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How to Ruin an Entire Medium: The Attack on Internet Radio

A lot of really crazy ideas were floated as the next big thing during the dot-com bubble. USB-powered olfactory devices, buying 50-pound bags of dogfood online, and even Internet currency backed by Whoopie Goldberg instead of the Fed all got a lot of press and a lot of money before disappearing. You might remember a lot of excitement around the idea of Internet radio back then too. It seemed for a while that everyone and their brother was setting up RealServer on a spare Pentium II or signing up with Live 365 to broadcast the definitive European house techno mixes or every bootleg Phish MP3 they could collect to the masses. Streaming was dodgy, but possible, over dial-up speeds and it worked so well over high-speed lines that universities and offices ended up blocking ports. But Internet radio has largely faded away. Was it a bad idea all along, like the CueCat? Nope. Was it killed by ever-expanding iPod storage? Probably not. Rather, Internet radio's popularity and vitality were drained by a poorly-legislated artificial monopoly and compulsory licenses. This all has to do with how music is licensed. In the wild-west days of the Internet, anyone could broadcast anything and it was up to musicians and copyright holders to go after broadcasters. Since broadcasters included anyone with some spare time and virtually no one was making any money, this resulted in a huge, messy, innovative, fascinating jumble of Internet radio stations, much like the fascinating jumble of Web pages we know and love. Clearly, though, musicians had a valid argument about not getting paid for their work. At first, the RIAA pursued the same tactic used against Napster and other P2P systems - refuse to negotiate at all and sue into oblivion. Lawsuits, or the threat of lawsuits, shuttered services like NetRadio. Finally in 2002 relief came in the form of uniform royalty rates set by the U.S. Copyright Office. Unfortunately the rate, 7/100th of a cent per song per listener, was much too high for all but the largest Internet broadcasters to pay. And the fee was retroactive to 1998, meaning big checks were due when the policy went in place. To put that fee into perspective, let's say you have a station that averages 10 listeners at any time. You play songs that average 3 minutes each, and were broadcasting from 1998 through 2002. That's 700,800 songs, and really 7,008,000 listener-songs, which means suddenly you owed almost $5000. Small change for Yahoo, perhaps, but good luck making $5000 in advertising revenue with an audience of 10 listeners. So by 2002 we've done a great harm to a once promising medium. It isn't dead yet, since some big players can afford the fees or subsidize their broadcasting with other revenue. Not quite dead, but not lively or interesting - let's say five years of a persistent vegetative state. Now The U.S. Copyright Office is pulling the feeding tube. It has granted the RIAA the exclusive right to administer a compulsory license over all music through it's collection agency, SoundExchange. This means two things will change- first, the fees are going to go up, way up. Second, even if you don't play any music owned by RIAA member record companies, you still might have to pay them. This doesn't necessarily benefit the copyright holders. SoundExchange doesn't have to seek out and pay the 13-year-old kid who created some random MP3 on his mom's iMac. Also, forcing broadcasters out of business will result in less fees being payed. Pretty much every blog on the Web thinks this is an ill-conceived plan. Listen, I've watched a fair amount of Star Trek in my day and when Wil Wheaton tells you something won't work, you better listen. In addition to stunting an entire medium, this whole system is obviously unfair. Internet radio will pay much, much more than terrestrial radio. The regular radio stations pay license fees based on a structure that was calculated based on their revenues. Those royalties probably totaled less than $500 million last year, but by the time the online fees hit their cap Internet radio will pay a projected $2.3 billion for fewer listeners. What can you do? Not much, but the founder of Pandora has asked people to sign a petition. The "Internet Radio Equality Act," introduced by Congressmen Jay Inslee (D-Wash.) and Don Manzullo (R-Ill.), would reverse the decision so writing your Congressmen might help a little. But in large part the damage is already done. Imagine if the Web had been subject to similar legislation. Back in the 1990s copyright holders like Disney and Fox were aghast that anyone could put up a site with a GIF of Bart Simpson or Mickey Mouse. Do you think the billions of dollars of value and commerce generated by the Web would have happened if every single jpeg, whether or not it was someone else's IP, required payment of .07 cents per pageload?

Finally, the Real Reason CD Sales Are Falling

For years, the representatives of the recording companies have issued predictions of doom and gloom for their own industry.  Since suing Napster in 1999 they have fretted over copyright infringement and piracy.  According to the RIAA, file sharing costs the industry $4.2 billion per year. But now CD music sales are down 20% from 2006.  Has file sharing finally destroyed the music industry?  I doubt it.  Even if those lawsuits were having the chilling effect they are intended to spread, shutting down every P2P network on the planet, CD sales would be suffering. Why? It's tempting to say there's no good new music, and that the record companies have brought this on themselves by promoting the Brtiney Spears' of the world.  But I'm sure there's good music out there somewhere, and this sounds more like a subjective criticism than a real hypothesis. What if albums are not just competing for your dollar against other albums?  Most people only spend so much money on entertainment or media, and CDs now have to compete against DVDs and video games.  Most people only spend so many hours a day consuming media, and music has to compete with TV, the Internet, and cheap cell phone minutes. I'm not the first person to think of this, I've seen this brought up on blogs and in forums like Slashdot.  But it has always struck me how little coverage this idea gets in the mainstream press, even the business press.  Finally Aaron Pressman from Business Week has put some hard numbers to the notion that CDs are losing out to other media. His source?  A report from the MPAA, hardly a den of piracy-loving communists.  Time spent on entertainment rose 4% between 2001 and 2005, which doesn't even match S&P 500 growth rate.  People spent less time per week listening to music and more time with TV and the Internet. This tracks pretty closely with my experience (and I realize that this is just anecdotal).  In the early and mid 1990s, I spent a good percentage of my entertainment money on CDs.  As videos started to fall in price around 1995 or so, I bought a few here or there.  Then DVDs hit is big around 2000 or 2001.  Soon after that DVDs of television series started appearing and falling to  $20-$40 a season. My CD spending has slowed to a trickle.  I have never been much of a P2P MP3 pirate, and I never even bothered to install Napster.  I am, on the other hand, a big proponent of downloading all the great free MP3s that bands and labels make available.  I also still listen to some of the same music I bought in the 1990s, now ripped to my hard drive. I only have so many hours in a day and although I can listen to CDs while surfing the Internet, I'm not sure I want to put them in my computer anymore, for fear of rootkits. So where does this leave the music industry?  No doubt they will continue to sue 9-year-olds and disabled retirees, and litigating against technological change is not a good business model.  Maybe the open-source-loving interweb hippies are right and bands will promote themselves using MySpace and YouTube and keep a much bigger piece of the profits.  Maybe not. What they are doing right now, though, isn't working.  It's the limits of human consumption and the invisible hand of capitalism they should fear, not some kids with cable modems.