Digital Media

Update 6:30 p.m.: To include insight on from industry sources.

The fight between YouTube and a U.K. music royalties group appears to be heating up as Radiohead, Billy Bragg, and Robbie Williams have come out against YouTube.

Williams, KT Tunstall, and the members of the rock band Radiohead will meet Wednesday with other marquee music performers to protest "at how badly they are treated by record companies and music streaming Web sites like YouTube," according to a report in the Times Online, a U.K. publication. The artists will gather as part of a newly formed group called the Featured Artists Coalition.

YouTube announced Monday that the Web's largest video site and Britain's Performance Rights Society couldn't reach a deal on licensing fees and YouTube had stopped streaming music in the U.K. The PRS collects royalties on behalf of the music industry in that country. Music radio station Pandora has already fled the U.K. and MySpace reportedly may also pull out.

"Google, YouTube's owner, is a company that makes billions in profits," Bragg told the Web publication. "We think they should be paying artist royalties from the advertising revenue they make. A dispute like this illustrates the needs for the creation of the Featured Artists Coalition, so we have a voice and the public understand that sites like Google should be paying for music."

But YouTube said in a response that the artists shouldn't have a beef with the video site.

"We absolutely agree that artists and writers should be paid from the advertising revenue earned from their content on YouTube," said YouTube in a statement. "That is precisely what we are offering the PRS."

Representatives from the music acts and the FAC were not immediately available for comment.

YouTube is not the only company that Bragg and Radiohead went after. MySpace and Nokia were also called out in the Times Online story.

"The music companies did a deal with Nokia recently," said Radiohead guitarist Ed O'Brien. "They could launch phones with access to all sorts of music. We think they all received advances from Nokia, but nobody is saying who got what--and we think some of that money should go to the artists."

My sources within the music sector say that the PRS is taking a hardline stance. Some U.K. label executives are quietly hoping that the PRS will make a deal.

One of the issues that may be facing YouTube, MySpace, Pandora and other services that stream songs over the Web is that recent studies have shown streaming is cannibalizing music sales, industry sources say. The labels have partnered with streaming services hoping that they would generate big advertising bucks and also promote sales.

That's not the way it has worked out and you can learn more in this story from Douglas MacMillan at BusinessWeek.

MacMillan wrote: "Researchers and industry consultants say online music sites are being used by a growing number of listeners as a substitute for purchasing music rather than serving as a catalyst for more purchases."

The case brought by rapper Eminem's former production company against Universal Music Group could have handed music artists a larger share of digital sales.

But a federal jury voted unanimously in favor of Universal Music and other defendants in the case, including rapper-producer Dr. Dre's record label, Aftermath Records, according to an Associated Press report.

Richard Busch, lawyer for plaintiff F.B.T. Productions told the AP that his clients--brothers Mark and Jeff Bass--were disappointed and were considering an appeal.

At the core of the case was F.B.T.'s argument that digital albums were different than physical sales. Artists are compensated on a royalty structure for traditional CD sales. When a CD is sold at a retail store, say at a Wal-Mart Stores outlet, the artist receives about 16 cents. The music publisher gets 9.1 cents.

Things like breakage are deducted from the artist's cut. As other bands, such as Cheap Trick and The Allman Brothers have argued, there isn't any breakage in digital music and such charges are unfair.

Some musicians want compensation for downloads to be structured like licensing fees they receive when their music is used for movies, TV shows, ringtones or commercials. In those cases, artists and labels split equally what's left after publishers takes their 9.1 cents.

Universal lawyers successfully argued that digital sales should be handled the same way as physical sales and that the royalty rate was fair.

Universal Music representative Peter Lofrumento told CNET News that the label "was pleased with the jury's verdict."

Queen Elizabeth II gets a tour Thursday of Google's London headquarters.

(Credit: Google)

Britain's Queen Elizabeth II joined the Web 2.0 generation on Thursday when she uploaded a clip to YouTube for the first time.

