It’s the end of the stream as we know it...

After years of suffering a music business that regularly resorts to suing its own customers, it’s easy to look at the crisis in Internet radio as a classic David and Goliath story — where the Davids are the true music lovers who slave away to promote deserving artists, without much scratch to show for it; and the Goliaths are anyone who gets in their way, usually to line their own pockets.

This spring, a decision to jack up the cost of running a streaming radio station has threatened to cripple or shut down most webcasters, from giant corporations like Yahoo and AOL to public broadcasters, college stations and passionate hobbyists who have nothing but a laptop and a stack of CDs. You know — the good guys. This triggered almost daily skirmishes, as well as new efforts to, as one organization put it, “Save Net Radio.” At press time, both the House and the Senate are considering bills to reverse the damage.

Of course, the full story isn’t so simple. The debate is over 10 years old and Byzantine in its complexity, but the latest chapter began when the U.S. Copyright Royalty Board finished a scheduled reassessment of the royalty rates due from webcasters. Instead of letting small webcasters pay a percentage of their revenue, as of July 15 all webcasters will have to pay a much higher per-play fee-retroactive to 2006. When the rates were announced March 2, they came as a shock to most webcasters, who’d expected a small bump but didn’t realize that their entire business was in jeopardy.

John Simson, executive director of SoundExchange — the organization collecting these royalties — calls the rate hike fair. Webcasting has grown into an estimated $100-150 million business that draws an estimated 50-70 million pairs of ears in the U.S. alone — and Simson argues that the labels and artists deserve a bigger share of the profits. As he told the Washington Post, “The attitude that really has to change is the idea that the people playing this music on the Web are somehow doing artists a favor.” And as for the ecosystem of tiny webcasters who don’t sell ads and never aimed higher than covering their costs, Simson asks, “Does having so many Web stations disperse the market so much that it hurts the artist?”

“The royalty is just so far from being workable that it’s ridiculous,” says Bill Goldsmith, owner of popular, listener-supported eclectic rock station Radio Paradise. “The record industry’s response is, ‘Well, they’re just not working hard enough to monetize their businesses. If they were really good business people, then they would be able to pay this royalty.’” Goldsmith challenges this: Many people have run the numbers over the last couple of months, and by almost all accounts, the new rates are dramatically higher. “For a small business webcaster like myself who doesn’t do anything else, the royalties in almost every case come up to over 100 percent [of revenue].”

DIFFERENT STROKES,
DIFFERENT FOLKS
There’s also the issue of fairness. Internet radio stations pay no less than 10-12 percent of revenue in performance royalties. Satellite radio — XM and Sirius — pays 7.5 percent of its revenue to cover the same royalties. And good-old-fashioned terrestrial radio pays exactly nothing and, in fact, recently went to court for taking money from the labels. Your local FM station gets weed, cash and free sneakers in return for spinning the hits; your local webcaster — who’s promoting all the other music — is forced into bankruptcy.

And while webcasters take the biggest hit, they’re also one of the most promising ways to find and disseminate music. From extreme metal to bachelor-pad bossa nova to all three waves of ska, any music, no matter how obscure, can find a home on Internet radio. There’s no dial to restrict your options and no orbiting satellite to deal with: You just need a computer, some tunes and an audience. Plus, webcasts usually display the artists and song titles, and even give you a link straight to iTunes in case you want to make a purchase. If you ran a label, wouldn’t you rather send free Adidas to the station that leads customers straight to a store, as opposed to the one that buries your song in a 45-minute block of hits and forgets to announce the title?