Digital Media

Few people know this but for a little while last year, the music-royalty rates that Web radio stations have complained about for years appeared to be behind them.

Pandora founder Tim Westergren

(Credit: CNET Networks)

In a midtown Manhattan law office last November 6, representatives from Webcasting companies and SoundExchange, the group that collects royalties for recording artists and labels, struck a deal "in principle," said sources familiar with the negotiations. The agreement was designed to restructure the royalty rates Webcasters have long said would decimate the sector.

But a week ago, came word that a final deal was never signed. The Digital Media Association (DiMA), the group that represents most of the largest Webcasters, including Pandora, Live365 and Yahoo, announced that the parties failed to reach an agreement. How could that happen? Both sides told members of Congress in September that they were close to a deal. In November, the blog All Things Digital reported a settlement was within grasp and quoted Pandora founder Tim Westergren saying "all the hard stuff has been done."

After interviewing multiple sources on both sides of the issue, the picture that has taken shape is that Webcasters blew a golden opportunity to reach an accord that would have given them much of what they asked for. What appears to have happened is that some in Webcasting were willing to play a game of brinkmanship with SoundExchange. At the very least, the actions of some larger Webcasters undermine their claims that they can't afford to continue for much longer without a settlement.

There is still a chance the two sides can come to terms. Talks are ongoing. But as it stands, time is quickly running out and nothing has occurred to indicate a breakthrough is near, according to sources on both sides. If a settlement isn't reached, its conceivable that some Web radio stations that legitimately can't afford to pay the performance fees set by the Copyright Royalty Board (CRB) two years ago may be in jeopardy. Representatives from SoundExchange declined to comment. Westergren did not return repeated phone calls.

Did Real want a deal?
There's no doubt who the music side blames for derailing the agreement.

Technology companies are supposed to be wide-eyed novices on Capitol Hill. I've read that they don't spread enough money around or aren't hip to the ways of Washington.

Regardless of whether that's true, this weekend saw Pandora, a struggling music service, whip up enough support among fans of Web radio to help persuade the House of Representatives to unanimously pass the Webcaster Settlement Act on Saturday, according to multiple people associated with the bill. The proposed legislation is designed to give Internet radio stations added time to negotiate a settlement with the music industry on reduced royalty rates.

Lower rates are vital to the survival of Internet radio stations, according to Tim Westergren, Pandora's founder, who pleaded with the public on Friday to call their congressional representatives and demand they support the bill. Webcasters and the music industry are close to reaching an agreement, but if the legislation fails to pass it could push the discussions back months and deliver a financial death blow to some services, Westergren said.

According to one Washington lobbyist, phone calls from the public were one of the factors that helped the legislation pass in the House and now have it headed for a Senate vote within the next two days without any major parties gunning for it.

Two other factors, however, likely played larger roles in getting the bill through the House: the lobbying efforts made by National Public Radio and some 12th-hour deal making to appease traditional radio broadcasters, who were trying to kill the legislation, according to sources.

"You know," said a fatigued Westergren, "it was a nerve-racking day."

In crunch time, Howard Berman came through
Saturday started with lobbyists for the National Association of Broadcasters "making a huge press in the House, blasting every (Congressional representative's) office" with appeals to kill the legislation, according to a lobbyist with knowledge of the events.

NPR, the publicly and privately funded nonprofit organization created by Congress in 1970, has plenty of friends in Washington. The group, which produces Webcasts and supports the bill, e-mailed members of Congress on Saturday, explaining how much it needed the legislation and that a deal on a new royalty rate couldn't be struck without it, sources said.

The real deciding factor came when Rep. Howard Berman (D-Calif.) met with members of the NAB. They told him that they feared their Web competitors would get a deal done first. Under the terms of the legislation, SoundExchange, the body that collects royalties and is part of the Recording Industry Association of America, has until Dec. 15 to negotiate a new rate. The NAB apparently was worried that the deadline didn't give the organization enough time to strike its own royalty agreement.

"Berman said 'Fine, we'll extend the date until Feb. 15, which gives you two more months to talk,'" said one music-industry source with knowledge of the discussions. "There isn't anything in the act that prevents traditional broadcasters from reaching their own royalty rate."

That did the trick, according to the source. Dennis Wharton, an NAB spokesman confirmed Saturday night that the NAB met with Berman and that the deadline was extended. He said the trade organization has dropped its opposition in both houses of Congress.

This means that unless something unforeseen happens, the Webcaster Settlement Act should pass, according to insiders.

Then what? Internet radio stations must still reach an agreement with the artists and labels about how much to pay them for streaming their music over the Web. Sources on both sides say they are closer than ever before to a number, and should the Webcasting bill pass in the Senate, they predicted that a deal could be reached as early as next month.

Update at 5:50 p.m. PDT: The House actually did weigh in on the bill on Saturday, passing it unanimously by a voice vote.

Proponents of Web radio stations are predicting a very close vote in Congress on a bill that they paint as life or death.

The House of Representatives is set to vote Sunday on the Webcaster Settlement Act, which would allow Web radio stations to negotiate with the music industry for a royalty rate lower than what Congress mandated last year.

Companies like Pandora are seeking a reduced rate and say that they simply cannot afford to keep operating with the higher rate.

The bill was scheduled to go to the House floor Saturday morning but was postponed twice. Meanwhile, the National Association of Broadcasters, which opposes the bill, was also using the extra time to sway lawmakers.

Because the bill is being considered under a suspension of rules, it will require a two-thirds majority to pass.

Asked which way Congress was leaning, Pandora founder Tim Westergren said it is too close to call.