The monarch took the leap into the wired world as she and her husband, the Duke of Edinburgh, were shown around Google's London headquarters, which are located down the road from Buckingham Palace. Editors' note: This story was originally published on Silicon.com as a photo gallery. Click here to see all the images.)

Joining the ranks of teenage narcissists worldwide, the queen posted her YouTube video, a 1968 reception for British Olympians, to the video-sharing site's Royal Channel.

Her whirlwind induction continued with a face-to-face meeting with the less than regally named daveyboyz, aka David Bass, and U.K. YouTube superstars Peter Oakley and Lauren Luke.

The Royal Channel launched in December 2007 and received more than 1 million channel views in its first week, making it one of the fastest-growing channels of all time.

Google marked the queen's visit with its trademark topical Google doodle on its home page.

(Credit: Google)

Although she has admitted to not even owning a computer four years ago, the queen has a history of embracing technology. In 1953, she allowed television cameras inside Westminster Abbey during a state occasion for her coronation, and in 1976, she became the first monarch to send an e-mail during a visit to an army base.

Google European President Nikesh Arora headed up a group of 50 staff and senior management in a meet and greet with the queen.

The tour immersed the royals in all things Google, with a demonstration of the ubiquitous search engine, a tour of Google Earth, and a talk on Google advertising and its contribution to U.K. industry. The London office includes Google's global mobile-engineering center, and it also handles product management, marketing, operations, legal issues, communications, sales, and finance.

Her majesty did not leave Google empty-handed, having been presented with a gift of Google code printed on aluminum by Arora.

Her visit puts her in tune with the people, as it's estimated that British residents spend more time online than those of any other European country, with an average of 33 hours per month online, visiting 3,252 pages.

Queen Elizabeth and the Duke of Edinburgh also met winners of the Doodle 4 Google contest, which asked young people from across the United Kingdom to design their own doodle. Google marked the visit with its trademark topical Google doodle on its home page, with the second "g" in Google replaced by the Queen's head and the "e" topped off with a crown.

Nick Heath of Silicon.com reported from London.

The Copyright Royalty Board on Thursday froze the rate that digital-music stores such as iTunes and RealNetworks' Rhapsody must pay music publishers.

The three-member board that sets statutory copyright licenses e-mailed the Digital Media Association (DiMA), the National Music Publishers' Association, Apple, and other download stores with its decision to keep the royalty rate at 9.1 cents a song. The board also set the same rate for CDs and established a 24-cent rate for ringtones. The decision is the first time the board has established royalty rates for digital downloads. The rates are set for the next five years.

What all this means of course is that Apple will not be shuttering iTunes--as if there was ever much of a chance of that--and appears to remain very much in control over the economics of digital music.

Alarm bells were set off on Tuesday when Fortune magazine reported that Apple had told the CRB that "it most likely" would shut down iTunes if forced to pay too high a royalty rate. Eddy Cue, Apple's iTunes manager, had told the royalty board in April 2007 that the company "would not continue to operate (iTunes), if it were no longer possible to do so profitably."

The group representing music publishers had sought a per-song rate boost from 9.1 cents to 15 cents, a 66 percent increase. The rate is paid to music publishers by the record companies, which deduct it from the 70 cents Apple pays them for every song it sells. Certainly, nobody can predict what Apple will do, but at this point, it looks as if the company got what it wanted. In short, Apple won.

"We're pleased with the CRB's decision to keep royalty rates stable," said an Apple spokesman.

A music industry source said that Cue's statement to the CRB may have gone a long way in persuading the CRB not to boost rates. "Sure it was posturing," said the source. "That's what you do in court. I don't think Apple would have gone out of business but a statement like that from the biggest music retailer is going to carry some weight."

