The CARP and LOC rulings that became law on July 8 impose costs and other burdens that will exile webcasters from the marketplace they pioneered and threaten personal bankruptcy in countless cases. Yet most stations are still on the Web. Why?
On May 22, the Librarian of Congress, James H. Billington, on the recommendation of Marybeth Peters, Register of Copyrights, issued an Order rejecting the licensing rates and terms for webcasting that were recommended by the Copyright Arbitration Royalty Panel (CARP) on February 22. The rates and terms had been regarded by internet radio broadcasters as a de facto death sentence.
Webcasters rejoiced. By nearly all accounts at the time, including my own, common sense had prevailed. The lone dissenter was Jonathan Peterson of Way.Nu, who wrote, “While good news for webcasters, I wouldn't be breaking out the champagne just yet. You can damn well bet that RIAA and the labels are already filling up Congresscritter appointment books to apply some pressure.”
One month later, Peterson proved a prophet.
On June 20, to the astonishment of just about everybody other than the RIAA and SoundExchange (which will collect the new royalties), the Librarian of Congress came out with a Final Determination that differed from the CARP original only in the degree of death its sentence imposed. It dropped the $.0014 charged per stream for “Internet only” broadcasts down to $.0007 for all webcasters and commercial radio stations also broadcasting over the Web. Performance fees were dropped from 9% to 8.8%. Charges for webcasting noncommercial radio stations were held to $.0002 per stream.
On July 8, 2002, the Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings and Ephemeral Recordings; Final Rule was entered into the Federal Register.
If you're a webcaster, payment for everything you've played, for every single one of your listeners since October 28, 1998, is due on October 20, 2002, whether you're still broadcasting or not. If you want to stay on the air and pay the price for trespassing in this new regulated marketplace, the clock starts running on September 1, 2002. Forty-five days later, you'll owe for that first month, and you'll pay within 45 days for every month that follows.
For a station with 2,000 listeners playing 15 songs per hour, the math looks like this:
15 x $.0007 = $.0105 per listener/hour
$.0105 x 2000 = $21 for 2000 listeners in an hour
$21 x 24 = $504 per day
$504 x 365.25 = $184,086 per year
That bottom line exceeds the gross revenues of every internet radio station today (if anybody knows a station making more, please info@linuxjournal.com). It almost certainly exceeds the additional revenues made by over-the-air stations that also broadcast on the Net. These costs also will surely bankrupt many of the individual broadcasters that have been pioneering this marketplace for the longest time. And even the lower rates ($.0002/stream) charged to noncommercial broadcasters are far higher than nearly all of them can afford. (WXYC, the first station to broadcast over the Net, has an annual budget of $20,000. Here's the station's response to the CARP ruling.)
Not surprisingly, there is a growing list of departed stations, including SomaFM, GrrlRadio, KOIT, KDFC, WAAF and WMMR. But it runs in the dozens.
Meanwhile, Live365 continues to host more than 40,000 stations. Every station on the list of favorites I wrote about on March 12 is still on the air (I just checked). So are the ones I listed one month earlier. The number of stations in Google's directory also has not diminished.
Clearly these webcasters have faith in something. Could it be the marketplace?
Unlike the commercial radio stations we hear on the old-fashioned airwaves, Internet radio stations' primary market relationship isn't with advertisers; it's with listeners. In many cases (Radio Paradise is a good example), the listeners are the primary source of revenue. This business model is similar to that of noncommercial (public) radio, only the market relationship is much more direct and efficient. Internet radio stations don't need to stop programming to hold marathon whine-fests begging listeners to call phone volunteers and pledge money to qualify for a mug or a t-shirt. Listeners simply click on a PayPal or an Amazon link, and after a few more clicks they've made a payment.
This market relationship is entirely voluntary, of course. There are still plenty of free-riding listeners. But there are good-faith buyer/seller relationships involved, and it is easily conceivable that, over time, these relationships will call forth the technologies required to support natural valuation, pricing and payment mechanisms. Given the resourcefulness, entrepreneurial spirit and technological know-how of many internet broadcasters, the emergence of a real and functioning “willing buyer/willing seller” marketplace is bound to occur.
But this was not obvious to the CARP, the RIAA, the LOC or other parties to the proceedings, for the simple reason that the most resourceful webcasters were busy rolling their own solutions without much help from commercial software or hosting companies (with a few notable exceptions, such as Shoutcast and Live365).
But missing market clues was built into the DMCA in the first place. That's why the DMCA provided these instructions (now burned into copyright law):
The copyright arbitration royalty panel shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. In determining such rates and terms, the copyright arbitration royalty panel shall base its decision on economic, competitive and programming information presented by the parties. (The italics are mine.)
