Web radio faces dead air: debate rages over how much Webcasters should pay artists and labels for the right to play their music

Randal Allen's business has an address (Mount Vernon Avenue in Alexandria, Va.), but there barely is enough room to hang a mailbox in the closet-sized room that was home to an automated-teller machine before he moved in three years ago. The space, a mere 70 square feet, is the primary production facility for Allen's Radio Del Ray, an Internet broadcaster that reaches out to listeners who love music but can't find what they want on standard radio.

Like Allen's minuscule workplace, the Internet-radio industry is small. And with few people listening, Webcasters don't attract significant advertising and generate little revenue.

Now, proposed federal regulation could silence Radio Del Ray and other Webcasters nationwide. Webcasters may shutter operations rather than pay royalties they say they can't afford to musicians and record labels. Musicians and labels counter that Webcasters have enjoyed a free ride for too long and must start paying a fee mandated by the 1998 Digital Millennium Copyright Act.

The royalties haven't been collected since the law passed four years ago because no formula was established to determine what amount Webcasters would pay. In February, however, a panel appointed by the U.S. Copyright Office devised a royalty rate, concluding Webcasters should pay 0.0014 cents per song per listener. Standard radio stations that stream their radio signals to a Website would pay half that rate. Fees are to be split evenly between artists and record labels. The Copyright Office is scheduled to make a formal recommendation to the librarian of Congress by May 21.

Standard radio stations, like Webcasters, pay a percentage of revenues to composers and music publishers, but they never have paid a royalty to labels and musicians--arguing successfully that they promote labels by playing copyrighted music, which leads directly to the sale of CDs. A whopping 95 percent of Americans older than age 12 listen to standard radio during any given week, according to a study by media research firm Arbitron Webcast Services. By contrast, about 9 percent of Americans older than 12 listen to Internet radio during any given week.

Despite their differences, artists and record labels hold Webcasters in high regard because they believe Web radio stations are good for the music industry. That is especially true for independent labels and obscure artists whose music stands little chance of making the playlists of behemoth FM stations. "We realize that the Internet provides a huge market for artists who don't get traditional radio play," says Ann Chaitovitz, national director of sound recordings at the American Federation of Television and Radio Artists, a union representing 80,000 performers.

But artists and labels simply can't give their music for free to Webcasters, says John Simson, executive director of SoundExchange, an unincorporated division of the Recording Industry Association of America that was established to collect and distribute royalties once Webcasters begin paying the copyright fees. "Webcasters pay for bandwidth. They pay their rent. Why shouldn't they pay for the music?" asks Simson, a former musician.

Webcasters aren't the only ones worrying about royalties. Independent recording labels are struggling because more and more consumers are downloading music rather than buying CDs, says Gary Himelfarb, president of RAS Records, an independent music producer that markets reggae music.

"We think it's a great ruling that Webcasters have to pay the royalty," says Himelfarb. "We also think it's too low. We are hurting. We need a shot in the arm in this digital age, and we think this is it. Webcasters need to pay to use our copyrighted material, and [0.0014 cents] is nothing."

The mere threat of a royalty rate already has claimed victims. NetRadio, a Minneapolis Webcaster, said last October it would cease operations. In April, the company told the federal Securities and Exchange Commission that its shareholders voted to liquidate NetRadio's assets and dissolve me corporation.

Standard radio stations also are pulling the plug on Webcasts. George Bundy, chief executive of BRS Media, a San Francisco electronic-commerce consultant, says the number of standard radio stations streaming their signal to the Internet has fallen from 5,700 last April to 4,600 this month. The falloff is due partly to the anticipated increase in the cost of doing business once the royalty rate takes effect, according to Bundy.

Web-only stations such as Radio Del Ray are more numerous than standard stations streaming their signal to the Web, but no accurate accounting of the industry's size is available. Live365. corn in Foster City, Calif., is a network of 47,000 separate Webcasters. Thousands more Webcasters operate stations out of their homes.

Such diversity is good for business, says Bill Rose, vice president and general manager of Arbitron. "We believe in the medium," says Rose. "We want it to succeed, and I think it's good for consumers because they have a diversity of choices over the Internet that they can't get over the traditional medium."