You Play, They Pay

Prior to the DMCA, Webcasters followed the same protocol as AM and FM stations, which pay royalties — amounting to roughly 5 percent of gross revenues — to songwriters. When KSHE plays the Guns N' Roses version of "Live and Let Die," for example, Paul McCartney gets paid; Axl and company don't.

Elsewhere in the industrialized world, it had always been so. "The United States stands alone in not compensating the artists," explains Walter McDonough, general counsel for the Future of Music Coalition, an artists'-rights lobbying organization. McDonough is also a member of the board of SoundExchange, a Washington, D.C.-based nonprofit that was formed to collect and distribute performance royalties. "If someone's using the music, then frankly I think people should be compensated for it."

David Oxenford, a D.C.-based attorney who represents 3WK and other small Webcasters, says the U.S. government used to see things differently. "It was felt that radio promoted the sales of records [and concerts, etc.], so that airplay of music was to be encouraged, not 'taxed,'" Oxenford writes via e-mail. "The composers, who did get royalties from broadcasters, do not benefit in anywhere near the same degree in the sale of recordings, and don't benefit from concert revenues. So that's been the way it is in U.S. broadcasting for well over 50 years."

The record industry's powerful lobby was determined not to let that happen on the Internet, and with the passage of the DMCA, the only question was how much digital broadcasters would pay.

The Copyright Arbitration Royalty Panel (now known as the Copyright Royalty Board) originally decreed that anyone who broadcasts music on the Internet or via satellite had two options for paying SoundExchange: pay 0.0762 cents ($0.000762) per song per listener, or calculate so-called aggregate listening hours and pay 0.88 cents ($0.0088) per hour (commercial-free stations were assessed a higher hourly rate of 1.17 cents [$0.0117], based on the fact that they play more music per hour).

SoundExchange then doles out the money, half to the musicians, the other half to the owners of the recordings (typically record labels).

David Oxenford says most stations opted for the aggregate method for the simple reason that it's easier to calculate.

Tony Jordan, director of interactive services for Emmis Broadcasting, parent company of KSHE-FM, says Emmis uses the aggregate method and that KSHE is paying about $10,000 per year in performance royalties.

For Webcasters like 3WK, who enjoyed growing legions of listeners but not much ad revenue to show for it, the decree sounded like a death sentence. Lumped in with their bigger Webcasting brethren and facing the prospect of paying royalties retroactive to the DMCA's 1998 passage, they teetered on oblivion.

"That royalty rate would have destroyed the industry. None of us could have stayed in business," says Kurt Hanson, who publishes "Radio and Internet Newsletter," an industry tipsheet, and operates the popular Web station AccuRadio.com.

The small-scale Webcasters pleaded for special consideration. After acrimonious lobbying on both sides, Congress in 2002 passed the Small Webcaster Settlement Act, establishing a performance royalty rate for companies that earn less than $1.25 million in annual gross revenue. Those companies were to pay 10 percent on their first $250,000 in annual gross revenue and 12 percent for revenue in excess of $250,000, or 7 percent of expenses, whichever is higher. The compromise took an enormous financial bite. Though she won't disclose specifics, Wanda Atkinson indicates that 3WK's profit in 2005, its first year in the black, was about $50,000.

Combined with the required royalty payments to composers, the little Webcasters had to fork over about 15 percent of their gross revenue — triple the rate that pure AM and FM broadcast stations pay.

The Small Webcaster Settlement Act did produce one benefit, according to Mike Roe, president of Radioio.com. "That whole experience galvanized us into a little community of independent operators," says Roe, whose company is the first Internet-only radio enterprise to be publicly traded. "We're all close, and we feel like we're all in the same business — and that's survival."

The 2002 settlement expired December 31, 2005. The new rate, once it's settled upon, will cover 2006 (retroactively) through 2010.

The Atkinsons and their fellow Webcasters have proposed that the performance royalty rate be set at 5 percent of revenues — essentially the same rate they and every other U.S. music broadcaster pay songwriters.

According to Kurt Hanson, the record companies are proposing just a little bit more than that: 30 to 40 percent of revenues. "Their argument is not that the landscape has changed, but that they always should have been getting that amount," Hanson says.

SoundExchange spokesman Willem Dicke declined to comment on specifics of the negotiations. But Dicke defends the notion of paying performers more than songwriters. "It's far less monetarily intensive to be a songwriter than a performer," he argues. "If you're a performer, you're out there on the road, and if you're a record label, you're making videos and promoting the music. The costs associated with performing are much higher than they are with just songwriting."