Proposed American Law Would Limit Royalties Paid Out by Internet Radio

Here in Canada, radio stations pay a series of fees for the privilege of playing music as part of their business plan.  The thinking is that if stations use the artistic works of others to make money, then the owners of those works should be fairly compensated.  No argument from me.

The amount of money an individual radio station pays out to artists is determined by gross revenues.  A station must pay out a certain percentage--always in the single digits--of those gross revenues to the aritst.  The more money a station makes, the more they pay.  Seems fair.

Internet radio is different.  While simultaneous streaming of an over-the-air signal is covered by the agreement I just described, an Internet-only music broadcast has its own payment rules.  Instead of being linked to revenues, royalties must be paid on a per-song per-listener basis.  

This creates all kinds of challenges.  Each and every song must be tracked and reported by how many times it was played and how many people heard it each time it was played.  There's software that can simplify things, but it's still quite a complicated procedure.

The bigger issue is this:  The more people you have listening to your Internet radio station, the more you have to pay REGARDLESS of revenue.  You begin to see the barriers to innovation.

And there's more.  When you run an over-the-air radio station, you can fix your costs to a certain extent. For example, the cost of the electricity to run your transmitter is the same regardless if you have a hundred listeners or a million.  That means the bigger you grow your audience, the more profit you stand to make.

This goal of economy of scale doesn't apply to Internet radio.  You get more listeners, you pay more. You never get a chance to increase your margins. In fact, if your costs go up (and they often do once you become more successful), your margins actually shrink.  The more successful and popular you become, the less money you stand to make.  How is that an incentive for anything?

This has been a major problem facing Web services like Pandora.  They're hugely popular with millions of listeners yet they're at a financial disadvantage when it comes to terrestrial radio.  A huge, HUGE percentage of their revenues--somewhere north of 70%--go just to paying royalties.

There are some sympathetic ears in Washington.  There's a new bill called "The Internet Radio Fairness Act" which would limit some of these costs, thereby giving companies like Pandora a better chance of making a go at it.

I LOVE this idea.  It would open the floodgates to new services and an new era in radio.

Naturally, though, the bill has its opponents.  Terrestrial radio likes their financial advantage. And the American Federation of Musicians--concerned about lighter payments to their members--call this the "Internet Radio Rip-off Act."

This could get interesting, especially if it passes.  Then what will other countries do?