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Music Radio on the Internet Faces Thorny Royalty Issues

Rafael Fuchs

Tim Westergren closed his Internet music radio site Pandora to users outside the United States because of international royalty problems.

Published: May 14, 2007

PARIS, May 13 — Since closed its box of digital musical delights this month to users outside the United States, the complaints have been pouring in from Dubai to Patagonia.

It is “a step back to the dark ages in the music world!” fumed Mario from Mexico City. Declared a user from Spain: “Why can’t they leave us in peace?”

With 6.5 million registered users, Pandora stands at the vanguard of the sprawling, global Internet radio market. But like other Webcasters, it faces an increase in royalty rates in the United States and is struggling with competing royalty collection agencies all over the world.

On May 3, that chaos prompted Tim Westergren, a former musician who founded Pandora in a San Francisco apartment, to pull the plug on the international market, blocking foreign visitors through computer Internet protocol addresses, which identify the country of the user.

“This is a watershed period that we’re going through,” said Mr. Westergren, who had intended to start a British site this week but postponed the project as the company wrestles with the royalties issue.

Internet radio sites are global by nature, streaming musical programs digitally to users all over the world. But there is no one-stop global shopping for royalty collections, which means that Pandora has to negotiate separate agreements with institutions from each territory or directly with music labels.

Global demand, though, respects no boundaries. The American Internet radio audience climbed to 34.5 million in March, and the share of listeners in Europe is even higher at 49.5 million, according to comScore, a marketing research company that tracks Internet traffic.

Those listeners are logging on to sites that can tailor programming to eclectic tastes., for instance, is a 10-year-old network of thousands of members who create their own online stations offering fare as diverse as Konkani music from the west coast of India or hundreds of versions of “Ave Maria.”

The expanding market has overwhelmed the existing royalty structure. But the International Federation of the Phonographic Industry in London has just completed an international agreement to develop a more manageable way to stream across competing territories and collect royalties.

“In actual practice, companies had two options if they wanted to remain legal,” said Lauri Rechardt, a legal consultant who helped negotiate the agreement for the federation, which represents 1,400 record companies in 70 countries. Either they limited their service to certain territories for which they had cleared the rights, Mr. Rechardt said, or they faced the physically impossible task of striking deals with hundreds of record labels.

Mr. Rechardt said he expected 40 national royalty collection agencies in the United States, Europe, Asia and Latin America to sign the agreement within the next few months. On Friday, Gramex, the Finnish collection agency, was the first to sign.

But the agreement leaves rate-setting to each individual country, and for the moment the United States is poised to set what could be, in effect, a global benchmark. The proposed increases could raise the cost of sound recordings for Internet stations 300 percent to 1,200 percent, and have set off a furious political struggle.

Currently, Webcasters pay a percentage of revenue in performance royalties for music streamed to the United States to an industry-backed association called SoundExchange, which collects and distributes the money. But the Copyright Royalty Board has set new rates effective July 15 that change the structure so that Webcasters are charged each time a user listens to a song.

The pending rate increases have sparked an intense lobbying campaign in Congress by small Webcasters and large ones like AOL Radio and Clear Channel.

Those efforts prompted Senators Ron Wyden, Democrat of Oregon, and Sam Brownback, Republican of Kansas, to introduce legislation last Thursday to reverse a Copyright Royalty Board decision setting the new rates.

John L. Simson, executive director of SoundExchange in Washington, said that the Webcasters had managed to portray themselves as a grassroots collection of gritty, independent Webcasters, but the ones who would benefit most were large companies with deep pockets like AOL Radio and Clear Channel.

“Do you say that if this service plays this music I get paid very handsomely, but if this service pays my music I don’t?” Mr. Simson said of the divide in resources between big Internet radio companies and smaller independents. “I think it’s a very delicate issue. And I think in any new area like the Internet there will be some businesses that survive and some that don’t.”

Along with a lobbying campaign in Congress, Webcasters are also pursuing a public relations offensive online through the SaveNetRadio coalition, which is urging listeners to contact their legislators to support the Internet Radio Equality Act., a popular Webcaster in London that is also a social networking site, will be affected by the rate increases, but is not terribly worried because of direct deals that it has negotiated with major labels, according to Christian Ward, a spokesman for

“The industry trusts us,” Mr.Ward said, “which means that there are always ways around the issues. It will be difficult, but we’ll find our way around the problem.”


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