Tales of the Sausage Factory

As internet radio subscribers today may have discovered, a number of internet radio sites are participating in a “Day of Silence” to draw attention to the upcoming increase in internet royalty rates that will drive many of the smaller sites out of business (and probably drive up rates for others). On July 15, the rates paid by internet broadcasters will increase dramatically (retroactive to 2006), thanks to a decision last spring by the Copyright Royalty Board.

Supporters of internet radio are pushing members of Congress to support the Internet Radio Equality Act (H.R. 2060 and companion bill S. 1353 in the Senate). The Bill would fix the rates for internet broadcasts to match the rates paid by satellite radio providers (terrestrial radio providers pay no royalties, heck they are able to extort payola from the music industry). You can find much useful information and how to take action from this Free Press Action page.

UPDATE: Members of Congress Beg Industry Not To Force Them to Actually, Y’Know, Do Stuff.

And I want to stress that action to pass this bill is desperately needed. Why? Because conventional wisdom (CW) in DC is that this bill is unnecessary since everyone expects Soundexchange (which reps the music industry on royalty collections for online play) and the “internet radio industry” to cut a deal. As the CW goes, everyone has too much to lose if the rates really do go into effect — what with public radio stations and other smaller radio broadcasters stopping their streaming, popular streaming sites like Live365.com potentially going under and independent musicians losing their exposure and so forth — that the relevant parties must inevitably cut a deal. And, if all else fails, the DC Circuit may solve the problem by reversing the Copyright Board. So why pass a bill when the problem will take care of itself?

Unfortunately, experience tells me that it is precisely in situations like this, when everyone thinks a deal is inevitable, that there is the highest risk of things spiraling out of control and falling apart. Each party thinks that because “failure is not an option” it can hang tough and the other side must blink. Usually, this collapses into a last minute scramble to reach an 11th-hour agreement. But given the diversity of players and complexity of issues, I don’t think you can patch this up with a Marathon session that ends at 11:59 p.m. on July 14.

Consider, there is a huge disparity among the terrestrial radio broadcasters on what would be the acceptable dimensions of a deal. Industry giants like Clear Channel and Viacom will be willing to settle for a much higher rate than either small commercial operators or NPR. NPR, in turn, will settle at a much higher rate than the small non-commercial stations such as those represented by the National Federation of Community Broadcasters. The “internet broadcasters” have even more exagerated divisions by size and business model, with many of the smallest players absent from the negotiations. An industry with participants from Yahoo! to the archtypal individual in the basement is not going to come together on a “unified position.”

Worse, there are other elements of the structure besides the rate itself. Other issues include the reporting requirments and DRM management systems demanded by the music labels. While these are not addressed by the legislation (which only addresses rates), the negotiations among the industry participants will likely include extraneous issues in an effort to get a critical mass of industry players on board. Again, this favors the largest participants with the most diverse interests.

Finally, the largest players — particularly the big radio chains — have incentive to cut a deal that reduces the existing rate but still jacks up the price (either in terms of rates or interms of additional monitoring and reporting costs) for smaller players (both terrestrial broadcasters and internet broadcasters).

On the music side, there is considerable diversity of opinion among musicians about what to do here. On the one hand, independent musicians love internet radio as an outlet where they actually get play time and do not want to see the internet broadcasters strangled. On the other hand, it is very difficult for people to aggressively advocate to cut their own pay. A good analogy is where a union negotiates with management for pay and benefit cuts to stave off a business collapse. On the one hand, workers want to keep having jobs. OTOH, it is tough to swallow — particularly when the fat cats (here, the major labels and the large terrestrial radio chains) are still making out like bandits. There is a natural inclination of independent musicians to ask “why the Hell should people ask us to save internet radio at our expense when we already get shafted by the system? Aren’t we entitled to get a pay raise?”

So, in my opinion, I think getting a “comprehensive settlement” that eliminates the need for legislation is a lot harder than people think. And, even if there is a settlement, it is almost certain to tilt toward the interests of the largest industry players with some crumbs thrown to the little guys. Everyone will pose for the photo op looking exhausted and saying that it was a tough negotiation but something everyone can live with. Meanwhile, the cutting-edge tiny independents — who don’t even register on the DC policy meter but who most need protection of a set, fair rate to survive — will die a silent death offstage.

And, even if there is a settlement and it is livable, this decision will hang over internet radio providers like a damn Sword of Damocles, shaping the industry and forcing them to play by the rules set by the big music labels and the biggest radio operators because they live in fear of when the agreement expires and they have to go through all this again. A world where internet radio broadcasters have a right to music at a set rate is a very different world from one where they must go begging on bended knee to the copyright lords for the privilege of access to music that competes with other powerful interests.

So if you love vibrant and truly independent internet radio, and if you want to keep the door open so that the next generation of internet radio innovators can come into being, please, please, PLEASE call your Sentors and Representative and tell them to support the Internet Radio Equality Act. Tell Congress to resolve this issue for good, in a way that both makes sure performers get paid and still allows internet radio and community-based terrestrial radio broadcasters to defy both the major labels and the big broadcasting chains.

Stay tuned . . . .