The webcasting industry has found itself squarely in the crosshairs of lawyers over the last several months as legal battles surrounding the very future of this nascent medium have intensified in volume and number. The Digital Millennium Copyright Act of 1998, which governs Internet broadcasting, is ambiguous in much of its language relating to the medium, raising questions about what the future holds for an industry in its infancy and what business models will ultimately prevail.
Webcasters have been butting heads with the Recording Industry Association of America since the landmark DMCA was passed. The core issue being debated and dissected is the definition of “interactivity.” The DMCA does not define interactivity and only states that, under the sound recording statutory license provision, webcasters must pay royalty fees for recorded music to the labels after the music is played. On July 30, the Copyright Office’s royalty rate arbitration proceedings, known as CARP, convened in an attempt to determine the fees that would be paid under the statutory license. A decision will have to be made within six months.
The question on interactivity is whether the online stations that consider themselves “consumer-influenced” will qualify for those rates or whether they must pay additional fees if their services are deemed interactive. If so, the interactive webcasters would need to devise direct licensing agreements with each label, a complex and onerous task that most providers want to avoid.
Operating within the framework of the compulsory license is the key to continuing to do business for many of the webcasters, said Jonathan Potter, executive director of the Digital Media Association. “The question is how far can they push the envelope and stay within the bounds of statutory license. That’s it-that’s your cost of doing business. But if you cross the line, your cost of doing business is whatever the record labels dictate-and you need permission from each copyright holder through a standard licensing agreement,” he said.
However, the RIAA does not think the prospect of negotiating individual licenses with each label is going to make or break anyone’s business. “The notion that the cost to obtain these licenses is any greater or any less expensive than other parts of their businesses, such as bandwidth, is not realistic. I don’t see any impediment for anyone wishing to get a direct license from the labels,” said Steven Marks, senior vice president business affairs for the RIAA.
When the definition of “interactivity” comes-most likely from the courts-it could determine the future and viability of many of the companies operating within this space.
For Internet radio to prosper, it must contain levels of consumer influence, said Bob Ohlweiler, senior vice president of business development for MusicMatch in San Diego. The ability to interact to various degrees with the music you listen to online is what makes online radio different from terrestrial radio, he said.
Interactivity in various forms-or consumer influence, as the Digital Media Association calls it-is essential to the future of the medium. “I think it’s beginning to be fairly widely accepted that the long-term value in Internet radio is going to require taking advantage of the underlying technology, which includes the ability to offer higher-value services than broadcast radio,” said Mr. Potter. “There is a reason why more and more companies are offering consumer-influenced radio-because it’s a heck of a lot more interesting that what’s on broadcast radio.”
Consumer-influenced radio is not the endgame, Mr. Leigh pointed out. On-demand services are. The only reason this “hybrid” form with varying degrees of personalization exists is that it fits under the DMCA. That’s why companies like Listen.com are focusing on the next step-on-demand services.
Other webcasters, including MusicMatch, intend to launch services later this year that they openly admit are clearly interactive. In introducing these on-demand products, MusicMatch and Listen.com will have hammered out individual direct-licensing agreements with each label. MusicMatch will also continue to offer its current service, which it considers consumer-influenced and thus eligible for the statutory license, said Mr. Ohlweiler.
If the battle ensues, webcasting participants will likely continue with the existing services, since the specter of lawyers and courtrooms has dried up the flow of venture capital into the online radio space, said Dave Goldberg, CEO of Launch Media. An environment in which companies are getting sued is not an attractive one in which to invest, making it tough for startup players to get funded, he said.
With or without consumer influence, the financial backbone of the medium will be advertising, say many experts. That has been the model for all new technological advances from television to cable to radio, said Bill Piwonka, vice president of marketing for MeasureCast in Portland, Ore., which tracks the Internet radio business. All the elements are in place for advertising to succeed, he said, pointing to ad insertion technology, a mass audience with roughly 25 percent of the general population accessing streaming media, and third-party measurement services from companies like MeasureCast and Arbitron.
Local advertising has been the bread and butter of the traditional radio business, and thus, say industry insiders, targeted ads will be essential to online radio’s success. Terrestrial stations that broadcast online will do best, since they have an overwhelming advantage in their loyal listener base, Mr. Piwonka said.
Radio conglomerate Clear Channel Communications is proof. According to Kevin Mayer, CEO of Clear Channel Interactive in Los Angeles, online listenership in the “best markets” is in the low single digits as a percentage of the on-air audience. In the past, Internet broadcasts were considered value-added for radio advertisers. Now it’s a whole new revenue stream, said Mr. Mayer. With the introduction of ad insertion technology that allows for geographically and demographically targeted ads, the station group is going to start selling Internet radio spots for the first time.
Clear Channel can sell targeted ads easily, since it has a local sales force around the country that can also pitch Internet spots, he said. “If you are Internet-only and on your own, I think you are in trouble,” he said.
However, independent and smaller stations can align themselves with other small operators or networks so that advertising could be sold in aggregate by sales representative firms, said Bill Rose, vice president and general manager of Arbitron Webcast Services in New York, which tracks the radio business.
Research firm Jupiter Media Metrix projects that by 2005, about 5 percent, or $1.4 billion, of all radio ad dollars will be spent on Internet radio spots. While advertising may be feasible in the long term for both terrestrial and Web-only radio stations, a legal victory for the RIAA in the courts would likely curtail the advantage of Internet radio, Mr. Ohlweiler said. “The idea that Internet radio should be just like terrestrial radio is like saying e-mail should follow the same rules as snail mail. Doing it without consumer influence [doesn’t make sense],” he said. The middle ground of consumer-influenced stations that rides between passive listening and complete interactivity-where users have some degree of personalization-could be wiped out.
That is already beginning to happen.
In mid-June, Listen.com of San Francisco withdrew from DIMA’s suit against the RIAA, which in turn agreed to withdraw its objection to Listen.com’s participation in CARP. The webcaster settled, explained Sean Ryan, Listen.com’s CEO, because it is focused on the on-demand service it plans to launch in October. That subscription-based service will require direct licenses because it is interactive.
Mr. Ryan acknowledged that fees could become too onerous for some companies to survive. If that happens, users could simply resort to piracy to get their music, he sa
id, an eventuality the recording industry would certainly like to avoid.
Piracy, coupled with the potential for Napsterlike services, could harm CD sales, said Phil Leigh, vice president for digital media with Raymond James & Associates in Tampa. “I think ultimately the triggering factor will be an irrevocable decline in CD sales. That will trigger the labels to be more serious and more amenable,” he said.
While the record labels are understandably trying to protect their intellectual property, they would be foolish to set a fee structure so high that webcasters would no longer see a compelling business model, said Mr. Piwonka. “I really believe the courts will decide, but I think what will happen is that this is such a compelling medium that a fee structure will be worked out that is reasonable and will allow broadcasters to have a business. Because if it’s not, the RIAA will be shooting itself in the foot,” he said.
After all, the record labels really do have the most to lose, said T.S. Kelly, director of Internet media strategies for Nielsen//NetRatings. Since the business of record labels is to drive as much consumption of their music as possible, it would behoove them to limit the outlets, including the Internet, for their artists.
A tiered system of royalties for different levels of interactivity would be mutually beneficial, Mr. Kelly suggested. Instead of an all-or-nothing approach, legislation that looks at interactivity from a “phase in” approach, creating different fees for levels of interactivity, would allow the business to survive and thrive, he said. “It has to happen. The current fee structure doesn’t allow for interactivity as quickly as it is being developed,” Mr. Kelly said.