Mark Litvack, an entertainment and copyright attorney and a former legal counsel for the Motion Picture Association of America, said rates have traditionally gone up during these kinds of negotiations. But Apple has "effectively set the economics of the music industry, which now appear to be frozen."

Music industry sings the blues
The group representing music publishers applauded the CRB's decision publicly but not everybody on that side of the debate was happy. One music industry source familiar with the negotiations said the publishers would probably have liked more money but should be happy that the CRB didn't attach the rate to a percentage of a music store's revenue.

That would have created huge accounting headaches, according to the source. The decision also prevents DiMA from going to Congress in the same way that the Webcasters did last week, according to the source.

Pandora, an online radio service was part of a movement to negotiate a new rate for streaming music (as opposed to downloads) with the music industry. That movement lobbied hard in Washington and won congressional OK to reach a settlement with the music industry on a compulsory license.

But in my dealings with music publishers, I've heard them complain for a long time about the 9-cent royalty rate. In some corners, the lack of any increase will not be received well. Nobody has been a more vocal proponent of raising rates than Rick Carnes, president of the Songwriters Guild of America. On Thursday, Carnes acknowledged he had hoped for an increase. Still, he insisted there was still plenty to be happy about.

"What DiMA had asked for was a reduction to 4.5 cents (or 55 percent)," said Carnes, who has written songs for Alabama, Reba McEntire, and Dean Martin. "When you look at 9.1 it's only a disaster, but 4.5 is Armageddon...If you look at record sales, they've just been a disaster. It's hard to go to the judges and ask for money at this point of time... Everybody is hurting, frankly, and until we get a solution to the massive looting on the Internet we're not going to be able to move this thing much."

Mike McGuire, a music industry analyst for Gartner, said that the royalty board made a wise decision for consumers, musicians, and download stores by not raising rates. The download stores are competing against piracy, and obtaining illegal downloads is simple and they're hard to compete with on price: they're free.

"This was a smart move by the CRB," McGuire said. "This is still a new and struggling industry and now isn't the time for a drastic rate increase that will have an effect on pricing."

The U.S. Senate on Tuesday afternoon passed the Webcaster Settlement Act, the legislation that lays the groundwork for Web radio stations to negotiate reduced royalty rates for the songs they stream over the Web.

The bill passed through the House of Representatives on Saturday and is now headed to the White House, where President Bush is expected to sign it.

"I'm relieved, optimistic, and grateful to our listeners," said Tim Westergren, founder of Pandora, a Web radio station and music-suggestion engine.

Webcasters have long complained that the royalty rate to stream music is too high for Web radio stations to generate any profit. Representatives from Internet radio and the music industry have been in negotiations for more than a year. Recently, the two sides have gotten closer to an agreement and both say they are confident a deal is within reach.

The deal needs the blessing of Congress because the parties seek a statutory license. Under such a license, any Web station is allowed to play songs that fall under the license without seeking permission. In return, Webcasters are required to pay the negotiated rate.

Westergren, who emerged as a de facto spokesman for the bill, said that had it not made it through Congress, a long delay would have ensued before an agreement could be reached, a situation he says would have driven some Web stations out of business. That's why Webcasters and representatives from the music sector, including representatives of the Recording Industry Association of America, teamed up to get the bill passed.

Believe it or not, the RIAA was in there fighting shoulder-to-shoulder with Pandora and the Web radio stations to fend off any threats to the legislation.

The most imposing obstacle came from traditional broadcasters, who lobbied hard the past weekend to snuff the bill for reasons that are still unclear. Rep. Howard Berman (D-Calif.), who has a history of voting for pro-copyright-holder issues, helped mediate a settlement with the National Association of Broadcasters, and the group dropped its opposition.

"This is a welcome and encouraging development and a sign of the constructive working relationship between the music industry and Webcasters," said Mitch Bainwol, the RIAA's chairman and CEO. "Together, we want to make this marketplace work for both music fans and music creators."

