07/12/2007 07:22 pm ET Updated May 25, 2011

The Day the (Web) Music Died

Internet radio has been a rising star among innovative Web 2.0 applications. With more than 60 million American users, it surpasses many of the top Internet destinations such as Facebook, which only brings in 27 million unique visitors a month. But with mandatory broadcast fees paid to the recording industry and artists set to soar when the clock strikes midnight on July 15, many of our favorite Internet radio stations could be forced to call it quits. Internet radio's star could be fading fast.

If you've been following this debacle you know that in March the Recording Industry Association of America (RIAA) convinced the Copyright Royalty Board, a panel of three judges at the U.S. Copyright Office, to more than double the royalty rate webcasters must pay to stream music. Even worse, they cut out past provisions which allowed small and non-commercial webcasters to broadcast music at affordable rates.

With the old fee structure it was possible for small, custom stations to cater to niche markets. Indeed, Internet radio is a classic Web 2.0 application, offering diverse programming that caters to a range of specific groups. Whether you want to stream Gregorian chants or hometown hits, there is a station out there for you. A great example of this is Radio Paradise, a successful, web-only radio station that streams a commercial-free mix of eclectic rock. Funded entirely by listener contributions, the husband and wife team avoids the endless advertising found on terrestrial radio. Good luck finding something that good on your local FM stations. With the new rates, these stations will go the way of the 8-track player. Goodbye NPR! See ya college web radio! Hello Top 40. The rates are so onerous that even large webcasters like AOL and Yahoo! are unlikely to be able to afford their current diverse broadcast lineups.

RIAA claims that these astronomically high royalty rates are needed to compensate the musicians adequately for their songs. But their claim that they are only doing this for the artists is about as believable as Kevin Federline's claim that he is a musician. Most artists never have a chance at getting airplay on terrestrial radio, in part because they are locked out by the record labels that pay big bucks to get their artists into a radio station's playlist. It's not surprising then that so many artists love web radio. Consider the fact that independent labels, which account for only 10 percent of play on over-the-air radio stations, get almost four times more play (37 percent) on Internet stations.

Moreover, Internet radio actually spurs the sales of music by providing artists with valuable air time. In 2006 alone, niche station Radio Paradise generated over a quarter of a million dollars in music sales on Amazon.comDKC. The promotional value of airplay is not missed by record labels. This is why they willingly pay promoters to get their songs on terrestrial radio.

This whole situation wouldn't be so bad if web radio paid the same as over-the-air radio, but it doesn't. The situation gets confusing because there are two copyrights: one for the musical composition (notes, lyrics, etc.) and one for the sound recording (artistic interpretation, specific vocalists, etc.). Both terrestrial radio and Internet radio pay a royalty on the composition, but amazingly only non-terrestrial radio (Internet radio, satellite radio, etc.) pays a sound recording royalty. In other words, it is the policy of the U.S. government to make the new technology of web radio pay significantly more than the older, less-efficient terrestrial radio technology. This outdated policy not only discriminates against new technology, but it runs counter to a core governing principle of the New Economy that policies should be technology-neutral. The fact that HD radio (digital terrestrial radio) has also been made exempt from sound recording performance rights proves that this is not some ideological debate over digital versus analog transmissions, but pure political pandering to the powerful broadcasting lobby. RIAA knows that it will have the fight of its life on its hands if it takes on the National Association of Broadcasters and tries to get terrestrial radio to pay; it's a lot easier to get fees imposed on the emergent and politically less powerful web radio industry.

Finally, in setting the rates, the Copyright Royalty Board ignored the fact that the music industry holds most of the cards in negotiations with webcasters. Since negotiating licensing rights with every copyright holder is prohibitively expensive for most webcasters, the government created a compulsory license that allows any webcaster to stream any music, as long as they meet certain conditions and pay a royalty fee. Sound Exchange, the performance rights organization representing the music industry, collects all the royalty fees and then redistributes them to the record labels and musicians. The problem with this system is that there is only one rate for all music. Clearly all music is not worth the same, yet with the government-created license all broadcasters pay the exact same price for every piece of music. Back in May, we proposed a better system that would allow the copyright owner to specify a separate rate for each sound recording. Then artists could set competitive prices and respond to the market. For example, if an artist wanted to promote a new album he or she could reduce or eliminate the royalty fees for certain recordings to drive demand. Instead, the current system has created a single organization that negotiates on behalf of all copyright owners for a single rate, which results in monopolistic pricing.

How do we fix this broken system? Two steps: First, Congress should either exempt web radio from sound recording royalties or insist that all forms of radio pay the same rate. It's time for consumers and record labels to recognize their common interests and agree that if web radio is to be subject to these royalties then terrestrial radio should stop receiving a free lunch. Consumers cannot expect Internet radio to thrive when its competitors pay nothing for the music they broadcast. Second, Congress should require Sound Exchange to establish a new system under which copyright owners can set competitive prices for their music. Only by eliminating this single price system will we be able to see true competitive pricing in the market. The time to act is now. Unless Congress steps in to fix this broken system, July 15th will be the day the music died.