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The Internet Makes Strange Stream Fellows

In the new fight to ‘save’ Internet radio, competitors join forces

It is once more unto the breach for Pandora.

The nation’s premiere online streaming music service has launched another website with a crusading banner over the top. “Take action,” declares the home page. “Stop discrimination against Internet radio.”

Pandora pushed hard for supporters to contact their representatives to back the Internet Radio Fairness Act. Pandora says it gets a raw deal when it comes to paying performance royalties, compared to other radio services.

Thanks to “legislative and legal strong-arming” by the Recording Industry Association of America, “Internet radio is subject to its own, very discriminatory standard,” Pandora founder Tim Westergren declared in a recent blog post.

The resulting bias is “staggering,” the commentary continues.

“To give you an idea, last year Pandora paid about half of all its revenue in performance fees alone.” Citing a SiriusXM royalty bill of 7.5 percent, the company says that, “no radio service anywhere in the world pays more than 15 percent of its revenue in such royalties.”

On Capitol Hill, offering a potential reprieve for Pandora and other streaming services, Reps. Jason Chaffetz (R-Utah) and Jared Polis (D-Colo.) in the House, and Ron Wyden (D-Ore.) in the Senate have sponsored Internet Radio Fairness Acts in their respective chambers. These laws would put online “pureplay” services on a performance royalty par with satellite and cable radio outlets. That could dramatically lower net radio royalty charges.

A Lot Has Changed Since 2009

SoundExchange, the non-profit that distributes royalties to artists and labels, is panning the idea.

In a response statement published on its official blog page, the operation claimed that Pandora “wants the law to be changed so that the rate could be set at less than fair market value, potentially much less.” SoundExchange asserted that this change would be unjust, because music is “the main content of a digital radio service.”

Pandora now has an unexpected ally in this fight: the National Association of Broadcasters. NAB Vice President Dennis Wharton sent Radio World a statement that it “appreciates the leadership of Reps. Chaffetz and Polis and Sen. Wyden and strongly supports legislative efforts to establish fair webcast streaming rates.”The trade group plans to work with the bill’s sponsors.

Fortunately for Pandora, this is not 2009 anymore. That was a tough year for streaming music copyright policy. In those days, the company — then the solitary symbol of Internet radio for most consumers — all but got on its knees begging for performance royalty relief.

Meanwhile, the big labels and Web streamers bitterly fought broadcasters over the Performance Rights Act, a perennially stillborn law that would require the latter industry to pay performance royalties just like digital streamers.

Complicating matters for Westergren is that now Pandora has lots of company in its niche. The most likely reason NAB is sympathetic to the Internet Radio Fairness Act is because, increasingly, traditional broadcasters are getting into the Internet radio business.

The most important of these entrants is iHeartRadio progenitor Clear Channel of San Antonio, Texas. Chaffetz lists Clear Channel as a supporter of his law. Other endorsers include the influential Consumer Electronics Association.

Pandora has more allies now, but more competition too. Even Apple might join the party, making noises about a Pandora-esque addition to iTunes. It’s worth looking at the Internet Radio Fairness War from its beginning to get a sense of how the pureplay streaming field has grown.

Fixed fees vs. percentages

The question of how to compensate online streams goes back to the 1998 Digital Millennium Copyright Act. That law put gave oversight over rates to the U.S. Copyright Office and a Copyright Arbitration Royalty Panel.

These regulators almost instantly began to quarrel over royalty rates. Congress wound up pinch hitting. And so in 2004, Capitol Hill replaced the system with a three-judge Copyright Royalty Board, which set to work and in March 2007 released performance tithes through 2010.

That’s when the digital yogurt really hit the fan.

For the uninitiated, CRB announcements are a blizzard of eye-glazing figures — tables filled with lines like 0.0019 per song performance. But for webcasters circa 2004, those numbers represented only half the problem. Particularly the smaller outfits wanted schedules that billed them via a percentage of their revenue, not on a song-by-song basis.

In response, CRB judges released a rising schedule of annual rates that webcasters insisted were established to please the RIAA. At this point the Internet radio industry, led by Pandora, “went to the mattresses.”