One of those parties was Yahoo!, which paid $5.7 billion for Mark Cuban's Broadcast.com in 1999. In those days Yahoo! had big plans for internet radio. Yahoo! was also by far the largest entity on the webcasting side of the arbitration process, and the one spending the most money to develop the “space”. So it made some kind of sense for the CARP to base its “willing buyer/willing seller” thinking on Yahoo!'s plans.
But the results are grandiose and absurd. Worse, the results are now law. Here's the relevant excerpt from the Final Determination:
5. The Yahoo! rates—evidence of a unitary marketplace value.
The starting point for setting the rates for the webcasting license is the Yahoo! agreement. In that agreement, rates were set for two different time periods. For the initial time period covering the first 1.5 billion performances, Yahoo! agreed to pay one lump sum of $1.25 million. From this information, the Panel calculated a “blended,” per performance rate of 0.083¢. This value represents the actual price that Yahoo! paid for each of the first 1.5 billion transmissions without regard to which type of service made the transmission. For the second time period, Yahoo! and RIAA agreed to a differential rate structure. One rate was set for performances in radio retransmissions (RR) (0.05¢ per performance) and another rate was set for transmissions in Internet-only (IO) programming (0.2¢ per performance). These rates were first used in early 2000 and do not apply to the first 1.5 billion performances.
However, the CARP did not accept these differentiated rates at face value. The Panel engaged in a far-ranging inquiry to determine how the parties established the negotiated rates. What it found was that Yahoo! agreed to a higher rate for the IO transmissions in exchange for a lower rate for the RR because this arrangement addressed specific concerns of both parties. In particular, RIAA wished to establish a marketplace precedent for IO transmissions in line with rates it had negotiated in earlier agreements, while Yahoo! sought to negotiate rates which, in the aggregate, yielded a rate it could accept. Consequently, the Panel found the rate for the IO transmissions to be artificially high and, conversely, the rates for the RR to be artificially low. For this reason, it made a downward adjustment to the IO rates and an upward adjustment to the RR rates.
Before making this adjustment, though, the Panel had to consider whether it was reasonable to establish separate rates for the two categories of transmissions. In reaching its decision, the Panel considered two facts, the fact that the Yahoo! agreement provided for two separate rates, and the fact that all parties agreed that performances of sound recordings in over-the-air radio broadcasts promote the sale of records. Report at 74. Based on this finding, the Panel concluded that a willing buyer and a willing seller would agree that the value of the performance right for RR would be considerably lower than for IO transmissions. Moreover, it attributed the existence of the rate differential in the Yahoo! agreement to the promotional value enjoyed by the copyright owners from the performance of the sound recordings by broadcasters in their over-the-air programs, and not to promotional value attributable to transmissions made over the Internet. Report at 74-75. Specifically, the Panel found that, “to the extent that Internet simulcasting of over-the-air broadcasts reaches the same local audience with the same songs and the same DJ support, there is no record basis to conclude that the promotional effect is any less.” Report at 75.
Fine. Except now it's July 2002, and Yahoo! is out of the broadcasting business. (Go to Broadcast.com and see what it says before your browser gets redirected away.) In fact, Yahoo! was already out of that business when the LOC reviewed the CARP recommendations for the final time between May 20 and June 20, 2002. Yet the LOC let those recommendations stand.
Think about it. Yahoo!'s original “deal”--the CARP's starting point for imagining a real-world market—is worse than unproved: it never happened. The CARP might have learned something if Yahoo! had tried and failed, but its efforts were stillborn. Without Mark Cuban's entrepreneurial savvy to guide them, and without sky-high stock valuations to encourage and fund all kinds of expensive market experiments, Yahoo! simply gave up and wrote the whole thing off.
Meanwhile, internet radio is being regulated on the basis of Yahoo!'s abandoned ambitions.
The feeble quality of the CARP/LOC due diligence work was fully revealed by Mark Cuban's e-mail to Kurt Hansen of RAIN, the Radio and Internet Newsletter, after the LOC's Final Determination. Here's the full text of that e-mail:
It's very interesting that they built this on the Yahoo!/RIAA deal.
When I was still there (the final deal was signed after I left Yahoo!), I hated the price points and explained why they were too high. HOWEVER, I was trying to get concession points from the RIAA. Among those was that I, as Broadcast.com, didn't want percent-of-revenue pricing.
Why? Because it meant every “Tom , Dick, and Harry” webcaster could come in and undercut our pricing because we had revenue and they didn't. Broadcasters could run ads for free and try to make it up in other areas so they wouldn't have to pay royalties.
