A Story of Weasels and an Evil Corporate Cartel

What do you do when a large corporate cartel threatens to shut your small business down forever? You refuse to give in and you fight for survival, of course.

If you have been reading my diaries, you have heard that the major record labels (The RIAA) are conspiring to kill Internet radio. To accomplish this they created a special copyright for "digital musical performances," meaning that they established a "right" to the digital recording and that anyone who performed the recording must pay the rights holder - almost never the musicians but instead the record label. In 1998, they got the then Republican Congress (can you say "campaign contributions") to grant them the right to collect a tax on all digital performances of music. The RIAA created a new corporation, called SoundExchange to collect this new tax. Most telling, this new tax was not charged to terrestrial broadcast radio, only Internet radio. Later, it was also charged to satellite radio but at a much lower rate than they charged Internet radio.

A brief aside - SoundExchange wants to call this a "royalty," but it is not a "royalty." If it was a royalty, it would be collected for ALL performances of the song. This fee is NOT charged to terrestrial broadcast radio and it will not be increased on satellite or cable radio. No, this is a targeted TAX on Internet radio, extortion designed to put Internet radio out of business. Let's call it what it is - an anti-competitive TAX. Also, if it was a "royalty," it would go to the artists, which much of the time it does not; the fees instead go to the record labels.

Back to the story: SoundExchange, in 2002, tried to collect the tax on the then brand new Internet radio industry at a shockingly high rate. The rate was so shockingly high that even the Republican Congress stepped in and passed in 2003 the Small Webcasters Act that placed a reasonable cap on the fees SoundExchange could charge.

Since then, the big record labels have been steaming. The tax was high - guaranteeing that most Internet radio stations lose money - but not high enough to overcome the love of music we Webcasters have and get us to quit. No, the RIAA needed to bankrupt Internet radio.

Another aside - Why do they want to kill Internet radio? Simple - control. The big record labels control corporate terrestrial radio. Recent lawsuits have proven that payola still determines the playlists of terrestrial radio stations. Even without payola, corporate radio only plays music from the big corporate labels. The big record labels do not control Internet radio. We are independent operators. Worse, the existence of Internet radio means that artists can go directly to an Internet radio station to get their music played without having to go through the record label system!  A record contract means you give up most to all of the control over your music. Independence means you can get your music played anywhere without a corporation taking a financial cut from your talent and efforts.

Though Internet radio has already paid several hundred million dollars in the Internet Radio Tax to SoundExchange over the past four years, they want to increase the tax up to 1,200 percent. Plus, they want to institute an additional minimum per channel tax of $500. This new tax is designed to kill group licensers Live365, LoudCity, member services like Pandora and   larger multi-channel stations like SomaFM. Live365 and Pandora would have to each pay over a billion dollars in additional tax; LoudCity several million dollars; and SomaFM over a half million dollars. These new taxes are many times higher than the revenue earned by these businesses. Smaller Internet radio stations would see their taxes increase similarly.

A final aside - It should be pointed out that all of this is separate from the traditional and actual royalties paid to artists and songwriters. Those royalties are collected by BMI, ASCAP, and SEASAC. Those royalties are charged even-handedly to terrestrial, satellite, and Internet radio stations, and BMI, ASCAP, and SEASAC are not raising their royalty rates.

Back to the story again: SoundExchange managed to get the Copyright Royalty Board (manned by Bush Administration appointees) to rubber stamp their tax increases without an open hearing. SoundExchange, and their hired gun spokesman Jon Simson, have been on a PR offensive saying the tax increases are "fair" and "necessary" to compensate artists. These are lies, of course, but the lazy corporate media reports slick corporate press releases as facts; they don't question, they don't dig, they just repeat the press releases. Even so, there has been a massive outcry from the public and even the corporate media and Congress have taken note. Congress has entered two bills called the Internet Radio Equality Act: H.R. 2060 and S. 1353. This Act would still require Internet radio to pay the SoundExchange tax but would cap the tax at a reasonable rate - the same rate charged to satellite radio.

Okay, sorry, one more aside: Internet radio operates have never refused to pay all royalties and taxes. We are honest, law-abiding small business owners and hobbyists who want to support the artists we play. This issue has never ever been about Internet radio trying to get out of not paying royalties, but only about fairness. Besides, SoundExchange can't provide even one artist supporting their tax, despite our requests that they show artist support for their endeavors.

The Congressional bill is good, fair, and reasonable and would ensure the survival of Internet radio. Not surprisingly, Simson and SoundExchange rail against the bill as "interference" - how dare Congress step in and prevent a corporate cartel from destroying anyone it wants. When Congress urged SoundExchange to avoid legislation and negotiate in good faith for a smaller tax increase on Internet radio, Simson and SoundExchange refused. Only when Congressman Ed Markey (D-MA) demanded Simson meet with representatives from Internet radio did Simson agree to meet (on July 13) and Markey did get Simson to agree to negotiate and agree to not enforce the tax increase due to take effect July 15th. However, that very evening, Simson started to backtrack publicly, putting out a press release saying he did not make any "promises" and that he only meant SoundExchange wouldn't start suing people July 16th and negotiations would have to be on his terms - which his past actions have shown means only agree with him (is he auditioning for a job with the Administration?)

In my opinion, Simson is a weasel, an unethical weasel who will say anything to further his own evil plans. The only thing he fears is Congressional legislation. So when he got hauled into Congress Friday he blinked and agreed to not enforce the tax increase. Now, he is trying to weasel out of his promise, still hopeful that he can achieve his objective of killing Internet radio. He will, as he always has, change his tune daily or even hourly.

