The battle over Web radio continues

Who benefits from the new rules? Point-counterpoint between the Recording Industry Association of America and an Internet radio pioneer.

By Salon Staff
Published April 3, 2002 8:30PM (EST)

On March 26, Salon published "Web Radio's Last Stand," an interview with Rusty Hodge, the program director of Web radio station SomaFM. Hodge explained how legal fallout from the Digital Millennium Copyright Act (DMCA) was threatening to put independent online radio stations out of business. Specifically, the Copyright Arbitration Royalty Panel (CARP), a body appointed by the U.S. Copyright Office, ruled on Feb. 20 that under the DMCA, radio stations must pay a fraction of a cent per song, per listener, for every song they stream.

The article inspired immediate reader response, including a lengthy letter from Steve Marks, senior vice president of legal affairs at the Recording Industry Association of America. Among his other points, Marks noted that contrary to Hodge's assertion, 50 percent of royalties generated by webcasting would go directly to recording artists.

The dialogue continues. Brian Zisk, a co-founder and former vice president of marketing and business development for the Green Witch Internet Radio, has taken issue with several points made by Marks. Marks has responded in kind. Readers interested in a detailed discussion of the ever-evolving world of Internet music are invited to dive in.

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Hi Steve,

It's been a long time since we've talked, and I hope you're doing well.

I couldn't help but notice the "clarification" you made in regards to the recent Salon article on Web radio. I'll skip over many specific points that I do not agree with to focus on one specific piece of spin that you've put forth. You report that "artists get 50 percent of the royalties by law."

It is interesting how this is phrased. It is clear that the artists will not see 50 percent of the royalty paid by webcasters and other digital broadcasters. First, money is deducted off the top for the expenses of SoundExchange, a division of the RIAA. While in all cases expenses deducted by SoundExchange will drive the royalty paid to artists below 50 percent, in certain cases the RIAA's record company members may be able to recoup up to 100 percent of the royalty before 50 percent of what's remaining (potentially nothing) is redistributed to the featured artists, AFTRA and AFM [the organizations representing artists].

In addition, while you're complaining about the multimillion-dollar CARP costs, isn't it true that the RIAA is attempting to ensure that as much as possible of the RIAA's share of these multimillion-dollar expenses will also be deducted from the pool before the money is split for the artists?

There are a number of other sketchy assertions, including that "most webcasters pay huge sums of money ... for bandwidth, marketing, hardware, software and other things necessary for their business." At this point, the majority of webcasters who have not already been forced out of business are running on a shoestring and not paying huge sums of money for anything. In addition, many webcasters broadcast using free software (such as Icecast and Shoutcast running on Linux and FreeBSD). It is clearly disingenuous to claim that most webcasters pay huge sums of money for marketing, when the majority of webcasters are small-scale micro-broadcasters and hobbyists, operating with essentially no marketing budget at all.

However, let's let a number of erroneous assertions such as these stand uncontested, so we can better focus on the fact that while the money paid to artists and labels is of great benefit to both, that in the case of the assertion that "50 percent of the royalties" will go to the artists, this is only true if everyone ignores the millions of dollars that SoundExchange and potentially the RIAA member labels are hoping/planning to siphon before splitting the remaining pool of royalties. I cannot believe that an RIAA lawyer as intelligent as you, Steve, just happened to ignore the millions of dollars SoundExchange (and potentially the RIAA's member labels) are siphoning from the royalties paid by digital transmitters.

In any case, hope all is well, and it's great that since last week, SoundExchange has finally updated its Web page after causing confusion for a long time. Thus, it no longer states that the royalty would be paid to "the sound recording copyright owner who shall be responsible for allocating to the featured artist." This would have been based on whether or not the artist had recouped, whether the label and the artist were currently involved in a dispute or other standard (or nonstandard) record industry payment practices.

It is telling that while the RIAA claims that the labels are doing all they can to actively move forward into the new digital marketplace, and while SoundExchange has an annual operating budget in the seven figures, that SoundExchange claims to not have anyone on staff who is able to quickly update its Web site, even when it knows that the information it is putting forward is flat-out wrong, causing confusion and hours of extra work for the RIAA's legal team. Are the hours of time wasted by the RIAA's legal team due to SoundExchange's not having someone available with the Web proficiency of an average 6th grader also going to be deducted off the top as CARP expenses before what's left of the royalties are distributed to the labels and the artists?

-- Brian Zisk

Hi Brian,

Hope you're well too. Frankly, I was surprised at your e-mail, because I simply can't believe that you could be so misinformed. Here are some corrections and thoughts ...

1) No spin about 50 percent of the royalties going directly to artists is necessary. The statute requires that 50 percent of the royalties be allocated to artists, and the CARP determined that this 50 percent should be paid directly to the artists (i.e., not through the record companies, and thus no recoupment). Period. In fact, the members of SoundExchange had already agreed to direct payment -- the CARP decision ensures that others distributing royalties will do so as well.

2) Where have you been? While SoundExchange is currently a division of RIAA, it won't be for long. RIAA, record companies and artist groups (including FMC) agreed last fall that SoundExchange should be governed by a board that is evenly split between sound recording copyright owners and artists representatives. The process of separately incorporating SoundExchange has begun.

