Yesterday Free Press launched a Rescue Internet Radio Campaign to protest the new royalty rates being imposed on digital audio broadcasters. I think it makes a lot of sense in this case to take some time to understand what's going on here, and in particular why those rates are greater than those rates paid by traditional broadcasters -- those AM/FM guys who broadcast on some part of the wireless spectrum.

So what happened here was that the U.S. Copyright Office's Copyright Royalty Board endorsed a proposal (pdf) put together by the RIAA-associated SoundExchange royalty organization. SoundExchange's license fees are set by law and have in the past been pegged at $.0003 to stream one song to one listener -- what's known as a listener hour. With this decision, CRB set those rates to $0.0008 retroactively for 2006. They climb from there, starting at $.0011 this year and increasing each subsequent year until they plateau at $.0019 in 2010. Under the plan, every digital audio channel would have to make a minimum $500 royalty payment to SoundExchange, including non-commercial stations. In the past, small webcasters were able to pay royalties based on revenue, with a small minimum fee per year -- something around $2000, I think. No more. What happens to them now? One estimate is that while traditional radio stations paid about $1.50 per listener in 2006, digital broadcasters will pay about $9 now and about $15 in 2008. The argument goes that for some digital broadcasters, their royalty obligations would come in at more than they money they take in. Many will quit broadcasting, most likely.

What's important here is that these are royalties for performance. The royalties collected by SoundExchange are based on the actual performance of the song. Half of what SoundExchange collects goes to the song's copyright holder, who is usually the recording company, while 45% goes to the featured artist(s) and 5% to backing musicians and vocalists. There was no performance rights for sound recordings before the 1990's and especially the Digital Millennium Copyright Act. and when the DMCA established one, it applied it only to digital performances. Of late, SoundExchange et al have been pushing for the application of a performance right to terrestrial radio, including Sirius, XM, and the like. As it stands, however, traditional broadcasters are right now exempt from the performance rates that digital stations have to pay. But both digital and traditional broadcasters do have to pay a fee to the composer of the song recorded. Those generally go to one of three composers' organizations -- ASCAP, BMI, or SESAC.

So the way it stands now is this. If you live in New York and hear Melissa Etheridge sing her version of Tom Petty's "Refugee" on say, Z100 at 100.3 FM, then the songwriters (Petty and guitarist Mike Campbell) are the ones to whom royalties are directed -- via ASCAP. But if you hear the same song on Pandora.com, then the work of both Etheridge via SoundExchange and Petty & Campbell are being licensed. (Fun fact: Petty says that the inspiration for "Refugee" and the whole "Damn the Torpedoes" album was his anger with the whole ferkockteh recording industry.)

Crystal clear, no? All this is fun (and profitable) mental exercise for lawyers, sure. If you think all this makes it extremely challenging to take on Internet radio as an entrepreneurial project, you're of course right. How did we get to this point? Consider that in 2004, the RIAA described digital radio as "the perfect storm" -- and they meant that in a bad way. The threat from digital radio is "real and imminent," (pdf) they said, and they argued that the greater potential for copying and the like had to be accounted for. Thus the establishment of SoundExchange. And in theory, the SoundExchange system was a way of making formal the webcaster model and streamlining the process by making clear what the costs of doing business are up front. And it also rewards performing artists. It's a good thing for performers to get paid, no doubt.

One reading of this situation is that the Copyright Royalty Board set rates at something shockingly high as a way of opening the discussion. And in fact, the CRB will hold further hearings on the royalty rate hike. The Free Press Rescue Internet Radio campaign is a way to let the CRB know that any royalty scheme that makes digital radio impossible is bad policy for all of us.