Aug 19, 2008, 12:23PM

Free Online Radio Suffocating

Last year a court ruled that online radio stations had to pay relatively more expensive royalties on music than regular or satellite radio. The result is a dramatic increase in cost that might kill of even the most sophisticated and professional online radio stations like Pandora. Score one for old media struggling to make money? Or are record companies killing a potential goose with golden eggs?

The founder of one of Internet radio’s leading lights, Pandora, tells The Washington Post that Web royalties may soon force his station out of business. The fees now soak up 70 percent of Pandora’s $25-million annual revenue, according to Tim Westergren. “We’re approaching a pull-the-plug kind of decision,” he says.

What’s striking is that Pandora is no fly-by-night operation: The Web-radio service, which lets users build radio stations to match their own tastes, reaches about a million listeners every day, and its recently created iPhone application has become one of the most popular downloads for the device. But the rules of the marketplace, as currently drawn up, are none too favorable to online broadcasters. Terrestrial radio stations don’t have to pay per-song royalties, and satellite radio providers pay only small fees. But by 2010, Webcasters can expect to pay between two and three cents per hour per listener.

Pandora isn’t dead yet: Rep. Howard L. Berman, a California Democrat, is working to arrange an eleventh-hour deal between online broadcasters and record companies. But the talks don’t seem to be progressing, and another proposed legislative fix — the Internet Radio Equality Act, which would apply the same royalty rate to terrestrial, satellite, and online radio stations — seems all but stalled.


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