Closing Pandora’s Box: The End of Internet Radio?

Internet Radio has become a powerful resource for people looking for greater musical diversity when they tune in. Now that diversity is threatened by a draconian rate increase for every copyrighted tune that these stations play.

In a ruling that was made public just after this article was initially published, the Copyright Royalty Board has extended the deadline for implementing the new rate structure to July 15th. According to the AP: "Webcasters can file a notice to appeal the decision in federal court, something they have said they plan to do."

Tim Westergren is one of the leading spokespeople for SaveNetRadio.org, the organization that is fighting back against the new regulations.

Westergren is also founder of the Musical Genome Project and Pandora Internet Radio. Coincidentally, Pandora has just hit a snarl with international licensing. On Wednesday, Pandora sent an email to its 6.5 million subscribers with bad news — they would now be forced to curtail access to subscribers in most non-U.S. countries. ("[W]e are deeply, deeply sorry to say... It is difficult to convey just how disappointing this is...")

I recently interviewed Westergren on NeoFiles. Jeff Diehl joined me.

To listen to the full interview in MP3, click here

RU SIRIUS: Let's start with the basics. What has the Copyright Royalty Board done?

TIM WESTERGREN: It's pretty simple. We pay a licensing fee for every song that we stream, which was determined by the Copyright Royalty Board. And the royalty board just voted to almost triple those fees within the next couple of years. So overnight, they've made webcast radio pretty much impossible. It's impossible, at these new rates, to really operate a radio station online.



RU: So who is the Copyright Royalty Board and how did they become so empowered?

TW: They're members of the copyright office in D.C. They were empowered by the Digital Millennium Copyright Act. Its purpose was, sort of, to govern webcasting; to provide a structure, both in terms of the constraints and the licensing structure. There were three judges assigned to this case.

RU: So there are no existing checks and balances at this point other than to try to go back to Congress?

TW: It looks like our only recourse is to get some legislative help. So in the last couple of weeks, under the "Save Net Radio" coalition, we've tried to organize as many webcasters and musicians and other folks to put pressure on Congress. There was such an uproar in the first week following this ruling that a bill was just introduced on Thursday of last week to roll it back, and to further alter the basic structural problem that really discriminates against internet radio.

RU: Who's sponsoring the bill?

TW: Representatives Jay Inslee, a Democrat from Washington, and Don Manzullo, a Republican from Illinois, are the lead sponsors. Many co-sponsors are signing up as we speak.

RU: Tell us a bit about the bill.

TW: It's called the Internet Radio Equality Act. As the title indicates, it's trying to establish parity between internet radio and satellite radio. Right now, internet radio is treated differently and worse than satellite and much worse than terrestrial radio for the same function. We're asking to be treated equally — which means paying a percent of revenue. The bill would void this Royalty Board ruling and establish parity with the percent revenue that's used for satellite radio.

RU: Do people who oppose this equal treatment argue that internet radio is harder to keep track of? Maybe more stations can slip through the cracks because the internet is virtually infinite.

TW: I don't think I've ever heard that argument. Originally, there was some argument that it was easier to copy off the internet because it's digital. But of course, HD radio is digital. Satellite radio is digital sometimes. So that argument is no longer used.

RU: Going way back, we could always slip a cassette in and record directly off the radio.

It's probably pretty difficult to get anything like this through Congress. My impression, for instance, is that the entertainment industry owns many Congresspeople, particularly in the Democratic Party, where a lot of your support would seem likely to come from.

TW: In general, I think that's historically true. When it comes to things like licensing and issues as it relates to media and music, Congress has been the domain of the industry. But I think in the last three or four years, we've started to see a reversal of that leverage. The internet has empowered this huge class of musicians and "participative listeners" now. I think that power is just starting to show and I don't think they're going to take this sitting down. In the end, I hope and believe that Congress is going to react to their constituents. There were hundreds of thousands of FAXes and letters sent to Congressmen within a couple of days of the coalition starting.

RU: Now, there seem to be two dates on this. I understand it's retroactive back to January of 2006 — but then there's another date approaching. Is that correct?

TW: Well, that's D-Day! July 15 is the day. That's the latest date we've heard when these rates are going to become law. And when they do become effective, the payments are retroactive back to the beginning of '06. On that day, every webcaster will be suddenly faced with a fee that they can't afford.

RU: Did they inform people of this in January of 2006?

TW: A plan for this rate to be readjusted was announced at the end of '05. It took a long time for them to set the rate, but I think what they came up with was a shock to everybody.

RU: But technically, you're playing songs in January of 2006 for one price, and then they're coming along and charging you more money. That doesn't sound legal to me.

TW: Well, I don't know about the legality of it, that's not my expertise. But I can tell you that on that day, the bills will be due from everyone from college radio to non-profits to small webcasters. For folks like us at Pandora, the costs are going to be astronomical.

