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3/12/2002
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Sour Note

Plenty of industries have reinvented themselves in the Internet age. But, Esther Schindler says, the music business isn't one of them. Case in point: Internet radio.

Ten years ago, I loudly scoffed at an industry analyst when he said, "The Internet will change everything." If I could remember his name, I'd apologize publicly now and even add that I'm sorry about the incident with the hamster and the duct tape.

As we've all learned, the Internet has forced nearly every industry to make major changes. Some have coped well; others are still struggling to embrace this thorny porcupine. The movie industry is exploring financially viable ways to exploit the Internet, from business-to-business theater distribution methods to movie promo sites. And, while the print publishing industry hasn't figured out yet how to make money off E-books and publish-on-demand, you've got to give it credit for trying. (Fictionwise.com is one example of an E-publishing model with a good chance, but then anybody who'd publish Kage Baker's science fiction would earn my affection.)

The music business? Bzzt. In Reinventing Business 101, I'd have to give it a failing grade. Rather than embrace the Internet, the music business is doing everything possible to strangle it. Nothing proves that point better than the current issue with Internet radio.

We Built This Site On Rock 'N' Roll
Internet radio isn't yet big business. There are a few big names involved--such as AOL and Microsoft--but most of the action and innovation comes from streaming servers operated by small independent radio stations. They have more personal passion than income, yet they've earned a growing number of enthusiastic listeners.

...However, the U.S. Copyright Office is in the final stages of approving a fee structure that could easily shut down many of those radio stations. (See Rates And Terms For Statutory License For Eligible Nonsubscription Services if you want the gory details.) Worse, the stations themselves have little formal recourse, and the Powers That Be won't listen to them. So they're depending on each of us (that's you 'n' me, folks) to write our congresspeople, loudly play Muskrat Love underneath their windows, or do whatever else is in our individual power to fight the decision.

I can't summarize the situation any better than did the folks at www.radioparadise.com, so with their permission I'll paste it in below. Forgive me for its length, but this really does tell you what you need to know.

The fees in question are royalties to the sound recording copyright owner--which have never been paid by broadcast radio, but are due in the case of digital transmissions under the terms of the DMCA (Digital Millennium Copyright Act). The stations in jeopardy are those run by individuals or small business, rather than large corporate interests.

Unfortunately, the CARP (Copyright Arbitration Royalty Proceeding) that evaluated this issue has come up with a set of recommendations that are tailored to a marketplace that never came to be: one dominated by large webcast operations generating huge profits derived from advertising revenue. Instead, in 2002 we find that those revenue projections were (in retrospect) irrationally exuberant, and most of the large webcast firms are out of business. Webcasting is dominated instead by stations like ours: with rapidly growing, passionately enthusiastic audiences but very little revenue, supported in great part out of the owners' pockets and through listener contributions.

We webcasters realize that we can't expect the free ride that broadcasters enjoy on the issue of sound recording copyright royalties. We are willing to pay the royalties, particularly when they actually benefit the artists rather than the record labels they are beholden to. However, there's a big problem with the existing proposal. In most cases such royalties are based on a share of revenue. This method has worked very well for decades in the collection of the songwriters' royalties that are paid by both broadcasters and webcasters, as well as bars, restaurants, background music services, and others. The CARP recommendation, however, requires a per-use royalty. Each time a song is played, the station must pay $0.0014 for each listener that is tuned in.

The RIAA (the trade organization that represents record companies) proposed that webcasters pay either a rather large share of revenue (15%) or a per-listen fee. DiMA (which represented the large webcast operations) attempted to protect the interests of its members (who, remember, expected to soon be generating huge profits from their webcasts) by recommending that the arbitration panel reject the revenue share method in favor of a much smaller per-listen fee. Since both parties were asking for a per-listen fee, naturally that's what the panel ended up recommendation--one midway between the figures suggested by DiMA and the RIAA.

This might be fair if it were being applied to large webcasting corporations whose stations were loaded down with lots of expensive ads. But, given the state of webcasting today, the highest fees would be owed by stations like ours that are in no position to pay them. We would be required to cease operation--depriving our listeners of a source of great enjoyment, depriving station operators of the opportunity to grow our stations into profitability, and depriving the artists of the potential revenue that would flow from our success.

