Royalty Rumbles

If the recording industry wants to kill Internet radio, it just might succeed.

You probably remember the outcries from Netcasters big and small when new copyright royalty rates were announced earlier this year – rates that amounted to increases of more than 300 percent for some Internet radio companies.

One of the reasons for the increased rates had to do with how royalties are calculated. Previously, royalty rates for Internet radio were calculated on a percentage of revenue, most often derived from advertising. However, the new rates are based upon the number of times each song is played, often resulting in rate increases that could easily outdistance a company’s yearly revenue.

While most protests against the new rates came from small Internet radio services, it now looks as if the big boys are also hurting from the new fees.

AOL and Yahoo are considering shutting down their radio services, citing a 38 percent royalty rate increase making it difficult, if not impossible, to derive any profits, Bloomberg News reported.

"We’re not going to stay in the business if cost is more than we make long term," the news service quoted Yahoo radio division GM Ian Rogers saying.

AOL and Yahoo stopped directing traffic to their radio operations last July, with the latter promoting videos and songs for sale instead of its Internet radio service.

But loss of income isn’t limited to the major companies. Smaller outfits, like, are also losing money.

It’s no secret the record labels have lost millions in the past few years. While the recording industry attributes peer-to-peer file-sharing as the major reason for its financial woes, factors such as CD prices and other entertainment opportunities available to consumers have also affected the recording industry’s revenue stream. It’s a money stream the labels are anxious, if not desperate, to replace.

Under the new rates, Internet radio stations pay a retroactive fee based upon .08 of a cent per song per play for last year, .11 of a cent per song per play this year and .19 of a cent per song per play in 2010.

If this sounds reasonable, remember that, unlike terrestrial radio stations where only one song is played at any given time, Internet radio sends individual streams to its listeners. That means hundreds, if not thousands, of songs are individually streamed to listeners at any given moment.

"The current math doesn’t add up," said AOL’s managing director of radio, Lisa Namerow. "If the rates remain as they are, it would be very challenging to sustain a business that is profitable."

Although companies like AOL and Yahoo are considered examples of big business, with net incomes often cited as just less than $1 billion per year, neither company is apt to continue running a service that loses money. And if neither company’s radio service can justify its existence by generating black ink, it’s a sure bet those companies will replace those services with something that can make a buck.

Or, as founder Tim Westergren said in the Bloomberg piece:

"At the new rates we’re losing tons of money. If we don’t think there’s a real answer that’s going to happen, it’s our fiduciary responsibility to stop."


Verizon Wireless’ New Hook Up

Verizon Wireless shook up the cell phone service biz recently by announcing that it will open its network to phones and devices other than those the company endorses, a move that might make people rethink devices embedded with proprietary technology, like DRM-protected songs that only play on certain digital players.

Cell phone users are already familiar with the drill. Each wireless provider presents customers with phones hand-picked by the company. For newbies buying their first cell phones, it might be the line of available phones that influences the choice of service provider. However, if a customer wants to replace a phone but is happy with the service, he or she must choose from phones already approved by the company.

It’s kind of like the iPod vs. all those other players. If you haven’t already digitized your CD collection in any particular format like MP3, WMA or AAC, you can choose from just about every device on the market. However, if you want a device compatible with iTunes, then your choice is limited to the iPod. That is, as long as iTunes sells music protected by Apple’s FairPlay digital rights management technology.

Although Verizon Wireless’ plan to open its network to outside devices means a greater choice for consumers, it doesn’t mean any phone will do. Instead, outside phones will have to pass tests paid for by the device manufacturers. Furthermore, Verizon Wireless will still offer its line of approved mobiles and devices, presumably at a cheaper cost than outside phones.

Aside from allowing for a wider range of phone choices for customers, Verizon Wireless hopes that opening its network to other phones will encourage third-party software developers.

The open phone policy also puts Verizon Wireless in the running when Google launches its free software package for cell phones. Many cell phone manufacturers, including Samsung, Motorola and LG, have agreed to install Google’s software on some of their phones, while several wireless providers like Sprint Nextel and T-Mobile say they will support devices running the software.

Although Verizon Wireless isn’t on the list of current providers supporting Google’s software package, a company spokesperson did say customers will be able to use the software with Verizon’s network on phones purchased from non-Verizon sources.

Then there are the third-party software companies, which have a lot to gain if more phones carried their programs. Microsoft, which would like to see its Windows Mobile Software running on more devices, has already voiced support for Verizon Wireless’s plan.

Of course, the major advantage for consumers is choice. No longer tied down to only the phones a carrier offers, consumers could change plans but keep the same device. Or they could buy the phone they want instead of the phone the carrier offers.

On the other hand, outside phones might cost more than devices that are part of Verizon Wireless’ official line of handsets since the carrier might not subsidize or offer discounts and rebates for outside phones. And many consumers have grown used to the concept of cheap cell phones.

"U.S. consumers are used to the idea that a phone costs $50 – $100," Forrester Research analyst Charles Golvin said. "This is going to be jarring to the mass audience."


Hitting Pirates Where It Hurts

A new antipiracy system recently unveiled in France threatens to attack copyright infringers where it really hurts – by cutting off their Internet access.

The new system is the result of a three-way pact hashed out by Internet service providers, the entertainment industry and the French government.

The "Memorandum of Understanding" calls for those suspected of film, TV or music piracy to receive warning messages about their illicit actions, thus giving them a chance to renounce their piracy ways. But if the recipients ignore the warnings, they’ll then find themselves disconnected from the online world, according to Reuters.

Although it’s the threat of losing Net access that’s making headlines, the concept of issuing a warning before taking any action against copyright perps is what makes this system different from other methods used to discourage infringing activities. The most common method used by entertainment companies throughout the world is to sue first, ask questions later, and never, ever warn anyone in advance that lawyers are readying to pounce.

Deciding who has been naughty or nice to intellectual property thieves will be left up to an independent authority, which in turn will be supervised by a judge.

In return for digitally circumcising copyright bandits, the pact also calls for entertainment companies to make a greater effort in putting their works online and finding ways to make copyrighted content compatible across multiple platforms. Meanwhile, ISPs pledge to increase efforts to identify and prevent copyrighted materials from traversing their networks.

"This is the single most important initiative to help win the war on online piracy that we have seen so far," said John Kennedy, chairman and CEO of the International Federation of the Phonographic Industry.