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?

But Net radio offers something else: It’s an evolving technology, and it’s constantly spawning new ways to stumble upon (or protect ourselves) from music. Pandora, the popular music-recommender site that can spin an entire channel of music out of one or two suggestions, is considered an Internet radio station; so is AccuRadio, where you can create a stream that cuts out the bands you don’t like. The law hasn’t even caught up to all these possibilities: Pandora founder Tim Westergren says that the CRB hasn’t confirmed exactly how his service will pay — as a single broadcaster, or with per-stream fees levied on each of the hundreds of thousands of individual streams they build for their listeners.

By the time you read this, the debate may’ve been settled one way or another. Many large and small webcasters support the bills now making their way through Congress, and the SaveNetRadio campaign has organized petitions and canvassed Capitol Hill to drum up support for their cause. If the legislation passes, the Copyright Royalty Board’s decision will be discarded, and webcasters will pay the same rate as satellite radio; in fact, they’ll actually pay less than they are now.

RADIO CURE
But the larger debate — about the role of music on the Internet — still grinds on. Ever since Napster launched in 1999, fans have taken it upon themselves to “set music free” on the Net — usually with no compensation for the artists. Since then, the digital-music space has lurched to maturity through hundreds of minor concessions. The major labels agree to support iTunes; the fans consent to a certain amount of rights management; and the balance between corporations and consumers readjusts itself, with plenty of grumbling from both sides. The industry still believes that, some day, everyone will become a happy, compliant iPod-owner dutifully paying for every track; and the fans believe that the industry will throw out its copyright laws and give away all its records for free, while artists make their living off of T-shirt sales or car ads or something.

The beauty of Internet radio has always been that it slipped right by the whole debate. You could hear all the music in the world, yet nobody actually gave away the shop: The music passed by in a stream instead of stopping on your hard drive, and stealing it was more trouble than just clicking a button and paying for it. This could all change in July — although not everyone will go down easily. Some companies are exploring direct deals with record labels, though copyright experts warn that this may not provide adequate legal coverage. Others might try a subscription model, although that has potential drawbacks for a format that’s been free since its birth.

Radio Paradise’s Goldsmith has a more drastic plan. After 35 years in the radio business and seven as the full-time owner and operator of his own Internet radio station, he says, “The most attractive [option] is to find a way to move the station outside the U.S. We would rather do that than shut down.” And Pandora’s Westergren expects that if the rates hold, they’ll have to close up shop—and box up years of hard work. “It’s almost unanimous that whether you’re a musician, or a webcaster, or a listener or a label even, you don’t support the rate change. The question really is, can sanity be the arbiter of what’s right here?” 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.