Tuesday, October 21, 2008

THE DIRTY GAME BEHIND WEBCASTER ROYALTY RATES

Internet radio broadcasters and labels are nearing a resolution on recording royalty rates in the US, but the process has been anything but equitable and balanced. In fact, a closer look raises questions on whether broadcasters and artists are ultimately getting the deal they deserve. That was a major takeaway from a morning discussion at the SanFran MusicTech Summit on Monday, one that featured Pandora founder Tim Westergren and former RIAA executive and SoundExchange counsel Gary Greenstein.

Anyone operating inside Washington is no stranger to dealmaking and leverage, though according to Greenstein, smaller webcasters were simply unmatched in rate-setting arbitration proceedings from the beginning. "These litigations are expensive, they cost millions and millions of dollars," Greenstein said. "SoundExchange is allowed to use the revenue stream that it collects from webcasters to pay its outside counsel. So, even though there are budgets, there is essentially an unlimited resource of money that enables SoundExchange to litigate fully," the lawyer noted.

As a result, Greenstein pointed to strong participation from major recording labels and major internet broadcasters like Yahoo, AOL, Apple, and RealNetworks. Smaller webcasters were also part of the early process, though their representation was considerably weaker. In fact, then-developing Pandora was not even part of the initial process, despite a leadership position in the current rates-setting debate. "Pandora was a small company, and to participate, it costs a lot of money," Greenstein relayed.

Greenstein also pointed to a stronger litigation strategy from SoundExchange, and several tactical mistakes on the other side. "SoundExchange had very competent outside counsel, they did a good job and I'm not sure that the litigation on the other side really shifted their logic from what didn't work the first time," Greenstein continued.

The result was a disproportionately high rate resolution for the owners of recordings, specifically major labels, one that webcasters are now battling against. In July of last year, the Copyright Royalty Board (CRB) approved a rate structure that ramps to $.0019 per stream, per listener in 2010, alongside various per-station minimums.

In terms of negotiation tactics, SoundExchange is now working from an elevated position. Pandora founder Tim Westergren has repeatedly warned that current rates threaten to put his company out of business, based on a royalty obligation that reaches 60 percent of potential revenue streams.

But Westergren is actually a moderate on the issue, especially compared to earlier internet radio startups from the late 90s. "On the technology side, there were a bunch of cowboys during the first few years of the technology," Westergren relayed. "They brought the wrong attitude to the negotiation, and that was a chapter that upset a lot of people, understandably," said Westergren, who also pointed to "calmer heads on both sides" in the current process.

But the current rates renegotiation is anything but subdued. In order to get back to the negotiating table, Westergren and the smaller webcaster community rallied their listeners to call Congress demanding a fair resolution. "The only reason I am still here now is because of the public," Westergren noted. "Pandora and a whole collection of webcasters sent emails to their listeners and said, 'call Congress,' and two million people responded."

Meanwhile, both Greenstein and Westergren pointed to additional representation issues within the rates-setting process, particularly as it relates to the artist. "Artist interests are not really being represented yet. They do have some board seats on SoundExchange, but I don't think they have a very loud voice on this issue," Westergren said.

Greenstein backed that assertion by sharing some inside details related to SoundExchange. "It's not that artists aren't necessarily speaking up loudly enough, it's that the structure of their negotiating body puts the decisions in the hands of record labels, and not artists."

SOURCE