The Day the Music Dies

SFweekly

With the current development with music royalties and internet radio stations, has the booming internet radio surge been dealt a mortal blow?

Elise Nordling answers the door to SomaFM's warehouse headquarters in the Mission District wearing blue hair, a studded belt, blue jeans, and black slip-on flats. She glides up three flights of stairs and into an art-filled workspace the Internet radio station rents for $600. Near the east-facing windows, natural light streams in through big, gridded panes and ignites her business partner Rusty Hodge's frizzy, fiery-red, shoulder-length hair and scruffy beard.

The 44-year-old Hodge is a big dude who obviously likes beer. He sits at his desk and wears a kid's smile, Hawaiian shirt, brown stone-washed jeans, running sneakers, and red tortoise-shell glasses. Beneath his manly gut, a MacBook Pro operates SomaFM's 11 stations. Red and black T-shirts, banners, and stickers for the 500,000-listeners-a-month station flank him like some schwag sweatshop.

Though you wouldn't guess it to look at them or their surroundings, Nordling and Hodge are media moguls — Internet-style.

They spend a huge amount of their lives just listening to what people send them and buying rarities, then needle dropping (playing few-second samples) to see if it's any good. "It drives my roommate crazy," says Elise. "I'll tell him, I'm going to be listening to CDs tonight and he goes ... " — she drops her voice to imitate someone sounding sullen — "'Oh.'"

"My neighbors always say, 'Can you play the whole song, please?'" says Rusty with his smile.

Rusty has built his audience from scratch since 1996, and the rise of SomaFM roughly corresponds with the rise of Net radio. Currently capturing 72 million listeners per month — versus 280 million for terrestrial radio — Net radio has hijacked the authority of terrestrial radio with one-billionth the resources over the last 15 years.

"Big radio's least-common-denominator approach creates playlists that the least amount of people will ever turn off. There's no personality, no edge," says Hodge. "The challenge here is to do a lot with a little."

Webcasters like Seattle's KEXP and San Francisco's SomaFM are the de facto curators of America's most avant-garde electric art galleries. Their playlists read like Next Big Thing cheat sheets for mainstream DJs, college radio stations, marketers, and advertisers. What was once a cult of hobbyists now encompasses major players like Clear Channel, which simulcasts existing holdings and compete against offerings from National Public Radio, AOL, and Yahoo.

Now this weird radio empire could all come crashing down in less than a month on what people in the industry are calling D-Day, or "the day the music dies."

On July 15, the bill comes due for a whole new set of royalties that will wipe out Net radio as we know it. No more KEXP, no more SomaFM, you name it.

A ruling by the Copyright Royalty Board back in March hiked SomaFM's royalty bill from $10,000 in 2006 to $600,000, retroactively — even though the little radio company's gross revenues were only $125,000 last year.

But SomaFM and other Webcasters are fighting back.

Within three weeks of the CRB's decision, a fan of Pandora radio — a site that uses a "music genome" to tailor what it plays to each individual listener's taste (see sidebar on Pandora) — created a SaveNetRadio.org Web site. Similar sites kept springing up, and many in the community saw the need for a unified front.

Around that time, SomaFM's Nordling and Hodge, Pandora founder Tim Westergren, and Ted Leibowitz from Bagel Radio met at a Starbucks in the Mission and planned an assault. They decided to ally themselves with their much bigger brothers at the Digital Media Association — which represents AOL, Yahoo, and terrestrial radio conglomerates like Clear Channel. SaveNetRadio is now more than just a Web site — it's a coalition.

"In an insane way, the best thing is rates are so insanely bad that everyone agrees," says Westergren with a laugh. "There's no disagreement on the margins where one player's saying, 'I think I can make this work.' They've unified everyone from the smallest players to the largest."

"Remember how in the Net neutrality debate, MoveOn.org and the Christian Coalition stood side by side on Capitol Hill, shook hands, and said, 'We support this?' It's like that," says Jake Ward, SaveNetRadio's lobbyist in Washington, D.C. "SoundExchange asked for it, and they got it. It's like the old saying, 'When God seeks to punish us, he answers our prayers.'"

The bad guy in all this is something called SoundExchange, a spinoff of the Recording Industry Association of America (RIAA) empowered by Congress to collect performance royalties on behalf of musicians. SoundExchange says artists need higher royalties to make a living and create music, and Web sites have to get a lot better at making money for artists.

But SaveNetRadio says SoundExchange just fronts for RIAA and the big four major labels — Sony, EMI, Universal, and Warner — who control 80 percent of all copyrighted music. RIAA doesn't like threats to its dying hegemony, SaveNetRadio's members say.

