IBOC Fees Stir Reaction
by Leslie Stimson
Many broadcasters are just realizing that to make the digital
transition, they'll need to pay Ibiquity Digital Corp. software
licensing fees in addition to what they will pay manufacturers
for new equipment.
This comes as a shock for some executives who have been paying
closer attention to day-to-day revenue and debt concerns during
the economic downturn than to the likely costs of converting to
digital radio.
The fee issue is controversial. The median one-time licensing
fee would be about $12,900. At the top end of the scale, a Class
C FM could pay about $70,000. Ibiquity also plans to collect 3
percent of yearly station revenues from data services associated
with IBOC.
In addition to the costs involved, some radio stations would
end up paying fees to Ibiquity, a company owned in part by their
group owners - or their competitors.
Some observers wonder if the fee question could delay, if not
stop, the IBOC rollout before it gets a foothold.
Although Ibiquity began discussing some aspects of this policy
last year, details are emerging from the technology developer
and from broadcasters as they begin to discuss the concept.
Like Microsoft
A NAB2001, Ibiquity President and CEO Robert Struble told attendees
that his company intended to charge broadcasters licensing fees
to use its in-band, on-channel digital audio broadcasting technology.
The fees would be separate from costs to purchase equipment,
and would be based on a formula derived from the FCC's annual
regulatory fees.
He likened Ibiquity to Microsoft and said, "We're a software
company. If you buy a transmitter, you'll need new software from
us."
Charging purchasers for software and upgrades is typical in other
industries, such as computers, but it's a bold concept for broadcasting
technology. Typically a station buys a piece of hardware and the
financial obligation is finite.
Ibiquity executives say they chose an equitable way to distribute
the decade-long development costs for IBOC and that, as part of
its business plan, it needs to start generating revenue.
"We're trying to come up with a standard pricing approach.
We've come up with a model that works across classes of stations,"
said Senior Vice President Jeff Jury.
In addition to broadcasters, Ibiquity is working with transmission
and receiver companies - transmitter manufacturers and transmission-related
equipment makers, as well as receiver component makers, chip manufacturers
and automakers.
Will broadcasters accept the fees?
Part of the answer may lie in Ibiquity's ownership and business
partners. Company shareholders include most of the major broadcast
groups. It has licensing agreements with transmitter manufacturers
Broadcast Electronics, Harris and Nautel, and with receiver manufacturers
Kenwood, Harmon Kardon and Visteon. Ford recently took an undisclosed
equity position in Ibiquity.
In addition to broadcast stockholders, Ibiquity also has Wall
Street investors who presumably want a quick return on their investment.
Ibiquity has spent millions developing IBOC technology and expects
to recoup those costs, as does its equipment partners.
"Everybody from each sector would say, 'Charge the other
guy'" in recouping costs, said Jury. "We're trying not
to burden any one sector."
Why now?
Some broadcasters familiar with the station fee plan assume Ibiquity
wants to charge stations now because it cannot wait to recoup
costs from its portion of the IBOC receiver sales.
When asked about the timing, Jury said, "As a business,
we can't just keep never making money. We need the money now in
the sense that we're starting the rollout now."
He said the company won't become succeed only from broadcast
license fees, that eventually it will make most of its income
through receiver sales.
The fees work like this: Annual FCC regulatory fees for radio
stations range from $250 to $4,550 based on station service, power
class and size of population served. A station would pay Ibiquity
a one-time licensing fee calculated as 15 times its annual FCC
regulatory fee.
Thus the range for a one-time perpetual license would be roughly
$3,750 to $68,250. Ibiquity says the median one-time licensing
fee would be about $12,900.
Stations also could choose to pay over a 10-year period. (See
"IBOC Q&A", page X.)
"If you look at those numbers, I don't think it's an onerous
amount to pay for digital radio," said Jury.
'Stumbling block'
Some broadcasters feel differently.
Members of Ibiquity's own broadcast advisory rollout board, made
up of owners and engineers, advised against the fee system.
"They're going to have to come up with a plan for broadcasters
to buy a new transmitter, pay, and be done with it at that point,"
said one member, who characterized the fees as a "major stumbling
block" in the rollout.
"I don't think they've thought them through," said
another advisory board member. "If they're trying to entice
broadcasters to go digital and require us to spend on average
$150,000 just on the hardware, it certainly reduces our enthusiasm.
