Tech News: The More Things Change, Royalties Still Remain the Same

by Shana Dines

The debate over royalty rates for online music continues, but digital music is safe … for now.

Last week, the Copyright Royalty Board (CRB) established, for the first time, an industry-wide royalty rate for digital downloads of songs. 

They made the decision by not doing anything. 

The rate Apple had established, 9.1 cents per song, which is typically sold for 99 cents, is now frozen for the next 5 years. 

This royalty decision is considered to be a victory for Apple, who threatened the CRB to shut down iTunes Music Store if the rate increased, according to Fortune Magazine.  This was not meant as a negotiating ploy, but a fact of the matter that Apple, already operating on a minimal profit margin, simply could not afford a steep hike in royalty rates.

Surprisingly, the same rate was set for the sales of physical CDs.
 
However, the rate for ringtones is 24 cents, making the typical price of low-quality, 30-second sound clips remain at $2 - $3.
 
They're musicians, not mathematicians.
 
The other side of the debate was argued by the likes of the Recording Industry Association of America and National Music Publishers' Association.  Their request for a 66% rate increase to 15 cents per song was viewed as an effort to offset declining music sales. 

Considering the Digital Media Association (DiMA), which represents various online music services including Apple, fought for decreasing the rate to only 4.8 cents per song, the decision to freeze rates was really a compromise.
 
Alternatively, the publishing groups asked for rates paid as a percentage of wholesale revenue.  This argument fell flat on the music sales side, but is likely to prevail with music streaming services.
 
Internet radio was also thrown a temporary lifeline when Senate approved a House bill to allow a renegotiation of royalty rates.  The Webcaster Settlement Act (H.R. 7084) was signed by President Bush on October 16, 2008.
 
The act has given internet radio broadcasters until February 15, 2009 to settle on a royalty rate with SoundExchange, the agency that collects and distributes royalties for online music use.
 
The original royalty was set at a mere $.0019 per stream, per listener.  While this sounds nominal, it is having disastrous effects on webcasters like Pandora and Live365, both of which offer nearly infinite stations.
 
Pandora has had to pay 70% of its gross revenue in royalties since the rate was passed.  According to Tim Westergren, one of the founders, Pandora will have to shut down if the rate is not reduced.  He credits the loyal listeners of internet radio as helping the Webcaster Settlement Act to pass so quickly.  Pandora and many other small webcasters emailed their listeners, asking them to call Congress and, reportedly, two million people responded. 
 
A rate based on revenue is expected to pass, which will be more viable for the many ad-supported music services.
 
While these agreements are in no way, quick fixes for the struggling music industry (or failing economy, for that matter), this type of collaboration and agreement is a step in the right direction towards a peace agreement between the recording industry and the internet.

Check back with MELON as more developments unfold.