It's important to note that the bill doesn't guarantee a settlement between the Webcasters and music industry. They now have until February 15 to reach an agreement.

See Kara Tsuboi's interview on Monday with Westergren, in which he explains why he's fighting to save Web radio.

Apple did indeed say that if it couldn't make a profit, it "most likely" will not continue to operate iTunes. You can find a copy of the statement here on page 4 (PDF).

Fortune magazine published a bombshell of a story on Tuesday by reporting that Apple once threatened to close iTunes if forced to pay more for music royalties. A more careful reading of the statement from an Apple executive shows that it was more of a veiled threat. Regardless, it's possible Apple could shut down iTunes.

But is it likely? No. Here's why:

Screen grab of the document Apple filed with Copyright Royalty Board

First, the comment was made by Eddy Cue, vice president in charge of Apple's iTunes Store, in a written statement to the Copyright Royalty Board sometime before April 2007. The CRB is a three-judge panel that determines rates for statutory copyright licenses. On Thursday, the CRB is supposed to rule on a proposal by the National Music Publishers' Association to make download stores pay more for the songs they sell. The publishers want an increase from 9 cents a track to 15 cents, a 66-percent jump.

Representatives from the NMPA could not be reached.

In his letter to the CRB, Cue said he had no doubt that raising music prices at iTunes would reduce the number of purchases, stifle customer growth, and shrink payments to artists. If iTunes were to absorb the increase in royalty rates, then the store would likely lose money and the company wasn't interested in that.

Here's the meat of his statement: "Apple has repeatedly made clear that it is in this business to make money, and most likely would not continue to operate (iTunes) if it were no longer possible to do so profitably."

Cue's comment that the company has "repeatedly made clear" is something else to look at closely. I can't find another example where Apple has said it will shut down iTunes. Two music industry sources told me that at no time have iTunes' representatives made such a statement to the record labels--not in negotiations, not in passing, never.

Still, there's no denying that Cue told the CRB that the company might shut down iTunes if forced to pay higher royalties. I have to question why it has taken 18 months for Cue's comments to come to light, and why they're popping up just two days before the board is scheduled to rule on a possible rate hike?

Maybe it's coincidence. Or maybe Apple is firing a public-relations shot across the bow of the music industry and CRB. When it comes down to mass appeal, Apple holds all the cards. If word gets out that music publishers are trying to stick it to consumers, and Apple is fighting to keep prices down on their behalf, well, there's liable to be public backlash against the record industry. If this thing follows the normal course, there would be calls for boycotts, protests, and so on.

The other possibility is that Apple could pull the plug on iTunes. But how likely is that? Would Apple CEO Steve Jobs leave iPod owners without anything to watch or listen to? In such a scenario, consumers would be predictably angry and direct much of it at the music industry. Then, I suspect, they would go out and buy music from Amazon.com or someone else.

Apple has sold more than 160 million iPods, and iTunes has sold over 5 billion songs. The store is now the country's largest music retailer. Apple isn't going to throw that away, and the music industry isn't going to risk losing its largest distributor.

Look for a deal to get done soon.

Five music industry trade groups have reached what they call a breakthrough agreement on how royalties should be handled for streaming music online.

The groups, which represent record labels, music publishers, songwriters, and music Web sites, say their proposal would resolve what has been a source of strife between the music industry and Web sites that offer on-demand streaming services.

Under the agreement, sites like Napster and Imeem would have to begin paying royalties of about 10.5 percent of revenue. Download services like Amazon MP3 and iTunes already pay such fees. And online radio sites saw a major royalty hike last year. Pandora, one such site, may be on the brink of going out of business due to that rate increase, according to its founder, Tim Westergren.

The organizations involved were the Digital Media Association, the Nashville Songwriters Association International, the National Music Publishers Association, Recording Industry Association of America, and the Songwriters Guild of America.

They have submitted their plan to the Copyright Royalty Judges, a panel of copyright judges, for approval.

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."