Internet broadcasters face legal static from the RIAA and a new hurdle to reaching profitability.

Nowhere on the Net will you find a stickier legal morass than the one surrounding Internet radio.

Bound by an arcane tangle of laws and rulings about copyrights in radio broadcasting, Webcasters are facing the sober reality that before the end of the year, they will be forced to hand over a chunk of revenue to the recording industry in exchange for the rights to broadcast over the Net.

Terrestrial radio stations pay a small fee (as low as 6 cents) for each song they broadcast; the money goes directly to artists via payment clearing houses like Broadcast Music. The new twist is that Internet broadcasters are headed toward having to pay these artist royalties, plus additional royalties earmarked especially for record labelsâ€"-royalties that old-school radio doesn't have to pay (unless a terrestrial station is simulcasting via the Internet). Has the Internet really changed things that much?

Nascent Webcasters have simply been strong-armed by the behemoth record industry, according to Jonathan Potter, executive director of the Digital Media Association, a trade association that represents online and offline broadcasters. Of the years of litigation, Potter says, "Remember in Wild Kingdom, when you'd see a pack of lions attack a pack of gazelles? They go after the weak one. Three years ago, DiMA had seven members, and [the recording industry] simply tried to put us out of business."

Mum's the Word

Potter is talking about the Recording Industry Association of Americaâ€"-the trade organisation most recently in the news for suing Napsterâ€"-and its mouthpiece, a new RIAA subgroup called SoundExchange.

According to its Web site, SoundExchange consists of record labels "united in receiving a fair price for the licensing of their music in a new digital world." Exactly how fair we'll never know. SoundExchange executives did not return repeated telephone calls requesting comment on this story.

Now that the RIAA has gotten its way, bankruptcy seems likely for Webcasters unable to pay the royalties, thanks to an unforgiving economy and still-depressed stock market. Most notably, since the litigation began, former high-flying Net broadcaster iCast has been forced to cease operations.

How bad the damage will be for the rest of the industry remains to be seen. None of the still-surviving major Webcasters would speak to us on the record about the royalty issue, invariably citing a confidentiality agreement with the RIAA.

Up next: more arbitration. In December the US Copyright Office set an arbitration schedule to determine the rate at which Webcasters will have to pay record labels to use their material. April 2 was the deadline for submitting rate proposals. Counterproposals and counter-counterproposals will likely stretch over the rest of 2001, with hearings beginning July 30.

After all this posturing, the prognosis appears simple. Potter expects that Webcasters will end up paying "a percentage that's in the low single digits" of their online advertising revenue, though he says some industry members would still like to pay on a per-stream basis. "The rate will get set, and people will pay it," Potter says. "Our goal will be to make sure we aren't discriminated against simply because we're Internet-based."

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