"To some this may sound crazy, but I sincerely am starting to hate the Internet," SoundExchange board member Jay Rosenthal wrote recently in the Los Angeles Times. "I know you see the Internet as some incredible invention that has opened the door to unlimited distribution of music — and your lofty goal is to bring music to as many as possible. But all I see is a tidal wave of artist abuse."

Reps for SaveNetRadio, however, say they're not abusing artists — they've even got more than 6,000 in their camp. Net radio launches artists, says Ted from Bagel Radio. He points to Silversun Pickups, an alternative rock four-piece from Silver Lake, Los Angeles, that was his band of the year in 2005. "I saw them play to like 16 people at Bottom of the Hill in 2005. They were almost the house band at Café Du Nord. This year I saw them play to a crowd of 30,000 at Coachella."

Lead singer Brian Aubert's voice can be heard on Bagel Radio promos, and Aubert credits Seattle Webcaster KEXP with the buzz that landed them on terrestrial radio.

"That they're charging these people more money is crazy," says Stephen Rodriguez of S.F. band the Otherside. "Record labels should be paying them."

---

Major labels continue to hemorrhage cash from their ill-placed bet on the irrelevance of the Internet. CD sales will never return to pre-Napster days, and digital sales aren't offsetting the losses.

The labels are pushing hard into merchandise and live shows, but royalties seem like the low-hanging fruit. The new unit of consumption is no longer the CD, says John Simson, executive director at SoundExchange, it's the "listen," and listens need to make more money for labels and artists. Royalty hikes are the first step.

"When you have services that are feature-rich like Pandora or Rhapsody, Yahoo or SomaFM, places where people spend a lot of time listening, that time that cuts into listening to CDs — that time's moved to listens instead of purchasing CDs."

Furthermore, content owners like the big four record labels are still smart from giving away the farm in the 20th century to Big Radio and Big MTV, both of who built billion-dollar empires on the backs of RIAA's content, and then creamed the content owners in court and on Capitol Hill with all the money they made.

The content owners appear determined to prevent a repeat on the Internet and would rather kill Net radio than let Yahoo or AOL take home serious gains without paying them 10 times the rates that terrestrial radio was paying. That's right — homegrown mom-and-pop operations like SomaFM will have to pay a higher percentage in royalties than, say, KFOG, which is owned by broadcasting giant Cumulus.

Consider this: The percentage of gross revenue paid out as royalties by the industry for terrestrial radio is 2 to 5 percent; satellite radio pays 3 to 7 percent. But thanks to the rate hike, Internet radio must pay between 50 and 1,000 percent of its gross revenue, effectively killing it. Additional administrative fees alone paid to SoundExchange will balloon their budget from $5.5 million in 2005 to $1.15 billion in 2006, for a staff of 28.

Politically, the origins of the current battle go back to 1995. Back then Congress made an unprecedented decision to add performance royalties to existing composer royalties for Webcasting, satellite radio, and music on services like DirectTV. But who would set the rates and collect the money? Several years later, Congress spun off an arm of RIAA — which represents the interests of the big four music labels — called SoundExchange to collect the performance royalties.

Then in 2004, Congress wanted a permanent body to set rates, and created the Copyright Royalty Board. The CRB is composed of six people housed in the Library of Congress: three judges — only one with substantial copyright experience — and three staffers.

Webcasting royalty rates became the CRB's first case.

Over the course of 18 months between 2005 and 2007, the judges heard evidence and testimony from two main parties: SoundExchange, on behalf of the content owners, and the Digital Media Association on behalf of the Webcasters.

SoundExchange asked for at least 30 percent of gross revenue and/or a similarly increased rate for each song played per listener. DiMA went the other way and for a decrease in royalties from 10.9 to 5.5 percent of gross revenues. Testimony and documents numbered in the tens of thousands. Lawyers for both sides called dozens of economists, industry spokespeople, and artists. Rebuttals occurred. The two sides played a game of negotiation chicken, each making ridiculous demands and refusing to budge.

On March 2, 2007, the CRB handed down its ruling and SoundExchange got nearly everything it asked for. The CRB threw out any percentage of revenue plan in favor of a hiked per-song-per-listener approach, and included a $500 yearly administration fee per "channel."

In their written decision, the judges said they based their rate hikes on the "willing buyer/willing seller" orders from Congress. The CRB used individual deals between huge companies like RIAA and Yahoo and then applied those rates to everyone. The CRB also said percentage of revenue deals proved illogical, because royalties are about playing songs, not how much a company does or does not make off them.

