Internet radio is an important force that allows listeners to avoid the stagnant playlists of commercial radio. It’s helped open doors of the music world by giving its 70 million monthly listeners in the U.S. alone a way to discover acts they might never hear otherwise—music that is essentially shut out of mainstream radio. Internet may have killed the radio star, but it’s also the reason you don’t sit at your desk at work announcing that if you hear “American Pie” one more time you’re going to stick a pencil in your ear.

Yesterday was supposed to be “the day the music dies.” Don’t worry. You didn’t miss a VH1 special on Don McLean. Rather, it’s a mildly clever slogan adopted by the SaveNetRadio Coalition—a group of artists, labels and internet broadcasters fighting the good fight to prevent legitimate music from being wiped off the internet. May 15^th was to be D-day, when new royalty rates for internet radio broadcasters were to take effect, almost instantaneously forcing at least one-third of all internet radio stations into bankruptcy. The new rates were issued in a ruling by the Copyright Royalty Board, part of the Library of Congress, on March 2^nd after a year-long arbitration process.  SoundExchange, the agency responsible for collecting from internet broadcasters, not surprisingly cheered these as “hard-won, fair royalties that artists deserve.”

We are all for artists getting paid for their music, but the reality is a lot different, and the back story of how this crisis came to be is a classic tale of politics, greed and grave stupidity. The sordid details are too long to list, but I have to start somewhere. It all originated with a change in U.S. copyright law in the mid ‘90s that created a patently unfair and unprecedented burden on the distribution of digital media. The RIAA and the music labels strong armed an unaware industry in a stage of infancy, adding a set of fees for internet broadcasters that didn’t apply to terrestrial radio and were additive to other statutory fees already being paid. They parlayed a fear of technology, bad public policy, dotcom mania, hired academic hit-men, rigged deals, and nonsensical reasoning into a jumbled mess to pass this glorious bit of double-dipping. The drama plays out as if the writers from Days of Our Lives, The Practice and The West Wing got together and wrote a comic tragedy after a weekend-long meth binge.

Up until this new law was established and SoundExchange was implemented as the collection agency, internet stations paid somewhere around 6% of revenues to songwriters (who owned the publishing copyright) through ASCAP, BMI and SESAC.  These fees are paid by all broadcasters, regardless of origin, and have been in place for decades. This ruling, which took effect in 2001 (retroactive to 1998), created a new set of fees dictating that internet broadcasters pay an additional 12 percent of revenue to “performers” (those who own the rights to the instance of each recording, called a “mechanical” in the industry).  While this was an additional and unfair burden on internet radio, the cost wasn’t debilitating and music flourished on the web.

Now, the new and improved rates that were to go into effect yesterday will change all of this. They move from a percent of revenue calculation to a “per play” metric where every song and every new stream is counted. The change in methodology is interesting in its details, but the critical element is the net impact to internet broadcasters. It calls for an immediate (and retroactive to January 1, 2006) increase in per song rates from .08 cents per listener/song in 2006 to .19 cents per listener/song. Those numbers seem small until you multiply by the millions of songs per month listened to online. Another fun twist is that webcasters are required to pay a $500 minimum per stream. For internet stations like Pandora, which allows users to generate streams based on music listening habits, this means almost certain death. Essentially, every time a stream is generated on Pandora, there’s a fee of $500—even if the user listens but only for a minute. 

SaveNetRadio estimates that internet radio services will end up paying out somewhere around “60% to 300% of their revenue in royalties.” That means that for every dollar earned in advertising or subscription, these services would have to pay up to $3 in royalty fees. It doesn’t take a Harvard MBA to figure out that this is not a great business model.

Take SomaFM for example, a popular donation-supported station based in San Francisco. They host 11 radio streams that play only a small percentage of songs by major label bands or SoundExchange member artists. In 2006, the station paid about $20,000 in royalties, and owner Rusty Hodge estimates that his fees for 2007 will jump to $600,000 and close to $1 million for 2008. Elise Nordling, DJ for the most popular channel “Indie Pop Rocks,” has never received any compensation in her five years running her channel other than once expensing a hard drive for storing her music.