Tim Westergren never thought he'd run a dotcom startup. He was a musician, sleeping in tour vans on the road and recording the occasional film score.
When he did decide to start a business, he put six years of his life into it. This week, he is preparing to shut down his nascent UK operation and mulling the future of the US one, as legislators on both sides of the Atlantic threaten to kill his business.
Westergren founded Pandora, an online streaming music service based in California that lets people build personalized stations. A ruling by the US Copyright Royalty Board that technically came into force on July15 at least tripled the royalties that Pandora and other Internet radio companies pay.
The next day, the UK Copyright Tribunal unveiled its own royalty charges that made his business in the UK untenable and left other large Webcasters fuming.
Outraged appeals from the net radio industry failed to overturn the US ruling, which applies retrospectively from January last year. As of last week, Westergren and others are in hock to royalty collector SoundExchange for unpaid record label royalties. Under the ruling, the royalty rate will rise each year until 2010. But Pandora could be gone long before that.
"In the face of those rates, we can't carry on," Westergren said.
Music has two copyright holders.
The publisher or composer holds the rights to the lyrics and the melody, while the record label or performer holds the rights to the sound recording. Radio stations have historically paid royalties for the musical work to the publishers but not for performance rights.
This was a sore point for the labels, which finally won the right to charge for performance rights over Internet radio in 1998. The US government created a statutory license under which Webcasters would pay a set fee to the labels for performance rights. In 2002, the Small Webcasters Settlement Act created a haven of sorts for Webcasters with revenues of less than US$1.2 million -- who make up the bulk of the US' 30,000 Webcasters. This restricted royalties to 12 percent of their income -- even though terrestrial broadcasters with substantially greater revenues pay no performance royalties at all.
Nevertheless, Webcasters and the labels had reached an uneasy peace -- until the royalty board's ruling this March. That swept away the revenue-based royalty scheme for small Webcasters, forcing them to pay a per-song royalty like every-one else. Smaller Webcasters could find their royalty payments multiplying by up to 12 times, SaveNetRadio.org said.
The board also approved a minimum charge of US$500 per Internet radio station, which would be disastrous for those Webcasters who create personalized channels for each listener. Every time a user creates a channel in Pandora -- and many users have more than one -- Westergren would have to make another payment.
"Ninety percent of the Internet radio stations in the US will go out of business," warned David Van Dyke of analyst Bridge Ratings.
"Our goal is to continue to grow with Internet radio," says John Simson of Sound Exchange, which set up four years ago by the Recording Industry Association of America (RIAA) to collect performance royalties. "We want to help our members to get value for the music being used."
But the labels benefit from Internet radio's promotional role, protests Kurt Hanson of Accu-Radio, a small Webcaster.