs to have and consider more relevant information so they are better able to develop a rate structure that will lead to a healthy, sustainable Internet radio marketplace," said Bob Pittman, the CEO of Clear Channel, in a statement.

The coalition will be facing tough lobbying opposition from record labels and the Recording Industry Association of America, which would rather cable and satellite be brought in line with the higher rates the Internet radio services are paying. They support a bill introduced earlier this year by Rep. Jerrold Nadler (D-N.Y.)

Music artists are already ramping up the rhetoric, calling the Internet Radio Fairness Act the "Screw Artists Act." "It would produce a windfall to millionaires, mandate a pay cut for artists, and provide no benefits to subscribers," said Ted Kalo, the executive director of the musicFIRST Coalition. "Pandora's attempt to hide behind a coalition of the already willing reeks of a desperate attempt to dodge accountability and create 'faux-mentum' for a bill facing growing opposition.'"

Ironically, the new coalition may be getting at least lukewarm support from the terrestrial radio business. Stopping short of a full endorsement of the bill, the National Association of Broadcasters said it supported "legislative efforts to establish fair Webcast streaming rates." Even the terrestrial radio stations, unless they are owned by the biggest companies, don't stream their signals due to the prohibitive cost of Webcast streaming fees.

Time is running out this year for any bill to move in Congress, but that doesn't mean there won't be some chewing of the issues in a hearing. The House Judiciary subcommittee on intellectual property, competition and the Internet, chaired by Rep. Bob Goodlatte (R-Va.) is planning to schedule a hearing for late November. Both Chaffetz and Lofgren are members of the subcommittee.