"If they were looking to encourage development, at a minimum,
they would defer software payments for a year or two, so we wouldn't
take a hit all in one year."
One broadcaster not on the advisory board said that if his company
were asked to cut a licensing check today for all the stations
they plan to convert this year, the total would be $1 million.
"There's no company that has a million unallocated,"
he said.
Noncommercial stations are exempt from the FCC's regulatory fees,
so they would pay the lowest IBOC licensing fees. But some of
them protest the levies as well.
In comments submitted to the FCC about the National Radio Systems
Committee report on Ibiquity's FM IBOC system, the Rocky Mountain
Corporation for Public Broadcasting wrote that its stations are
"outraged at this unprecedented use fee plan."
One unnamed manager wrote to the FCC, "I think it is unconscionable
that they are asking the FCC to adopt their sole technology as
the only system and then charge every station an annual use fee
on top of the fees you will already pay to Harris etc. that will
be built into their digital equipment if and when you decide to
buy their transmitter."
One noncommercial manager said, "This is going to kill noncommercial
stations." He added that public radio stations, which typically
vie with public TV for grant funds for equipment purchases, face
added pressure from TV's mandated digital conversion.
'The most sense'
Some commercial station sources pointed out that not all noncoms
have the same resources and felt those stations also should be
charged a sliding scale. Other commercial sources did not begrudge
the noncoms getting the lowest fee.
When asked about the concept, Jury said Ibiquity decided the
model it developed "made the most sense."
Ibiquity has been discussing the fee plan with its investor broadcasters
and other station owners, distributing "Memorandums of Understanding,"
precursors to contracts.
Several broadcasters who spoke to Radio World suspect the Ibiquity
fees are up for negotiation and hope to see them reduced or delayed.
It's not clear if any have signed licensing fee contracts with
Ibiquity, which considers that information confidential.
Some broadcasters think early adopters might get a break. But
other broadcast sources don't believe there are deals to be had.
Some feel that the biggest groups, Clear Channel or Infinity,
would negotiate the terms and that all other groups and individual
stations would need to fall in line.
One such source said his company lawyer termed Ibiquity's memorandum
language "weasel wording that will be meaningless in negotiating."
Ibiquity says there will be no deals, not for its investor broadcast
groups, nor for early adopters, and that there will be no bulk
station discounts.
"What we're trying to do is put information out there that
we plan to stick to," said Jury. "It doesn't make sense
if we change it for each person. We think that this pricing model,
which is fair, already takes that into account," said Jury.
He said the fee concept has been in its business model for several
years. Executives had discussed passing through its development
costs onto the equipment costs, as suggested by some broadcasters,
but decided the licensing fee system was more equitable.
Manufacturers close to IBOC development disagreed on whether
licensing fees could impede the rollout.
Data fees
Another part of the fee plan concerns revenues stations would
make from ancillary data services potentially possible using IBOC
technology. Ibiquity wants 3 percent annually from station revenues
generated from the IBOC data services.
How Ibiquity intends to police this is unclear. The situation
invites stations to hide such revenue, sources said. Others said
it might be difficult for commercial stations even to calculate
their data revenue if, for example, they had given data services
to advertisers as a value-added item.
Sources said Ibiquity's memorandum states that it has the right
to audit station books twice a year to determine the real revenue
from the data services, something some companies strongly oppose.
Although Jury would not confirm or deny this language, he said
it would not be unusual for such a software fee license contract.
"We're not trying to get into people's books, we're trying
to get into the data business." He said the process of calculating
revenue from data is a "gray area" that would have to
evolve.
Observers said Ibiquity may demand the right to audit a station's
books but that doesn't mean the company would actually do it,
and termed the language standard contract boilerplate.
Another gray area is how a station would pay for upgrades.
Theoretically, the fee only gives the station the right to use
the software in the gear at the time of purchase. An upgrade could
require another licensing fee.
This situation is still under discussion at the company. Ibiquity
doesn't want to alienate purchasers by charging for software upgrades
immediately.
Another question is what happens when a station is sold. Would
the terms of the licensing agreement remain with the facility?
It's pertinent, as the FCC processes 3,000 to 4,000 radio transaction
applications each year.
Several sources hoped the FCC would question Ibiquity about the
licensing fee issue, but a source close to the commission said
he doubted the agency would "put a wet blanket on this transition
by getting into the fees."
Similarly, the NAB and NRSC do not have a position on the fees.
