Yesterday, it was announced that CBS would be operating Yahoo’s Launchcast Internet Radio operations. This is ironic as the industry seems to have now come full circle, as Yahoo’s Internet Radio operations include the interests that they received when they purchased Mark Cuban’s Broadcast.com, which had a substantial part of its business in the streaming of terrestrial radio stations. While Yahoo long ago stopped streaming the broadcast signals retransmitted by Broadcast.com, it is ironic that a traditional broadcast company has now taken much of the control of not only the Internet radio operations of Yahoo, but also those of AOL and Last.FM (see our post on the AOL deal here). Explicitly blamed for Yahoo’s decision to turn its Internet radio operations over to CBS was, according to press reports, its concerns over the Internet radio royalties as set by the Copyright Royalty Board last year, a decision about which we have written extensively. How will this transaction affect the debate over those royalties?
Initially, this action once again shows that assumptions about the state of the Internet radio industry that colored the perception of the Copyright Royalty Judges in their determination of the royalty rates were incorrect. While not explicitly part of the grounds of the CRB decision on the webcaster’s royalty, there was much testimony in the CRB proceeding that suggested that Internet radio brought customers to portal sites, and that higher royalties were justified by the value that these visitors added to the portals when the listeners engaged in other activities at the portal. Yet, that model now seems in tatters, as both AOL and Yahoo have turned their operations over to CBS. This seems to emphatically demonstrate that the economics of Internet radio operations, whether stand-alone or as part of portals, simply do not justify the royalties that were imposed (see our discussion of the Pandora economic and the royalties here).
The action also seems to emphasize the need for a separate deal for small Internet radio companies. While the operation of Launchcast and AOL by CBS will probably be good news for enhancing the perception of Internet radio as a viable advertising medium as a traditional broadcaster with significant advertising relationships has decided to invest in the medium (see the analysis here), it does further demonstrate that the high royalties, which preclude the successful operation of small independent webcasters, undercuts the very purpose of the statutory license for the use of music by Internet radio stations. The statutory license administered by the Copyright Royalty Board was established to minimize transactional costs and make it easier for small companies to pay one fee to one entity (now SoundExchange) and have access to all the music that is publicly available. If that royalty under the statutory license did not exist, each service would have to individually negotiate with each individual copyright holder for the rights to use the sound recordings featured in their transmissions. It was felt that such negotiations would be impossible for smaller entities, both because they lacked the bargaining power to negotiate with the large record companies, and because they lacked the resources to locate and negotiate with all of the smaller labels and individual copyright holders. Yet, by setting rates so high that only very well established media companies like CBS can survive in the industry, the goals of the DMCA have been undercut.
Thus, to preserve the promise of Internet radio, that it will allow the flowering of diverse music sources that will play the great diversity of music that exists in this country, a royalty arrangement that permits such independent services to operate and make a profit (as this transaction demonstrates that even the largest Internet companies will not operate Internet radio stations without a profit) must be adopted. Let’s hope that, before the February 15 deadline of the Webcasters Settlement Act, such a deal will be adopted and the promise of the statutory royalty preserved.