I think that this ruling has virtually no constituents.

RU: Well, there's the RIAA

TW: I would argue, though, that if they really thought this through, they would recognize that this is a bad decision. It's crushing a promotional channel.

JEFF DIEHL: Did they give a rationale for such a huge hike in the rates?

TW: Well, Sound Exchange is the organization that pushed for it. And their rationale is that it's fair, and that if you can't run a business on it, you shouldn't be in business.

RU: That's not much of an argument.

JD: But why that amount of a hike? An incremental increase would be one thing, but this is exponential. They don't give any reason for that?

TW: All I can do is take at face value what I hear, in terms of press releases and commentary. And it's all been, "It's fair, and if you can't run a business on it, then you shouldn't be in business."

RU: Who does Sound Exchange work for? They're supposedly representing musicians, right?

TW: That's an interesting question. Sound Exchange is meant to represent all musicians. And their board is comprised of artists, and representatives of the small labels and the large labels. And I'm a musician myself. I used to play in bands. I spent ten years living in a van and doing that whole thing. I think you'd be hard-pressed to find a dozen musicians who — if they got fully educated on the subject — would actually support this ruling that is ostensibly supposed to help them.

RU: It's sort of mysterious how this could emerge from an artist's organization rather than from the music corporations. I mean, obviously radio had promoted music for several generations. It's baffling.

TW: There were two sides in the discussion – the webcasters and some artists were on one side; and then Sound Exchange, the RIAA, and these various constituents were on the other. They argued in front of the Royalty Board for different solutions. And the Royalty Board, in a very flawed ruling, went all the way in one direction. So my guess is that the ruling surprised even Sound Exchange, although they've defended it since.



RU: I'm still trying to figure out whose interests are being served...

TW: Well, if this goes through, it basically ruins internet radio. But maybe a small handful will continue to stream – folks who can somehow continue. And in order to continue, they'll be forced to sign direct licensing agreements with labels. When they do that, there's a big difference in the way the royalties are divided up. In the current DMCA statute, all the royalties get split half with the artist, half with the label. In the world where you're dealing directly with a label, it virtually all goes to the label. So that could be one incentive.

RU: Okay, I'm beginning to see some interests who would like to monopolize Internet radio and who could be behind this.

On the Save Net Radio web site, there's talk about a 300% - 1200% percent increase. That's a big difference. How is all that mapped out?

TW: That's a good question. The reason for the difference is that in the previous rate structure, there was two ways stations could pay. Smaller and non- commercial webcasters could pay a percent of their revenue. And if you got beyond a certain size, you had to pay per tuning hour rate. The new ruling creates one rule for everybody, and it's all just "per song." So if you take someone who's paying a percent of revenue, and then translate that to what they would be paying in this new rate, in some cases it's over a 1,000% increase.

RU: Stations that have very little revenue had a way of functioning before and now they won't.

TW: And I think that's important. Pandora is all for paying musicians. We completely believe in that and we've done that since the very beginning. But the rate that they're paid needs to make sense in this business as it exists right now. And it's all about promotion. Online radio is the only hope that your average indie musician has for getting any kind of exposure.

RU: It's become common knowledge that most people hate terrestrial radio. They hate the radio stations and what the corporations have done to them. And people are looking all over the place for alternatives.

TW: The growth in internet radio is certainly partly because folks are looking for alternatives. And it's an alternative for musicians too.

RU: Of course, it took a while to work out an agreement where internet radio stations were legally allowed to play music that's owned. I think it was really after the DMCA in 1998 that some agreements were worked out. Do you know anything about that history?

TW: I'm not a perfect historian on this, but basically in 2002, that whole legislation that you're talking about was re-considered. And that's when new language was inserted into the bill that changed the standard for rate setting for internet radio. It's called the "willing buyer, willing seller" standard. It's a standard that's only applied to internet radio — it's not applied to satellite and it's not applied to terrestrial radio. It opened up a doorway for this kind of crazy rate-setting to come along.

RU: Many people have observed that the smallest webcasters are the ones that are really going to get screwed by this. Most college stations stream on the web, and they will be among the first to go. Where is Pandora in this?

TW: Pandora's a large webcaster…

RU: Are you guys going to survive?

TW: Not at these rates. Pandora can't make it work at these rates.

RU: That's very honest of you. Your investors must be...

TW: Yeah… they read a quote in the news from me one morning saying, "We're dead if this stays." It wasn't hyperbole. Larger webcasters like Pandora… we're actually a viable alternative for independent musicians. We have 6.5 million listeners right now, and that figure is growing fast. That's the kind of critical mass that's really going to allow you to build a new independent artists' foundation. And I'm a huge fan of indie, but even indie musicians need scale. They need to support the growth of large internet companies that do this, as well as the small ones.

