Royalties breakthrough: RIAA and media agree on streaming rates

By Scott M. Fulton, III, BetaNews

September 23, 2008, 5:08 PM

While legislation before Congress languishes in the midst of two wars and now a severe financial crisis, the major parties in the online music royalties debate have actually come to an agreement on compromise rates.

In a surprise announcement that could actually signal the beginning of the end of the long-running streaming media royalties debacle, representatives of the Recording Industry Association of America state they have reached an agreement with DiMA, the leading trade group representing digital media broadcasters. That agreement could cap the music royalties that streaming broadcasters pay to 10.5 percent of revenue.

BetaNews is seeking clarifications on the formula from the main parties involved. But here is one feature that the joint news from the RIAA, DiMA, and other parties appeared to make clear: Mechanical royalties -- what a streaming radio broadcaster like Pandora pays for distribution to songwriters, for the right to reproduce their work -- will be limited to 10.5% of revenue, for services that provide interaction or "limited download" capability (for instance, storing music in a cache to be listened to later, as opposed to downloading an MP3). It appears that formula includes revenue from both subscribers, if there is any, and advertising which accompanies the music online.

That amount will be reduced, the joint statement says, by the amount which each online broadcaster pays for performance royalties -- the amount which officially goes to artists. (In many cases, both allotments often end up going to the same copyright holders anyway, which are represented by the recording industry. Believe it or not, there's a third royalties tier that's apportioned specifically for copyright holders anyway.) While the matter of a fair performance royalty amount is still being debated in Congress, under this agreement, it would not be in anyone's best interests to set that rate at higher than 10.5% of net revenue. (Even the proper formula for determining "net revenue" is being debated in Congress.)

Here's where things could get tricky: According to today's joint statement, "Outside the scope of the draft regulations, the parties confirmed that non-interactive, audio-only streaming services do not require reproduction or distribution licenses from copyright owners."

Strange as this may seem, most streaming radio services over the Internet fall into that category -- for instance, Shoutcast. You can tune into a Shoutcast stream without using the Web; for Pandora, by comparison, there's a little bit of interaction involved. That could mean Shoutcast's mechanical royalties tier is reduced to zero, on the theory that an Internet-based radio player such as Winamp is more like a traditional AM/FM radio than it is a CD reproduction system.

But if Shoutcast's royalties formula starts at zero, then how can its fee be reduced by performance royalties? That 10.5% cap may be good news for Pandora because it sets a barrier for the other major tier; without such a barrier in place for non-interactive services, someone could concoct an argument saying Shoutcast's performance royalties fee should remain high. BetaNews has contacted the major parties involved, though since this news is so fresh, we expect clarification to come perhaps tomorrow.

Also according to today's statement, the playing of 30-second or shorter promotional music clips within ads, or in promoting music online for purchase (which Amazon and BN.com currently do), will not incur a mechanical royalty fee "in the interest of encouraging paid uses of musical compositions." This news comes just one day after the US' three top performance rights organizations, led by ASCAP, called for the imposition of new performance royalties for sound clips -- a move that met a swift, negative response from DiMA yesterday.