As an extension to that, I also wanted there to be an advantage to aggregators. If there was a charge per song, it's obvious lots of webcasters couldn't afford to stay in business on their own. THEREFORE, they would have to come to Broadcast.com to use our services because with our aggregate audience, if the price per song was reasonable, we could afford to pay the royalty AND get paid by the web radio stations needing to webcast.
More importantly—and of course I didn't tell the RIAA this—we had a big multicast network (remember multicasting? Yahoo! didn't seem to after I left). Well, multicasting only sends a single stream from our server, so that is what we would record in our reports for the RIAA, and that is what we would pay on.
So that was the logic going into the Yahoo!/RIAA deal. I wasn't there when it was signed, but I'm guessing and I've been told that there weren't dramatic changes.
Now, no one asked me any of these things prior, during, or after the first or second pricing. I'm not sure that this matters. But if it does, here it is: The Yahoo! deal I worked on, if it resembles the deal the CARP ruling was built on, was designed so that there would be less competition, and so that small webcasters who needed to live off of a “percentage-of-revenue” to survive, couldn't.
There you have it, if anyone cares.
Mark CubanDallas Mavericks
So the real plan was to squash the little guys and o play rope-a-dope with regulators by funneling many streams into only one, so Yahoo! would spread the cost of one stream across hundreds or even thousands. Nice, huh? How come the CARP panel didn't pick that up in its “far ranging inquiry”? Mark Cuban's a talkative guy. Did they even bother to ask him about it?
In “Labels to Net Radio: Die Now”, in the current (July 15, 2002) issue of Newsweek, Steven Levy writes,
So why are the record labels taking such a hard line? My guess is that it's all about protecting their Internet-challenged business model. Their profit comes from blockbuster artists. If the industry moved to a more varied ecology, independent labels and artists would thrive—to the detriment of the labels, which would have trouble rustling up the rubes to root for the next Britney. The smoking gun comes from testimony of an RIAA-backed economist who told the government fee panel that a dramatic shakeout in Webcasting is “inevitable and desirable because it will bring about market consolidation.”
Which gives us CARP/LOC's final solution: consolidate the market to zero.
This idea became even more clear to me on June 21, when I talked with Howard Greenstein on the phone. I first met Howard in the summer of 1996, when he was an Internet radio pioneer, running a startup that fielded a whole fleet of stations. Howard later moved on to other things, but he learned a lot about internet radio business models in those pioneering days, and he has followed the whole CARP/LOC process with growing astonishment.
“There's no business model”, he told me. The DMCA, the CARP and the LOC all conceive webcasts as “performances”, and insist on pay-per-song royalties, yet there is little or nothing in reality to suggest that hearing an MP3 stream is worth anything more than zero to a listener. The royalty rates also are set so high that stations would have to charge a 20x advertising premium (over a nominal $10 cost per thousand), which barely cover the costs of playing a few songs between ads, ruling out advertising as well.
So, if you rule out pay-per-listen and advertising, what's left? The short answer is nothing: just a fenced-off space with severe fines for trespassers. The long answer is let's see: give the pioneers and their customers a chance to work something out.
But the long answer wasn't the one the lawmakers and regulators wanted to hear. They were working on behalf of what Joni Mitchell calls “the star-maker machinery behind the popular song”: namely, the record industry and the commercial radio business it pays to help manufacture and promote blockbuster artists. Since the money collected from internet radio will be divided up according to record sales, most of the income will go to blockbuster artists—not to the actual artists whose songs are streamed by the stations (even though the new law requires that stations keep unbelievably detailed records of what's being played, along with a mountain of other information, and even though the technologies for capturing and organizing all this information do not yet exist).
We customarily think of markets as cold, hard “forces”. But in fact, most people, given a choice, go into business to do what they love. And in some business categories, such as music, customers love the goods as much as the vendors do.
Internet radio as we know it today—what the RIAA and the Librarian of Congress want to kill off—is mostly by and for people who love music. To a significant degree this was also true of commercial radio, even up to its golden age, which on AM ended in the 60s and on FM ended in the 80s. What killed music-loving radio was bean-counting at all costs. And now it's about to strangle internet radio in the cradle.
Maybe, if enough of us love music and radio as much as these webcasters do, we can find a way to stop this insanity.
Where to start? Visit Save Internet Radio and Save Our Streams, look over your options, and start making some of your own noise.
One opportunity for that will come up today, July 17, when the US Department of Commerce Technology Administration hosts a public workshop on digital entertainment and rights management. The Department invited public comment through an e-mail form on the workshop site.
It'll be interesting to see what happened to it.
As background, here are other Linux Journal pieces I've written on the subject:, with the most recent items on top:
