SharkJumping

The Copyright Royalty Board last week released its ruling on Internet radio royalty rates for the next five years, and all it did for me was trigger brutal reminders as to why the digital music business is a terrible sector for anyone but content creators.  As a reminder, music labels are not paid directly in the US for songs played on the radio (publishers are) since it ostensibly contributes to sales of the music as a promotional vehicle. 

But the RIAA was able to insert a clause into the DMCA legislation which gave the labels the right to a royalty on Internet radio play, and the CRB determines the royalty rate in multi-year segments - it's a government statutory rate, similar to the 8.5 cents paid to publishers for every download or physical sale.

The 2005 rate was $.0007 per song, or roughly 1 cent per hour, assuming 15 songs per hour, although it can be more with a song skipping feature.  It doesn't seem like a lot, except that a company pays that fee PER USER (unlike broadcast) and still has to pay for bandwidth.  In addition, the Internet radio ad market is still nascent, especially since most radio advertising is local, and Internet radio doesn't have enough scale in any one market to make it worthwhile for the local car dealer to create ads (although it might change in time). 

Well the new rates are going to be far higher, moving steadily up to an amazing $.0017 per play by 2010, or 2.5X the current rate, which is somewhat higher the projected inflation.  And the new rates eliminated or reduced any type of exemption for smaller broadcasters.  Kurt Hanson has a good take on the ruling .

So who does this affect?  in the public markets, only Real () has a big enough Internet radio presence to be hurt, and it's still only a portion of Real's music business.  In the private markets, this could be devastating to popular radio services such as Pandora, Last.FM and Live 365 - and it will positively destroy the smaller players who have no chance of generating enough revenue to pay for the royalties.   

Hell is sometimes defined as "getting what you ask for" - well the RIAA and the labels just got it.  In the short run, this may be a revenue boost for labels and artists.  In the longer term, it just points out why no investor should put money into any music business which requires label licenses, and that's probably bad for the entire music sector. 

As a sidenote, the CRB might actually want to consider both sides of the argument next time it rules on similar issues, but just as in other political sectors, he who pays the most lobbyists wins.