"NAB is gunning full bore to kill the bill," Westergren said. "It's become a straight up battle between NAB lobbying might and constituents. Calls from listeners have been raining in since last night. (It's) touch and go."

UPDATE Friday, 3:25 p.m PT: To include Pandora's letter to fans

Time is running out on a bill that could pave the way for Pandora and other Webcasters to pay reduced royalty rates, as traditional radio broadcasters are now trying to kill the legislation.

As Congress readies to adjourn, representatives of the National Association of Broadcasters are lobbying lawmakers to stop legislation that would allow anyone streaming music over the Web, such as National Public Radio and Pandora, to continue negotiating with SoundExchange, the body that collects statutory rates for the music industry.

SoundExchange and the Digital Media Association (DiMA), which represents Web radio stations, have been at odds over the fees required to stream music, but the two sides are "optimistic that a deal can be reached," said Tim Westergren, founder of music service Pandora. He has long said the music service won't survive unless royalties rates come down.

The bill, introduced late on Thursday, would allow negotiations between Web radio stations and the music industry to continue and reach a settlement while Congress is adjourned. The two sides need the government's OK before reaching a settlement because they're after a statutory license. Such a license gives Web radio stations the right to stream any copyright songs they want, but also requires them to pay a negotiated rate.

Without the legislation, the talks could come to a halt and the deal could fall through, Westergren said. The bill is scheduled to be voted on the House floor Friday. Congress is expected to adjourn no later than noon on Monday.

Westergren said the NAB's efforts to kill the bill is nothing more than an attempt to stifle the burgeoning Web radio sector, which many in terrestrial radio see as a competitor.

"This bill doesn't effect the NAB at all," Westergren said. "This bill is designed to give us the time to resolve what it looks we're close to getting resolved. The NAB is trying to suffocate the first viable alternative to broadcast radio and is reaching out of their industry to kill another."

Responding to Westergren's comments an NAB spokesman issued this statement: "NAB has concerns related to Congress attempting to fast-track a bill introduced less than 24 hours ago that could have serious implications for broadcasters, Webcasters, and consumers of music. NAB spent more than a year trying to work out an equitable agreement on webcasting rates, only to be stonewalled by SoundExchange and the record labels. We will continue to work with policymakers on a solution that is fair to all parties."

Westergren said that there is nothing in the Webcasting bill that would block traditional broadcasters from reaching their own rate agreement.

Friday afternoon, Westergren issued a letter to fans asking that they call their congressman to voice their support. He signed off: "Thanks for helping Pandora survive."

With Congress due to adjourn Friday, lawmakers worked late Thursday evening to resolve a couple of high profile digital-entertainment issues.

A "Webcasting" bill was introduced in Congress on Thursday that would allow SoundExchange, the body that collects royalties on behalf of the music industry, to reach a settlement on royalty rates with the Digital Media Association (DiMA) after Congress adjourns.

SoundExchange and DiMA, which represents Web radio stations such as Pandora, have been at odds over the fees charged to stream music. Sources close to the talks say the introduction of the bill signals the two sides are close to cutting a deal. "They wouldn't be seeking the government's blessing unless they were close," said one person with knowledge of the talks.

The two sides need the government's OK to reach an agreement because they're after a statutory license. Such a license gives Web radio stations the right to stream any copyright songs they want, but also requires them to pay a negotiated rate.

The bill would give the two sides until mid-December to cut a deal. Pandora and other Webcasters fiercely object to a decision by the Copyright Royalty Board--a three-judge panel that sets rates for copyright statutory licenses--to double the current $.0008 price per stream by 2010.

The board also set a $500-a-year fee for each channel a Webcaster broadcasts.

Earlier this week, DiMA and the recording industry agreed to a deal that called for interactive music and limited download sites to pay 10.5 percent of annual revenue as a royalty rate. Interactive music sites are those that enable users to choose the music they want to listen to (such as iMeem). Limited downloads sites are those that deliver music to users as long as they continue to pay a fee. Music subscription services such as Napster and Rhapsody offer limited downloads.

Another tech-related issue Congress acted on Thursday was the Enforcement of Intellectual Property Rights Act, which passed the Senate Judiciary Committee in a 14-4 vote earlier this month.

President George Bush indicated he might veto the proposed legislation on Tuesday. In a letter to the Senate Judiciary Committee this week, the Bush administration said it would oppose authorizing the U.S. Department of Justice to bring civil suits against file sharers. Since then, that part of the bill has been removed and it is once again working its way through the Senate.

Music insiders say they are confident the bill will pass the Senate by early Friday and return to the House where it already passed once by a wide margin.

Tim Westergren, the founder of popular Web radio start-up Pandora, has said in an interview with The Washington Post that his company may be close to a shutdown.

"We're approaching a pull-the-plug kind of decision," Westergren said in the article, published Saturday. "This is like a last stand for webcasting."

The problem, he explained, is last year's royalty hike for Web radio, which makes it extremely expensive for an independent start-up to stay afloat in the business. The royalty increase will eat up 70 percent of Pandora's $25 million in revenue, Westergren said.

SoundExchange, an organization comprising representatives from record labels and performers, believes that Internet radio owes a bigger cut of profits than traditional radio does. Activist groups like the SaveNetRadio Coalition, along with start-ups like Pandora, have fought the fee hikes.

A few Web geeks weren't convinced that Pandora's situation is as dire as Westergren says it is. "I love Pandora like my old baseball glove, but they can only pull this Chicken Little move so many times," marketing consultant Brian Oberkirch posted to Twitter on Monday morning.

But Westergren assured in the Post interview that he's not exaggerating. "We're funded by venture capital," he explained. "They're not going to chase a company whose business model has been broken. So if it doesn't feel like it's headed towards a solution, we're done."