JD: What role do the record labels really play for the artists anymore — marketing, getting musicians on the radio? Isn't it possible that an outfit like yours could connect directly with artists and say, "We'll support you"? Is there a chance to get rid of that middleman?

TW: Well, I think that the industry is starting to bifurcate. There is still the sort of "hit" industry that is the traditional business. And the stations that play that are largely marketing vehicles, like you said. But with some good software editing tools and good recording chops, you can make a CD now without borrowing half a million dollars, which was the whole premise for the record deal in the beginning. So technology has now allowed musicians to make professional-sounding CDs, and make them available globally, virtually for free. The record labels won't go away. They're going to change and consolidate more and more, which they've already been doing.

RU: There are some startups that are trying to do that — to eliminate the middleman.

TW: Oh yeah. There's a whole industry growing up around the "new label" — which is more like a quasi-management/distribution/promotions company. I think that's going to play a bigger and bigger role.

RU: And then some rock stars who have enough of a reputation can also...

TW: … do it on their own.

RU: Prince has done some of that.

TW: Pandora is not going to go into the label business. We really need to separate the radio from having any kind of agenda related the music we play. I think that's really important.

RU: Does it bug the music industry that people can make their own radio stations with companies like yours? It was always a dream of mine that I could just run down a list of all my favorite artists, and just have some station regurgitate their entire catalogues in some randomized fashion.

TW: I think that one of the debates around internet radio, is: is it promotional or is it substitutional? When it gets really interactive and you can choose at any time to listen to "Dark Side of the Moon" from front to back — chances are you're not going to buy the album. And when that happens, whoever is doing that is providing something that's kind of in lieu of buying a CD or buying a single. They would need to charge something different for that.

RU: It seems like you guys are pretty close to that boundary compared to, say, a station where DJs spin tunes that they choose.

TW: To me, the real bright line is that we're not offering songs on demand. On Pandora, you won't know when a song's coming, just like on terrestrial radio. I think that makes it fundamentally different. And Pandora's a wildly promotional service.

RU: The big broadcast stations also have streaming on the internet. Are you getting any support from any of them?

TW: Yeah. The National Association of Broadcasters is with us too. Every radio company wants to be part of the online world.

RU: So what's in it for us podcasters? When do we get a voice in Washington?

TW: Well, I think this is a great bill for anybody who wants to include music in their programming because it's acknowledging the internet format as radio. So I think it's a step in the right direction for podcasters too.

RU: Good! Do you think we could grandfather ourselves in under this? We could just say, "Hey, this applies to us!" and maybe make a test case out of it.

TW: Well, I think the one difference between podcast and radio is that you create and post copies of your shows. So you create a copy of a piece of music that you can replay, rewind, and so on. So it's in a different category. And I think that if you're making a copy of a piece of music that can be used and re-used, it's legitimate to worry that people won't buy the music. So it's different.

RU: Before I let you go, tell us a little something about your own work. How was the Musical Genome Project conceived and how does it work?

TW: It's something that we started about seven and a half years ago in a one-bedroom apartment in San Francisco. It's an enormous collections of songs that we have been analyzing, musicologically, one song at a time to try to capture their musical DNA. A team of musicians literally listens to songs — one at a time — and analyzes them for their attributes. We have 50 musicians working for us now. We've been at it for seven and a half years, so it's really been a long path to create enough music in one collection to power the radio service. It takes between 15 and 30 minutes to analyze each song.

RU: I was trying to think about whether music can really be broken down into its component parts. So I tried your station. I combined Brian Eno, Leonard Cohen, The Beatles and Sonic Youth and it worked pretty well. But then I was thinking, if I added my absolute favorite band, which would be The Rolling Stones circa 1966 – 1972, I'd wind up getting lots of stuff that sucks like Aerosmith and Guns 'N' Roses.

TW: Musically, there's always going to be some stuff that's great that you can't quite put your finger on. I think that's part of what makes music so great. But yeah… it works most of the time, but there are going to be some situations where you're not going to be happy with what you hear.



RU: Give folks a final pitch for how they can get active to save net radio.

TW: Go to SaveNetRadio.org where we're keeping all the news and recommendations on what to do and we’ve got the latest news on the bill. But the basic call to action is for folks to call their Congressperson to urge them to support this bill, which is called the Internet Radio Equality Act, and it's House Resolution 2060. Call your Congressperson for your district. You can look it up on the web just by typing in your zip code. All that information's at SaveNet Radio.org. Make a call and say "Support the bill!"

See Also:
Dear Internet, I'm Sorry
Is Yahoo/Flicker DMCA Policy Censorship?
Detention and Torture: Are We Still Free, or Not?
How the iPod Changes Culture