3) Yes, it is true that the costs of collecting and distributing royalties will be deducted from the royalties, but how else would the money get to the record companies and artists? And why should record companies, which fronted millions for the CARP on behalf of all royalty recipients, be stuck with the bill for 100 percent of those costs? Shouldn't all royalty recipients share the costs? Again, everyone involved in SoundExchange agreed to this, including artist representatives FMC, AFTRA, AFM, MMF and RAC. By the way, isn't that how other collection and distribution agents, such as ASCAP and BMI, work -- they deduct costs (including litigation) from the royalties collected?

4) Maybe you are suggesting that webcasters should pay the costs of collection and distribution instead of the royalty recipients. We'd be all for that. In fact, if you are so concerned about limiting the necessary costs of collection and distribution, you should be preparing comments in the upcoming record-keeping proceeding that ensure webcasters will provide detailed information so that SoundExchange's costs can be limited.

5) Your statement that all the royalties could end up in RIAA's or the labels' coffers is most misleading of all. As I've already said, 50 percent of the royalties go DIRECTLY to artists (without passing go). The provision you referenced in our agreement with the artists' groups doesn't change that -- that provision was an agreed-upon mechanism to ensure that RIAA's investments in building the infrastructure of SoundExchange won't be lost to reckless decisions by the board. Remember, RIAA (not the artist community) invested millions to establish SoundExchange, and it is now giving 50 percent of the organization over to artists. Isn't it prudent to protect that investment with some kind of safeguard remedy in the event the board, without a super-majority vote, does something to undermine that investment? In any event, no one expects that that provision will ever actually be invoked, and the artist groups agreed to it.

6) Now to your propaganda about webcaster finances. First, you point out that most webcasters are either out of business or on shoestring budgets. For those out of business, I assume you'd agree that royalties had nothing to do with it because they'd never paid a dime (e.g., NetRadio went out of business before the royalty rates were even announced thus denying record companies and artists in the millions of dollars). For the others, you claim that most are using Shoutcast or other free software. But they still must be either paying for bandwidth costs that would generally exceed their royalties, or having someone like live365 pay on their behalf. Live365 participated in the CARP proceeding (and actually hired two different high-priced law firms to represent them!). In the proceeding, live365 submitted evidence demonstrating how their costs for bandwidth, employment, sales and marketing, and hardware and software were many, many times their revenues. Of course, I can't tell you the exact amount because live365 conveniently redacted that information from the public record so as not to undermine their other arguments.

7) In fact, we took the opportunity to check out some of the webcasters cited in yesterday's New York Times article (which I assume you are familiar with given that most reporters I've spoken with had already spoken with you). Here are some real facts:

The article said would pay more than $100,000 in fees, but according to Measurecast reports on time spent listening, they would actually pay $23,476. (Ken Shively at told me the fees would be a little higher because Measurecast doesn't capture all the streaming, but even then the number would be closer to $35,000-$40,000, roughly the same as their bandwidth costs alone.) OnionRadio is part of the WarpRadio Network, which includes 12,518 stations. WarpRadio is likely to be paying, not OnionRadio. More important, based on Measurecast reports, WarpRadio would owe about $57 per station. By the way, I called OnionRadio to make sure that they understood how the rates work, but my message was returned by DiMA -- thus confirming our belief that leaders in the webcast community are using small webcasters as pawns in an orchestrated misinformation campaign designed to influence the appeals process and policymakers primarily so that large companies like AOL and MTV can get lower rates. KSDS-FM, which the article said shut down, told me that their fees based on the per performance rates would be about $51 annually. Finally, JavaJane is part of the live365 network. Again, live365, which participated in the CARP, will pay on behalf of JavaJane. Moreover, if you go to the site, you will see that JavaJane is in the "10,000 and up" category of listening hours per month. At 10,000 listening hours per month, the fees would be $2,520 a year. Even if we assumed 50,000 hours, the fees would amount to only $12,600 -- hardly the $200,000 that was reported in the New York Times article. (We don't have actual numbers because JavaJane never responded to us.)

8) We understand that hobbyists are different. We are prepared and intend to work with true hobbyists to find a solution. Remember, hobbyists were not represented by other webcasters in the CARP and the arbitrators had no evidence to set a separate hobbyist rate. Also, we've already worked out a separate deal with NPR to cover all CPB-funded radio stations.

9) Finally, with regard to your observation that the confusion about the artists' share of royalties is the fault of SoundExchange because its Web site is not up to date, you'll be happy to know that's because SoundExchange doesn't have a webmaster -- thereby eliminating one more thing that might otherwise "siphon" money from the artists.

Hope that helps clear up some of these issues for everyone.

-- Steve Marks

Hi Steve,

I understand that there is a difference between 50 percent before and after expenses, but ... you state that "50 percent of the royalties go DIRECTLY to artists (without passing go)," yet 50 percent of royalties paid to artists is extremely different from 50 percent of royalties paid after numerous deductions have vastly decreased this amount.

