Dear _______________:

I am writing you to express my strong fear that the U.S. Copyright Office, in its efforts to set a "sound recordings performance royalty" rate for Internet radio as required by the Digital Millennium Copyright Act (DMCA), may be about to make a decision that will bankrupt virtually all webcasters and effectively destroy Internet radio as a medium.

This issue is not about Napster — in fact, quite the opposite! Internet radio is a perfectly legal new medium, in its very early stages but growing in popularity, that is offering wonderful benefits for musicians and record companies as well as for consumers.

Internet radio at this moment is a young but thriving medium: There are tens of thousands of Webcasters, including thousands of small businesspeople — many of them music fans broadcasting via companies like Live365 and AOL's Shoutcast, but also hundreds or even thousands of commercial operations, plus thousands of broadcast radio stations around the world that are "simulcasting" on the Internet. Tens of millions of Americans have sampled Internet radio, according to a study available at Arbitron.com, and the number of loyal Internet radio listeners in the U.S. is in the millions and growing at over 100% per year.

Also, significantly, the most-popular Internet radio formats are those that are not available on AM and FM radio in most cities, including various forms of classical, Americana, "world music," bluegrass, trance/electronica, and various forms of jazz.

In short, Internet radio is a medium that does not deserve to be bankrupted and shut down 60 days from today.

THE DMCA'S RATIONALE FOR THIS NEW ROYALTY IS FLAWED

As you may know, over-the-air broadcasters have traditionally had to pay royalties to the composers of musical works, but not to the record companies and performers, as Congress has always felt that record companies and performers have benefited sufficiently from the promotional value of radio airplay. (Note that record companies actually spend hundreds of millions of dollars each year in their efforts to encourage radio stations to play their product!)

However, in 1998, the DMCA established a new "sound recordings performance royalty" for digital media, including Internet radio, under the rationale that digital copies are "perfect" copies and thus might put record company revenues at risk.

With the benefit of hindsight, we can now see that this rationale is flawed. Here's why: People don't make copies of the music on Internet radio at all! (Furthermore, even if they could, the music on Internet radio is almost always delivered in a reduced-quality format. Thus, it's true that Internet radio could theoretically offer consumers a "perfect" copy...but only of a low-quality original!)

It's no doubt true that record company revenues are at risk in this "digital millennium," but that's due to the phenomenon of MP3 file sharing (e.g., Napster) and the growing popularity of the "CD burners" which allow consumers to make unlimited perfect copies of CDs.

However, Internet radio is NOT one of the problems! In fact, it's giving new exposure to dozens of musical genres and thousands of artists who can't get radio airplay on traditional AM and FM radio.

THE CARP PANEL MADE A RECOMMENDATION
THAT WILL DESTROY THE INDUSTRY

Despite everything I've just noted, I realize that unless and until the DMCA is amended, the Copyright Office is nonetheless obligated to set a royalty rate. However, the Copyright Arbitration Royalty Panel (CARP) that was convened last summer has reached a conclusion that is probably far more draconian than anything Congress intended!

Record companies initially asked webcasters for a royalty of 15% of gross revenues. Webcasters initially countered by offering something close to 3% of gross revenues (analogous to the royalty they pay composers). Thus, the two sides went to arbitration in front of the CARP.

The CARP's recent recommendation to the Copyright Office, however, is not a percentage of revenues, but rather a price per song streamed multipled by the number of listeners of that particular song. Specifically, for Internet-only webcasters, their recommendation was .14¢ per song per listener (or about 2¢ per hour per listener), with discounted rates for AM and FM simulcasts and noncommercial radio broadcasters. Even if webcasters eventually achieve the same advertising success that broadcasters have achieved, that would work out to a royalty rate of 200% of gross revenues!

The Internet radio industry is still very young and its audience is as yet too small to interest most advertisers. Thus, most Webcasters have seen very little revenue to date. In the current advertising environment, their recommendation is more like an effective royalty rate of 200% to 300%, or even more, of gross revenues!

Worse yet, this royalty rate is not only due going forward but also retroactively to October, 1998, when the DMCA was passed — and the retroactive obligation is, for most webcasters, more like 500% or more of gross revenues. With the exception of a handful of webcasters owned by major corporations, it will bankrupt or force the shutdown of virtually everyone in the space (including all of the small businesspeople).

A royalty rate of a mere .14¢ per song might not sound like a lot of money, but for a popular independent webcaster (imagine two or three people working out of a home office or a campus apartment) that has had, say, an average audience of 1,000 listeners for the past three years, the bill for retroactive royalties — which will come due 45 days after the royalty rate is approved — would be $525,600!

An effective royalty rate of 200% to 500% of gross revenues simply CAN'T be the kind of royalty rate that Congress had mind when it passed the DMCA!

WHY THE CARP RECOMMENDED
SUCH A HIGH ROYALTY RATE

How did the CARP come up with such a high royalty rate? Because they were instructed by the Copyright Office to set the rate based on the principle of what a "willing buyer" and "willing seller" would agree to... and that instruction was virtually impossible to fulfill.

The only relevant "willing buyer/willing seller" transaction that the CARP could identify was one agreement between record labels, represented by the RIAA, and Yahoo!, which was in a very unique position -- it was trying to prop up its at-the-time recent $5.3 billion purchase of Broadcast.com.

The financial situation of Yahoo! was unique — and it was a deal put together at the height of the dotcom boom a couple of years ago. In short, it was an ATYPICAL transaction, occurring during an atypical moment in history,and envisioning a rich advertising market that has not yet developed (and perhaps never will).

That one deal shouldn't be expected to set a rate for an entire industry today.

PLEASE ENCOURAGE THE LIBRARIAN OF CONGRESS
TO SET A REASONABLE RATE

Although Internet radio is still in its very early stages of growth, it has already given new exposure to thousands of new artists, adds diversity that is a perfect counterbalance to the effects of consolidation on AM and FM radio programming, and is a key motivating factor behind consumers signing up for broadband Internet service. It deserves your support.

For most Webcasters, the critical issues facing the Librarian of Congress are (A) that the CARP arbitrators set a rate far higher than the rate for composers' royalties, based largely on the Yahoo!/RIAA deal, and (B) that the CARP panel rejected the "percentage of gross revenues" royalty concept that both sides had previously been willing to accept — and which most Webcasters were counting on to stay in business.

There is also a secondary issue hanging out there — the Copyright Office has proposed complex reporting requirements from webcasters, almost exactly as recommended by the RIAA (18 pieces of information for every song that's played and 7 pieces of information on every listener that listens!), that would force many smaller webcasters off the air. Any help you could offer in this area would also be appreciated.

If the Librarian sets a rate along the lines of the CARP recommendation, the industry will be effectively dead by the end of May.

On the other hand, if the Librarian sees fit to set a royalty rate that is expressed as a percentage of gross revenues and is somewhere in the range of the royalty rate paid to composers, and sets more-reasonable reporting requirements, this young industry can survive and grow.

I urge you to communicate to the Librarian of Congress that you and your fellow legislators, in passing the DMCA, did NOT intend for the royalty rate to be set so high that it would bankrupt the fledgling industry.

Many of your constituents and I will greatly appreciate your attention to this concern.

Sincerely,

______________________