The House subcommittee on Telecommunications and Internet will hear testimony from representatives of the online, satellite and terrestrial radio industries at today's 2:30 PM (EST) "Digital Future of the United States: Part II – The Future of Radio" hearing.
Live video webcast (Windows Media Player only). [Update: archived version]
Bob Kimball, Senior VP for RealNetworks, will testify on behalf of all webcasters, but specifically for Real and DiMA members. We have his written testimony, posted below in its entirety.
These companies are panicked about Friday's royalty rate increases, which threaten to drive webcasters out of business -- especially small and/or innovative sites such as Pandora and Rhapsody that most widely diverge from traditional radio formats.
We have posted the full written testimony of RealNetwork's Bob Kimball below in its entirery. If you don't have the time toread all 16 pages, here's a quick summary (although you should skim thefull doc below for the full picture):
- Online radio offers far more variety and a better user experience than traditional radio.
- People spend more time per day listening to online radio thanthey do to traditional radio, usually at work, and advertisers preferthem because they're sitting in front of a computer where they canrespond to ads and buy music, rather than sitting in a car where theycan't. (Online listeners also tend to make more money, and so aredoubly desirable.)
- People love online radio and are using it more and more (oneexample, which I can back up, having heard similar things countlesstimes over the years: "I'm 77 years old and the music I like and grewup with just isn't played much any more. Sometimes tears come to myeyes when I hear certain songs. They bring back so many memories.")
- The provisions of the Copyright Act and Friday's royalty rateincreases by the Copyright Royalty Board ask for only 7% of Sirius/XM'srevenue, yet demand more than 100% of webcaster revenue.
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U.S House of Representatives
Subcommittee on Telecommunications and the Internet Hearing on
“Digital Future of the United States: Part II – The Future of Radio”
Testimony of Robert Kimball, Senior Vice President, Legal and Business Affairs RealNetworks, Inc.
On behalf of the Digital Media Association
Chairman Markey, Mr. Upton and Members of the Subcommittee:
My name is Bob Kimball. I am the Senior Vice President of Legal and Business Affairs
for RealNetworks. RealNetworks is a leading provider of Internet media delivery
software and services, and is widely known for the creation of the RealPlayer, a
pioneering media player that introduced streaming media and radio over the Internet in
1995. RealNetworks offers music to users through a number of free and subscription-
based services that provide consumers with on-demand access to millions of tracks
through our award-winning Rhapsody service along with rich Internet radio services. In
addition to our music services, RealNetworks offers online games, is the leading provider
of ring-back tone services for mobile carriers and provides other digital media services
and tools to enable businesses, governments and educational institutions to broadcast
over the Internet. RealNetworks is a founding board member of the Digital Media
Association.
On behalf of RealNetworks and the Digital Media Association (“DiMA”), I am pleased to
speak with you today about the radio industry, and particularly about Internet radio’s
current business and our opportunity to develop innovative new radio services that would
benefit consumers, musicians and copyright owners, and advertisers.
I will also discuss significant impediments to realizing this opportunity, notably the
provisions of the Copyright Act that disadvantage Internet radio in comparison to our
competitors. These disparities were starkly highlighted last Friday, when the U.S.
Copyright Royalty Board determined that royalties paid to record companies by Internet
radio services will increase 30% retroactively, and then 30% again in each of the next
three years through 2009. The CRB then went on to impose a $500 minimum fee per
station, which threatens to destroy the vast diversity of multi-channel programming that
exists only on Internet radio. These minimum fees do not apply to terrestrial or satellite
radio.
I. Internet Radio Basics
Internet or online radio is simply radio programming transmitted over the Internet instead
of the terrestrial airwaves, satellite signals or cable. Several hundred terrestrial radio
stations simulcast their primary programming online; additionally, several thousand web-
based “stations” offer Internet-only original programming. For example, RealNetworks
offers several Internet-only radio stations for every conceivable musical taste.
Internet radio is not confined by radio spectrum limitations. Thousands of services can
webcast at any one time, and these services are constantly creating new stations and new
audiences for their content. This ability to offer an unlimited number of stations enables
Internet radio to provide a much more diverse and rich experience. Internet radio enables
people to find a range of content that is far broader than what is available on terrestrial or
satellite radio. For example, while a traditional radio station may have only 30 songs
regularly rotated through its playlist to ensure that listeners hear one of a handful of songs during a short car ride, our corresponding station might have over 650 songs, including many more independent artists.
Just like the broadcasters and satellite services represented on this panel, Internet radio
services are supported either by advertisements or subscription fees. In the subscription
radio model, subscribers typically do not hear advertisements and are able to access
significantly broader programming choices. There are two major types of Internet radio
music programming:
• Pre-programmed stations, which are typically genre-specific, e.g., jazz, rock, Top
40 and country. Many Internet radio services offer dozens or even several
hundred pre-programmed genre-based stations, so they can be focused on more
specific musical niches. For example, there are stations devoted to Southern
Rock, the Motown Years, Disco, and even something called “Psychobilly”.
• Consumer-influenced programming, which permits a listener to identify genres,
songs, time periods, artists or albums he or she enjoys allow the radio
programmer to choose the station best suited to the listener. For example, a user
who enjoys U2, Coldplay and Dave Matthews would be provided a station that
blends these artists’ songs with those of less-known acts that the user has never
heard of, but is likely to enjoy. This content discovery is one of the most
powerful features of Internet radio and leads directly to more purchased music.