You mention that SoundExchange is moving to no longer be part of the RIAA and discuss the "mechanism to ensure that RIAA's investments in building the infrastructure of SoundExchange won't be lost to reckless decisions by the board. Remember, RIAA (not the artist community) invested millions to establish SoundExchange." If the RIAA and its member labels have the right to get back the present value of their investment in SoundExchange (all of SoundExchange's assets), there's no way that it can be inferred that the RIAA no longer controls SoundExchange. It's like saying, "Yes, we have a gun pointed at your head, but no one really expects that we're going to shoot it."

As far as the RIAA recouping its CARP-related costs, and your stating that the FMC agreed to this, that is false. The actual language that FMC released, while endorsing many of the major points of the agreement you reference, was:

"There has been some discussion regarding the desire of some SoundExchange members to attempt to recover legal costs related to the ongoing CARP proceedings out of the SoundExchange pool. We consider this to be an inappropriate use of these monies, and believe this agreement should not be used as a means to this outcome.

Music and technology companies that were negatively affected or put out of business by the lack of an interactive statutory webcast license will never be able to recover the costs or the equity that they lost due to the uncertainty of access to licenses and the eventual fees. Furthermore, there is reason to believe that musicians are now suffering in a landscape of reduced business models and opportunities due to this practice. It is therefore particularly inappropriate for a lobby group like the RIAA to recoup lawyers' fees out of the artists' and copyright holders' shares for actions that A) many folks feel have hurt the artists; and B) limited the public's ability to encounter new artists."

If you feel as you state that "why should record companies, which fronted millions for the CARP on behalf of all royalty recipients, be stuck with the bill for 100 percent of those costs?" you are obviously ignoring dozens if not thousands of interested parties who have lost and wasted substantial time and money working toward A) a solution, and B) complying with the onerous requirements thrust onto webcasters due to the RIAA's lobbying these rules into existence, who will not be able to recover any of their costs, let alone costs out of the artists' share, as the RIAA intends to do.

If the outcome wasn't worth the effort, there's no one to blame but the RIAA, which pushed the DMCA through. Recouping out of the artists' share is despicable, especially when it's debatable if the media consolidation and obstructing of new technologies that will result is beneficial to artists, or actually harmful.

As for your comment regarding the limiting of costs to webcasters, if the copyright owners were to provide information on what they actually own in a publicly accessible database, this would save everyone huge amounts of money, and prevent webcasters from each having to enter the identical information in numerous data fields for each song. This is a huge effort that is being forced on all webcasters, whereas if you uniquely identified a track, SoundExchange could simply backfill the rest of the data.

Nonetheless, it appears that the aim is to keep the database private. Is the database owned by the SoundExchange as some have told me, or is the database owned by the RIAA with SoundExchange licensing the database from them? I was told by an RIAA employee (or maybe it was SoundExchange, I can't tell them apart as SoundExchange e-mails come from addresses) that SoundExchange pays to license the database from the RIAA, and then SoundExchange feeds the data back to the RIAA, improving and increasing the value of the private database. So what really should be a public database provided to webcasters is improved at the webcasters' onerously excessive expense, and claimed as private information (by the RIAA, or is it SoundExchange?) to make a profit on.

I must also disagree with your comment that the yet to be imposed royalties had nothing to do with webcasters' going out of business. When faced with a business decision, knowing that you're going to have excessive (and unknowable) costs can clearly force you out of business, especially as financing is rarely forthcoming when you're a company that cannot predict their costs. I will also note that bandwidth has become much more inexpensive, and thus your claims of bandwidth costs exceeding upcoming royalty costs are not true among many of the webcasters I am familiar with. It is true that almost no webcasters have revenue exceeding expenses at this point, but the same was true for many other industries that are now invaluable to our culture (not to mention the record industry), and adding costs that do not apply for doing the same thing as other media (such as broadcasting on traditional radio) simply does not make sense to anyone but the RIAA, and the politicians whom they convinced.

I am thrilled that you intend to work with hobbyist broadcasters, and I am glad that you brought up that they were not represented at the CARP. Simply because the RIAA has more money than hobbyists to put into the CARP proceedings (which they intend to recoup in any case) does not make it right that the RIAA got their way, and that small webcasters are now screwed (even more by the absurd reporting requirements than by the rate) and must deal with the RIAA to beg permission for their existence. Or is it SoundExchange to whom they must beg? Steve, you work at the RIAA and refer to "we," yet claim that SoundExchange and the RIAA are separate. Who is it that you represent when you mention that "We are prepared to work with true hobbyists to find a solution"?

As for SoundExchange's inability to update its Web site due to not having an on-staff webmaster, please take a look at this 10-minute guide to HTML. I'm sure some of the talented folks at SoundExchange could pick up the skills needed to update the text of your Web site within a couple of days, and it would have saved many hours of many people's time (and prevented much confusion) if there hadn't been a number of folks pointing to the SoundExchange site as proof that (for instance) SoundExchange will not be paying the artists directly.

Looking forward to everyone's coming to a better understanding of the situation, which will hopefully occur through open dialogue.

-- Brian Zisk

Salon Staff

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