“The RIAA has effectively convinced this federal committee to establish rates that make online radio a non-viable business,” Westergren declared in a March 6, 2007 blog post.

Streamers also launched a public relations campaign that culminated in a National Day of Silence for Internet radio, paralleled by a blitz of Congress. Once again, the House and Senate came through, passing the Webcaster Settlement Act.

The WSA gave SoundExchange authority to circumvent the CRB and cut alternative royalty fee deals with Internet radio outfits. The agency did just that on July 7, 2009 — offering revenue based schedules for most services.

Westergren declared victory. “For more than two years now I have been eagerly anticipating the day when I could finally write these words: the royalty crisis is over!” he told followers in a July 9 statement.

Well, not exactly. Pandora tacked on a 99 cent fee to users who accessed the service for more than 40 hours a month, prompting Westergren to add that he felt the “system as it stands today remains fundamentally unfair.”

Meet the new players

Despite the gripes, the Pureplay Settlement of 2009 offered Internet radio breathing room, and the industry grew. Pandora went public, reporting an astounding 80 million registered users and more than $90 million in revenue by October 2011.

A veritable battalion of “pureplayers” either joined the fray or expanded their presence there. These included British streamer, acquired by CBS Interactive in 2007; Rdio, created by the progenitors of Skype; Spotify, which allows users to create web interfaces of their playlists;, which offers listener supported channels; and, a service that lets deejays create “decks” they can play hits to “rooms” of followers.

iHeartRadio came along in April 2008, representing a hybrid online model, allowing subscribers to access the company’s 800 radio stations or use the service as a Pandora-like streamer of recommended music.

The success of that venture became apparent when, in December of 2011, Clear Channel and Cumulus Media joined forces. The latter gave the former access to its “daily deal” SweetJack advertising service. In return, Clear Channel began airing Cumulus’ then-570 stations on iHeartRadio.

At around the same time, another Texas-based outfit upped the ante on Internet broadcasting. Decade-old online AM/FM station aggregator TuneIn radio added a song search feature that made it easier for mobile users to find both streaming and over-the-air stations. A tune query might land you on a neighborhood FM station or a channel.

By late 2011, pureplay radio was no longer the terrain of online mavericks; it was merging with over-the-air radio. The good old boys were getting into the act and winning market share.

Fair burden of proof

But this season of sprinting still hasn’t been easy for Internet radio. Growth is one thing; profit, another. Although Pandora scored record revenue gains in late 2011, it still lost money overall — about $17 million over the last two years. Many of these companies struggle with tricky models that combine advertising with pay subscriptions for mobile users. There isn’t much room for error, which means that performance royalty rates can make or break a pureplay business. That’s why Pandora and pals still go hat-in-hand before Congress.

Ron Wyden’s version of the Internet Radio Fairness Act is a complex affair. The gist of the law is that in any performance royalty setting proceeding, royalty seekers will have to demonstrate that payments “do not exceed the fees to which most copyright owners and users would agree under competitive market circumstances.” Copyright Royalty Board market benchmarks must mirror rates “that have been agreed under competitive market circumstances by most copyright users.” The idea is to tether royalties to the lower rates paid by satellite and cable streamers.

What are the chances of this legislation getting to a president’s desk? gives the bill odds of about 3 percent, which is actually better than the prospects for most legislation in these hyper-partisan times. Nothing is going to happen with this proposed law until Congress holds hearings on it, of course. Wyden’s bill is housed in the Senate Judiciary Committee at this writing.

Incidentally, we asked for a comment from Public Knowledge, one of the most influential beltway think tanks when it comes to copyright policy. A spokesperson told us that they were still reviewing a draft. But even if this particular initiative sputters for a while, support for it hints at a growing consensus in favor of a kinder system for streamers of all sizes and business models.

Postscript: On Oct. 25, several organizations including Clear Channel and Pandora together launched the “Internet Radio Fairness Coalition” to urge Congress to support the Internet Radio Fairness Act of 2012.

Matthew Lasar teaches history and technology history at the University of California at Santa Cruz. His writings on media technology appear in Ars Technica, Radio Survivor and Radio World.