The recent decision by the Copyright Royalty Board (CRB) to sharply raise fees for playing songs on Internet radio could not have come at a worse time for advertisers. In 2005, weekly Internet radio listening was at 15% of the U.S. population 12 and over. A new study shows that as of January 2007 that figure increased 26% to 19% of all persons 12 and older. This translates to 57 million listening to Internet Radio on a weekly basis. Internet radio is hot, and getting hotter.

The new rate schedule is the second, and supposedly final, attempt at setting royalty rates for Internet radio. While most involved with the issue expected some kind of rate increase, few were prepared for how drastic the increase would actually be. The royalty rates have changed from a percentage of revenue, around 12%, to a fee based on the number of listeners for each song, and a fee so high few stations could possibly afford it.

The general consensus among Internet radio station owners is that the new fee structure will amount to 125% of total gross revenues for the most profitable Internet radio stations, and between 150% and 200% for those less profitable. One Internet radio service said they generated about $400,000 in sales under the previous schedule, for a $50,000 yearly fee, and now face approximately $600,000 in annual fees, which will bankrupt them.

It would take a book to adequately detail the political shenanigans that have led up to this point, but a brief description is as follows. The Digital Millennium Copyright Act created a new revenue stream for musicians and their licensing agencies by granting a performance right for certain digital transmissions of their work, like Webcasting (but the new right would not apply to conventional broadcast radio for some reason).

While the DMCA created performance rights, it didn t set the rates, but instead created the Copyright Arbitration Royalty Panel and gave it the following responsibility:

"The copyright arbitration royalty panel shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. In determining such rates and terms, the copyright arbitration royalty panel shall base its decision on economic, competitive and programming information presented by the parties."

The CARP s attempt at setting rates in 2002 set rates so high that Congress was pressured into intervening with a more moderate interim rate schedule until a final rate schedule could be determined by a new group, the Copyright Royalty Board reporting to the Library of Congress.

Despite a rather broad charter, the CRB conducted very limited research in determining what a fair marketplace value would actually be. The only Internet radio companies to have any major input into the CRB s decision making process were Yahoo, AOL, Live365 and a few smaller webcasters including Radioio, Ultimate80s and Accuradio. Under the rules, only these companies will be able to file an appeal, and they only have 15 days to do so.

Most of the CRB s determination was based on rates hammered out between the RIAA and Yahoo, just after Yahoo acquired broadcast.com from founder Mark Cuban in 1999 for $5.7 billion. This deal made Yahoo the largest player in Internet radio at the time, however, by 2002, Yahoo essentially had given up on Internet radio without ever really making an attempt to see if the rates it negotiated were commercially viable.

Still, the CARP based the final rates on the Yahoo deal.

The fundamental problem with the LOC's Final Determination was pointed out by Mark Cuban in the following e-mail to Kurt Hansen of RAIN, the Radio and Internet Newsletter.

"It's very interesting that they built this on the Yahoo!/RIAA deal."

"When I was still there (the final deal was signed after I left Yahoo!), I hated the price points and explained why they were too high. HOWEVER, I was trying to get concession points from the RIAA. Among those was that I, as Broadcast.com, didn't want percent-of-revenue pricing."

"Why? Because it meant every "Tom, Dick, and Harry" webcaster could come in and undercut our pricing because we had revenue and they didn't. Broadcasters could run ads for free and try to make it up in other areas so they wouldn't have to pay royalties."

"As an extension to that, I also wanted there to be an advantage to aggregators. If there was a charge per song, it's obvious lots of webcasters couldn't afford to stay in business on their own. THEREFORE, they would have to come to Broadcast.com to use our services because with our aggregate audience, if the price per song was reasonable, we could afford to pay the royalty AND get paid by the web radio stations needing to webcast."

"More importantly--and of course I didn't tell the RIAA this--we had a big multicast network (remember multicasting? Yahoo! didn't seem to after I left). Well, multicasting only sends a single stream from our server, so that is what we would record in our reports for the RIAA, and that is what we would pay on."

"So that was the logic going into the Yahoo!/RIAA deal. I wasn't there when it was signed, but I'm guessing and I've been told that there weren't dramatic changes."

"Now, no one asked me any of these things prior, during, or after the first or second pricing. I'm not sure that this matters. But if it does, here it is: The Yahoo! deal I worked on, if it resembles the deal the CARP ruling was built on, was designed so that there would be less competition, and so that small webcasters who needed to live off of a "percentage-of-revenue" to survive, couldn't."

"There you have it, if anyone cares."

Well, advertisers should care, and we need to let Congress know we do care. The new Internet royalty rates are based on conditions about as detrimental to advertisers as could possibly be constructed. If the new rates stand, Internet radio will be a mere shell of its former self, and it will offer little for advertisers, the public or the musicians the CRB was allegedly trying to protect.

The advertising industry needs Internet radio, but unless a lot of pressure is put on Congress immediately, Internet radio will be stopped dead in its tracks. And we just can t afford to let that happen.

Glen Emerson Morris has worked as a technology consultant for Network Associates, Yahoo!, Ariba, WebMD, Inktomi, Adobe, Apple and Radius, and is the developer of the Advertising & Marketing Review Data CD.