These music-industry people are acting like a bad substitute teacher in a high school classroom. The only way they can control the unruly teen-agers is to shout, "Shut up!" (It didn't work in high school, either.)

To paraphrase Arlo Guthrie: If you want to win a war and stuff, ya gotta sing loud.

Won't Get Fooled Again
There are a couple of issues here. One of them is the specific concern about Internet radio Webcasting. (And, in case you're as interested in this as I am, I'll include resource links at the end of this column.) The larger problem, though, is that the music industry hasn't managed to wrap its hands around the Internet, and it doesn't look like it's getting smarter anytime soon. Do I need to mention DMCA? Napster? MP3? I didn't think so.

What's worse: They have a rectocranial inversion in regard to celebrating the unique business opportunities presented by the Internet.

Need a fer-instance? OK, let's turn back to Internet radio Webcasting. Broadcast radio is necessarily limited by signal strength; because a station has an inherently geographically defined audience, you hear ads for local car dealers or grocery store specials. The Internet is anything but geographic; you can serve (and reach) a well-defined niche market that can't find its goods or services by hitting the scan button on the car radio. Yet, Internet stations are still broadcasting the local ads. While I might be interested in a sale in Santa Cruz, Calif., it's probably not a good use of my time or the advertisers' money.

I listen to that online radio station because it serves a specific need that's unmet in the "general store" of rock radio. That's a missed business opportunity, and I don't see anybody exploiting it. Traditionally, niche markets are willing to pay a little more for their specialized needs, and they often see relevant advertising as information, not an annoyance.

Specialized audiences also provide unique advantages to those who want to sell to them. I'm not just talking about Rounder Records buying radio spots or Web banner ads on folk-music radio stations (though I'm a little surprised they don't). Smart marketers will connect other demographic relationships and turn that knowledge into profit. (That's what all those personalization applications were supposed to teach us. Remember?) Here's one hint: Computer programmers have an incredibly high likelihood of being science-fiction fans, just as IT staff are almost always interested in space exploration. Surely I'm not the only person who makes these connections? However, I've never seen an ad for computer equipment in Analog.

The Internet's successes came about because some smart individual saw this medium as a new way to connect businesses and people. In the book business, which relied on in-store browsing and serendipity, Amazon.com managed to create loyal customers with personalization and nearly unlimited availability. Surviving B-to-B services found a way to replace the old way with something better.

I don't know the answers. As I see it, however, the music industry is trying to stop everything so hard that it hasn't taken the time to look for new, uniquely online opportunities that would earn more royalties than $0.0014 for each Internet radio listener (that's going to disappear right quick when the stations do).

The only thing they're managing to stop is innovation. I don't think that the music business knows the answers any more than I do--but it's quit looking for the right questions, and that's a much more dangerous situation.

Esther Schindler is InformationWeek.com's site editor and apologizes deeply for mentioning Muskrat Love. You can chat with her about this column in the Talk Shop forum.

Keeping Internet Radio Alive: The Resource List
Most of the Internet radio stations will tell you about the new ruling and point out that they won't be "on the air" for much longer if this matter isn't resolved. But if you want to learn more about what's happening, here are a few spots worth checking out:

  • SaveInternetRadio.org is acting as a clearinghouse for most of the news on the subject and provides links to most of the relevant documents.
  • Save-The-Music.org has a slightly broader mission of explaining "what the RIAA (the record companies) are trying to do to you as a music fan." But it's still worth a stop on your Web travels; it does have a discussion forum.
  • The Radio and Internet Newsletter sends out updates about the latest issues involving radio and its relationship to the Internet.
  • This issue is pulling together the community. Among the most well-spoken people involved is Doc Searls, who's probably best-known as one of the authors of The Cluetrain Manifesto. Searls has been reporting on the radio issue in his personal Web log, though sometimes with language that would get me frowned at by my mom.
  • The L.A. Times ran an article about the subject, Groups Appeal Online Royalties Proposal.

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