Internet music services--such as Napster, Live365, and Radio Paradise--are hampered by the lack of compulsory licenses, permits that would allow them to play any song, provided that they pay an agreed-upon sum in exchange for the right to play it. Compulsory licenses are the means by which terrestrial radio stations are able to spin any record, and the reason that musicians can cover any song in concert without getting prior permission. Rights-collecting societies such as ASCAP, BMI, and SESAC collect licensing fees from broadcasters, sample the airwaves and clubs, and apportion their kitties appropriately.

High-tech music services started their businesses on the assumption that they would get a similar deal, since they too are in the business of promoting music to audiences. What's more, they can produce usage numbers for any given song that are far more accurate than the statistical samples used by the rights societies.

Fox guarding the henhouse
After years of big-money litigation, bankruptcy, and polemics, Webcasters, artists, and labels are finally sitting down with the U.S. Copyright Office to hammer out the licenses under which music will be distributed on the Internet. But Webcasters and artists claim that the Recording Industry Association of America (RIAA), with its deep pockets and high-placed lobbyists, has hijacked the process and is setting up a world where the music industry fox guards the Internet henhouse.

The RIAA is lobbying the U.S. Copyright Office to set both the royalty rates paid by Webcasters for the music they play and the means by which those royalties will be collected and distributed to artists. Whatever rate is set will also apply retroactively; Webcasters will be legally obligated to compensate copyright holders for any material used over the past three years.

Webcasters insist that the RIAA's proposed rates are too high, while artists insist that the system the RIAA proposes for collecting and distributing royalties is unsound. There's a lot at stake for all interested parties, from Webcasters to artists to the recording industry.

The math doesn't add up
"If I were allowed to start small--in terms of both audience and payments--and be allowed to grow, eventually I could afford to write a nice check to whoever distributes artist royalties," explains Bill Goldsmith, whose Radio Paradise Webcast draws more than 50,000 listeners per month. Goldsmith's listeners donate $3,000 or more per month via PayPal for the service just to keep it going. Still, if Goldsmith were to abide by the RIAA's rates and terms, he'd quickly go bankrupt.

"I've calculated that I could be liable for as much as $16,000 per month--over four times my current income from the station--under the RIAA's proposed rate structure," he insists. "I don't think anything as ludicrous as that will actually be imposed, but any per-listener or per-use fee structure is going to kill off anybody without very deep pockets, because at this point in time, revenues from Internet radio advertising are virtually nonexistent."

"Any of the proposed digital performance royalties would mean that Internet companies end up paying more for playing music than their terrestrial counterparts--there are no performance royalties for traditional radio broadcasting," explains Brian Zisk, technology director for the Future of Music Coalition (FMC).

Zisk, who was himself a Webcaster in 1998 when he cofounded The Green Witch Internet Radio, contends that the RIAA's proposed fee structure--under which Webcasters would have to pay a royalty every time they play a song--would put most independent Webcasters out of business. He also claims that the RIAA could use the threat of suit under the Digital Millennium Copyright Act to hold Webcasters hostage, because its mandated statutory Webcast license is written in such a way that makes it virtually impossible to stream music legally.

"The current licensing scheme is a perfect example of the absurdity that the controversial Digital Millennium Copyright Act gives rise to," he says. "It places the power in the hands of the recording industry to pick and choose who they file suit against, or otherwise coerce."

Protection money
According to Zisk, Webcasters were required to sign statutory Webcast licenses starting in 1998, in advance of providing noninteractive streams. This license stated that they would pay whatever rate was decided in the future, retroactively being billed for what they had streamed since 1998.

"Every single negotiated deal was done under duress," he claims. "Otherwise, you just had to sign the statutory Webcast license and agree that you'd pay a rate to be determined later."

In order to participate, Webcasters and artists must file a Notice of Intent to Participate, agreeing to pay a portion of whatever court fees were incurred during the proceedings. There's no way of knowing in advance how much those costs might be. "It's a long and involved process and in the end, official participants will get a bill for an unspecified amount," says Zisk. "The time, commitment, and legal fees involved are unknowable but will likely be huge."

The RIAA is trying to convince Congress that it is capable of performing the duties of an objective agent for copyright holders. In November 2000, the RIAA created SoundExchange to function as a "collective" that would aggregate the royalties obtained from compulsory license fees and distribute them to artists. The U.S. Copyright Office is considering the RIAA's proposed rate structure based on the organization's claim that the 200 members of SoundExchange "own copyrights in approximately 90 percent of the legitimate sound recordings sold in the United States." Artists' rights organizations such as the FMC say that the RIAA and its agencies are not neutral parties in this arrangement and can't be trusted to fairly collect and disburse the royalties.

On July 23, 2001, the U.S. Copyright Office solicited feedback on the means by which SoundExchange would function. August 22, 2001 was the last day that interested parties could file comments opposing the RIAA's proposed regulation for collecting and distributing royalties from pre-existing subscription services. The FMC was one of the few pro-artist groups to file comments.

Corruption waiting to happen
The RIAA's petition proposed that SoundExchange would be able to deduct administrative costs from royalties--prior to paying them out to artists--without setting any limitations on these costs. Artists would be required to foot the bill for any independent audits, and SoundExchange would be allowed to absorb any revenue from unclaimed royalties after only three years, despite the fact that the process for copyright holders claiming such royalties hasn't even been decided yet.

In its comments, the FMC claimed that the RIAA's SoundExchange proposal "is uniquely flawed and unworkable as it is currently conceived" and urged the U.S. Copyright Office to pay closer attention to the situation "so the allocation of future moneys is not compromised by confusion and litigation." FMC also emphasized how the model used by ASCAP and BMI is one that should be emulated.

In addition, the FMC stated, "We urge the Copyright Office to consider the historical precedent provided by the performing rights organizations and the music publishers. These entities have spent decades developing their procedures for the direct payment of performance royalties to artists and songwriters. There is no reason why we should not learn from their successes and mistakes in order to create the best possible payment system for recording artists and record companies."

And Bill Goldsmith agrees. "The model is already there: the fee structure used by ASCAP and BMI is based on a share of gross revenue. That I can live with." Hopefully, the Copyright Office sees the light before it's too late, or we might lose the Internet's incredible potential for streaming music.

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