Hodge says the law that the CRB judges use has to be changed because it rigs the system against the little guy. "I'm not vilifying the CRB. I'm vilifying the instructions the CRB was given by Congress," he says. "They use a 'willing buyer/willing seller' system that doesn't ask, 'Which buyer? Which seller?' They need something that takes into account the real world."

Simson says SoundExchange didn't get everything it wanted. "But we got a lot," he allows, "and I think that's one of the reasons the reaction is so dramatic."

Indeed, within weeks SoundExchange faced a frontal assault worthy of a screenplay.

Since SaveNetRadio.org went live on April 16, it has stoked an incredibly smart, rich, and vocal segment of the population — the biggest of which is angry 20- to 40-year-old males trapped in cubicles. Web radio stations large and small have pitched in, posting banner ads linking to the site and breaking into regularly scheduled broadcasts for SaveNetRadio announcements.

SaveNetRadio's lobbying efforts have fanned a firestorm of letters, phone calls, and e-mails to Washington, sometimes eclipsing issues like Iraq and immigration. "It's kinda sad, actually," says Hodge.

The coalition got Rep. Jay Inlsee (D-Wash.) to introduce the Internet Radio Equality Act, HR 2060, into the house of representatives on April 26, 2007. The bill would nullify the copyright royalty board decision and set royalty rates at 7.5 percent of gross revenue. The house bill has 118 co-sponsors of a needed 216. Two weeks later, U.S. senators Ron Wyden (D-Ore.) and Sam Brownback (R-Kan.) cloned the same bill and introduced it in the Senate. Net radio listeners have already blasted their representatives with more than 85,000 phone calls, and 400,000 faxes, and e-mails to their offices. According to Ward, "when the fax lines jammed, we physically walked the printed-out faxes down to their offices. You should've seen the look on staffers' faces when we came in with file boxes full of paper, saying, 'These are letters from your constituents.'"

All of SaveNetRadio's efforts appeared to pay off on May 22 when SoundExchange offered an olive branch of sorts. They issued a press release saying they would spare small Webcasters the hiked rates through at least 2010. "We've certainly reached out to that category," says Simson.

Hodge of SomaFM says people in the coalition were divided initially over whether to accept the reprieve: "There were some people who said, 'Maybe we should take it.' My stance was, 'We'll be right back where we were in four years.'"

Eventually, Hodge persuaded other small Webcasters not to take the deal from SoundExchange.

That decision may have been costly. Rosenthal threatened small Webcasters in print by saying that seeking a congressional solution will only hurt chances for individual negotiations later.

The Webcasters have gone all-in with their bigger brothers, and the next few weeks will be nail-biters.

---

For the next two weeks and likely longer, Rusty and the SaveNetRadio coalition will battle on the Net, in court, on Capitol Hill, and in the press. The stakes are high — so high that the $20 billion terrestrial radio industry, as well as NPR, which is also impacted by the rate hikes, has thrown its heft into the debate to fight the royalty rate hikes.

SaveNetRadio threw a benefit concert on Capitol Hill on June 19 with a bunch of no-name artists and one guy from the Decemberists who used to work at Pandora. However, David Byrne of the Talking Heads has spoken out. So has Thomas Dolby, the guy who wrote "She Blinded Me With Science." Science!

On another front, SaveNetRadio filed an appeal in the U.S. Court of Appeals, D.C. Circuit on May 31, 2007, seeking a stay of the CRB's ruling. Ward has no idea if it'll work, since "the CRB is so new, there's no precedent for overruling it. No one's ever done something like this before."

Most people have a murky idea of the future at this point.

"We're playing it by ear," said Westergren of Pandora. "It's an evolving situation."

No matter what happens on D-Day, Rusty says he'll keep broadcasting till they send him a bill. "And then I'll keep broadcasting till they send me a collection notice. And then, I guess SomaFM will go bankrupt."

"Internet radio's still going to be around," Rusty adds. "It's going to be injured on July 15, but it'll come back in some form. Even if we're killed, we'll go on. The worst-case scenario is we up the arms race and go peer-to-peer ."

Pirate Internet radio from overseas is also an option, but it's a specious one, says Hodge.

"There's plenty of ways to go unlisted on the main aggregators and just broadcast to your five friends," Hodge says. "Plenty of kids will continue to stream to their buddies."

"You're not supposed to tell him that," Elise says.

More than likely, July 15 will Latin American-ize the economy of Net radio, eradicating the middle class like Hodge and leaving only the super-rich like Yahoo and super-unknowns in metaphorical favelas. Of the estimated 30,000 Web radio stations out there, most have five listeners or fewer, says Hodge. With a staff of 28, SoundExchange can't go after them all.

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