Streaming deal worries NAB

Small Webcasters required to pay 10% of gross revenues to recording industry

A new royalty deal may be enough to keep many small Webcasters afloat, but commercial broadcasters worry that their efforts to expand into a new technology platform could be crippled if they are saddled with a similar arrangement.

Last week, the U.S. House approved a royalty rate worked out between small Webcasters and the recording industry with exemptions intended to mollify broadcasters. Despite the House assurances, the NAB is expected to oppose the plan in the Senate.

Although commercial broadcasters are exempt from the royalty structure negotiated between independent Webcasters and the Recording Industry Association of America (RIAA) last week, station operators fear that the arrangement could become a template for their streaming-royalty negotiations. At the heart of their concern: Web-only streamers must fork over a huge portion of their gross revenues—more than 10%—for the right to play music. That's not just gross revenue from Webcasting; that's all
revenue from audio or other entertainment programming and any other media- or entertainment-related businesses. To add insult to injury, revenue from any Internet or wireless services would be added, too.

"Even though broadcasters are exempt, we're concerned about the precedent-setting potential on stations that stream," says NAB spokesman Dennis Wharton. The NAB won't confirm plans to block Senate approval, but recording-industry sources predict an assault on the plan by radio-station owners if a vote appears likely.

If a similar deal applied to commercial broadcasters, revenue from radio and TV ads would be included in the royalty calculations as would cash from any additional entertainment businesses the station owners control.

Whether the Senate will take up the House plan is unclear. With lawmakers aiming to adjourn for election campaigning next week, there's little time to negotiate a separate Senate bill. Passage of the House bill unchanged is a possibility, but that option probably requires its inclusion on a docket of non-controversial bills requiring a vote of two-thirds of the Senate.

Such a strong endorsement from the Senate is unlikely, especially now that closer reading of the details is giving small Webcasters second thoughts on the deal, which bases their fees either on gross revenues or expenses, whichever formula would provide the greater royalty. The fees may be low enough for them to survive as a business, but few could make a lucrative business under those terms (see box), sources say.

For now, broadcasters that offer streaming continue paying royalty rates established by the Copyright Office, and an exemption clarifies that gross revenues and expenses won't affect any future royalty obligations of broadcasters.

Still, the NAB would like to see the exemption strengthened if the group can't kill the bill in the Senate.

The controversy over royalties came to a head in February when the Copyright Office established rates for both broadcasters' streaming and Web-only operators that go into effect Oct. 20. Broadcasters argue that they owe no streaming royalties to record companies at all and have taken the issue to court. Oral argument is scheduled Dec. 2 in federal appeals court in Philadelphia.

NAB argues that the threat of Copyright Office fees prompted many stations to drop Web operations. According to the latest numbers from BRS Media, stations on the Internet fell from a high of 5,710 to 3,940.

RealNetworks Vice President of Public Policy Alex Alben rejects the gloomy outlook for Web radio. RealNetworks, which offers streaming stations for a monthly subscription, is negotiating with RIAA to set royalties for subscription-only operations. Traditional ad-based operations will have leverage to boost more-favorable terms once the NAB's court battle is resolved.

"Things are turning around," Alben says. "The recording industry realizes it needs economic arrangements that allow Webcasters to survive. Webcasters in general will get a better deal when the FCC-licensed broadcasters bring their leverage to negotiations."