This is why we MUST keep up the pressure on Congress. The only way to stop a corporate cartel is with government authority. This is why conservatives hate strong government, by the way. Congress has taken notice and has gotten SoundExchange to retreat, but it is only a temporary retreat. SoundExchange has no interest in a negotiated settlement, they want to destroy Internet radio. The Internet Radio Equality Act is the only way to ensure media openness and fairness that allows independent musicians and independent Internet radio to continue without corporate interference.  

Our fight goes on.

To end on a positive note - Live365 and LoudCity, licensing companies that enable thousands of Internet radio broadcasters to stay legal, have both announced that they will defy the exorbitant fee increase.

Official statement from LoudCity:

LoudCity is not shutting down after July 15 and neither should you. We expect a resolution soon, but more on that further down.

Here are responses to some recent concerns posted by customers:

Liability
You have nothing to worry about if you are abiding by our rules then it's all on LoudCity. If you're not following the rules then now is a great time revisit them and make corrections ASAP. If you're direct linking you should stop it right now.

Surprise Billing
We can't surprise bill you if prices go up. You are paying with PayPal subscriptions. We have to ask you to agree to a price increase. That's how PayPal works.

My Future
Business as usual is to  be expected.

However the worst case scenario is we have to shut down one day and only then you'll have to figure out what your next move will be. We don't expect this to happen, but if it did you would have ample notice. As a protest we would stay online stay online for AT LEAST 6 more months, dragging this out as long as possible through every legal option that can delay closing.

Current Status
This is a poker game, and no one has shown much of a hand yet. The players are Congress, Webcasters (and supporting artists/labels) and SoundExchange (and supporting artists/labels). Someone has to show the first hand after July 15.

Congress has heard us, they know the new fees don't make any sense. They heard from nearly a million constituents, thousands of supportive artists and personally met with dozens of businesses, including LoudCity. They know a business can't exist under the conditions set by the CRB. They greatly prefer to have this resolved outside of Congress but will move to save the businesses if it can't be resolved with direct negotiations.

SoundExchange is a complicated organization serving many kinds artists, all the RIAA labels and indies. It's our opinion that RIAA is steering SoundExchange right now, and that's holding up the works. They have expressed interest in working with small businesses but want to charge the big guys (like Yahoo) as much money as possible, and in many people's opinion that's holding up the works too. If they offer the little guys a more favorable deal, that will weaken their argument to charge the big guys more. SoundExchange has admitted the new CRB rates aren't going to work, but they've offered nothing more than laughable solutions so far. My personal favorite is an offer to delay the $500/channel minimum fee (that's the cause of Pandora and Real's $1 Billion dollar administrative fee) for 18 months if webcasters stop lobbying for the IREA. That's a horrible deal, and shows you how much they don't want Congress involved because IREA will create a more level playing field and SX will no longer be able to set wildly varying rates.

Webcasters have a proposed solution on the table, it's called the IREA (Internet Radio Equality Act) and we stand behind it until Congress shoots it down. We're optimistic it will be passed in some amended form, but probably not by July 15. We'd like to see Congress get involved and SoundExchange be more forth coming with a real offer for a temporary solution. We'll know what our next move should be after Congress shows their hand and I personally hope they'll do it as early as Friday (July 13th) or Monday (July 16th) since the 15th falls on a weekend.

Official statement from Live365:

Hi Live365 Broadcasters,

As the clock winds down during this final week before the July 15th deadline, I wanted to update you on Live365's service plans and our continued activities to oppose the unsupportable new sound recording royalty rates set by the CRB.

In answer to the top question on broadcasters' minds: we have no plans to shut down on July 15th when the billions in per channel minimums and significantly higher rates come due, unless forced to by SoundExchange.

We believe Congress and the public share our outrage over the fundamental inequity in performance royalty rates. Why is it that terrestrial radio pays NO royalties and satellite and cable radio pay much lower royalties than Internet radio to SoundExchange? Many artists have also contacted us to voice opposition to new CRB rates that will decimate Internet radio and eliminate their chance to be heard. The momentum of public opinion and business sense is on our side and we plan to continue to fight for artists, webcasters and their audiences until a resolution is found.

In the meantime, let us assure you: webcasters covered under the Live365 SoundExchange license will not be responsible for any retroactive fees. Upon resolution of the new rates, Live365 will honor its obligation to provide advance notice of any change in pricing with the option for you to continue services or not, prior to imposition of any increases.

Here's what's going on this week on the negotiation, legal and legislative fronts.

First, negotiation has been proceeding slowly even though SoundExchange has been requested by Congress to negotiate with webcasters. I am in Washington D.C. this week with other SaveNetRadio Coalition partners to make myself available for face-to-face negotiations with SoundExchange. We'll keep you posted.

Second, we are continuing with litigation. Although the D.C. Circuit Court just denied our Petition for Emergency Stay of Payments under the new rates, as was expected, we will vigorously proceed with our appeal.

Third, we are still actively pursuing Congressional cosponsors and support of the Internet Radio Equality Act. The bill would throw out the unrealistic CRB internet radio rates and replace them with those paid by satellite radio.

All of us have worked hard to protect the medium that we love. Broadcasters have spent amazing amounts of time and money on PSAs, website updates, interviews, testimonials, letters and calls to Congress. Thank you all for your valiant efforts. In turn, Live365 has invested countless hours of staff time and cash from testifying in the initial hearings over a year ago to our current presence in D.C. As the largest supporter of independent artists through their primary fans—our webcasters, Live365 will continue the battle until there is a resolution. We will continue to fight for parity and fairness as well as be the voice of reason! We firmly believe that we are on the right side of history.

Please stay tuned!
All the best,
Mark Lam
CEO, Live365