In addition to music, most Internet radio stations will provide users with links to related
content, like album art, artist biographies, editorial reviews and music videos. This
provides users additional opportunities to explore the music more deeply and enables
artists to connect more directly to their fans.
Significantly, most Internet radio stations also offer listeners a click-to-purchase-music
opportunity, which benefits listeners, as well as artists, labels and songwriters.
Many Internet radio stations offer consumers the ability to use their radio station in new
and interesting ways, including:
• “Skip Ahead” – if a user does not like a song she can skip to the next song;
• “Pause” – a listener can pause the station and return to it later;
• Personalized recommendations and listener input, including rating songs, albums and artist and requests for related artists, based on what the listener is hearing on the radio.
The Internet Radio Audience
Audience Size and Demographics
• Internet radio is a mainstream activity that is becoming increasingly
popular. Studies by Arbitron and Bridge Ratings conclude that between 50
and 70 million Americans listen to Internet radio monthly, and about 20
percent of 18-34 year olds listen to Internet radio weekly.
• Internet radio is primarily a workday/office-based activity, with 75% of
listening occurring at work. At-home listening is growing quickly,
however, as home networking has taken off and people connect their home
audio systems to the Internet. In the past year home listening increased
79% according to one recent study.
• Fortunately for advertisers, musicians and copyright owners, Internet radio
attracts upper-income, tech-savvy early adopters. Internet Radio listeners
are 36 percent more likely to live in a household with an annual income of
$100,000 or higher, when compared to the general U.S. population of 18
and older:
Audience Growth: Internet radio has enjoyed steep growth in listenership.
• In the last year regular Internet radio listening jumped dramatically, from 45
million listeners per month to 72 million listeners each month. Weekly
listenership also jumped, increasing 26% to 57 million listeners.
• Remarkably, not only did Internet radio attract significantly more listeners,
those listeners spent much more time tuned in to Internet radio:
Hours per week listening (Bridge Ratings)
Age 2006 2005
12+ 9:06 7:00
13-21 11:40 9:20
22-35 9:54 7:36
36+ 6:35 4:40
• A significant number of Internet radio listeners (38%) report they expect to be
listening to more Internet radio a year from now, and one study concludes that
the Internet radio audience will double by 2010 and grow to nearly 200
million monthly listeners by 2020 (Bridge Ratings).
The Business of Internet Radio
Internet radio services enjoy two revenue streams: advertising, just like broadcasters, and
consumer subscriptions, just like satellite radio. As Internet radio audiences continue to
grow, our ability to monetize our audience will also develop further and our businesses
will become as successful as our programming. Today, however, our industry’s revenue
is relatively small.
On the advertising side, Internet radio stations run the same 15, 30 and 60-second
commercials as broadcast radio. Additionally, Internet radio services run “gateway” or
“pre-roll” advertisements when a consumer first tunes in a station. After consulting
within the industry and with advertising sales experts, DiMA’s best guess is that around
$100 million was spent on Internet radio advertising in 2006. This contrasts with more
than $20 billion spent on broadcast radio advertising.
Many Internet radio consumers pay a subscription fee to enjoy ‘premium’ Internet radio –
stations without commercials or stations that permit users to have more influence over the
programming they enjoy (e.g. skipping songs, requesting artists or genres, etc.) A
recently published report estimated Internet radio subscription revenues at $45 million for
2006. By comparison, XM and Sirius recently announced $1.5 billion in subscription
revenues for 2006.
II: The Benefits of Internet Radio to Consumers, the Music Industry and
Advertisers
Internet radio’s growth has been driven by the medium’s ability to use technology and
consumer input to create a better experience for listeners, copyright owners and
advertisers.
Greater Variety of Music Benefits Listeners, Music Creators and Advertisers
As the Subcommittee is aware, AM-FM radio music programming is generally limited to
repetitive hit-driven playlists, which makes it hard for new artists to find an audience and
for consumers to discover new music that they enjoy. Even XM and Sirius are limited in
the number of channels they offer and the diversity and creativity of their playlists.
Internet radio reverses the hit-driven equation favored by traditional terrestrial radio
stations. The flexibility and diversity enabled by the Internet provides significant
benefits to both artists and consumers:
• One DiMA radio service reports that its listeners enjoy the music of more than
30,000 artists each week, 48 percent of whom are not signed by major labels.
This alone demonstrates the value of Internet radio to artists challenged by the
short playlists of terrestrial radio and even the limitations of satellite radio.
• A second DiMA service reports that its average station has a playlist of between
500 and 700 songs, which compares dramatically to KROQ, one of the biggest
music broadcasters on the West Coast which has 31 songs in heavy rotation.
By offering a wide variety of programming, Internet radio services virtually guarantee
that everyone will find a station they enjoy. This makes listeners more likely to continue
listening through commercials rather than flipping channels, and to stick around for the
next song. By offering consumer-influenced programming, Internet radio services learn
more about what types of music and the combinations of music consumers enjoy, which
enables services to provide eclectic unpredictable song mixes that enable music discovery
by consumers. This music discovery feature is critical to help smaller bands find an
audience for their music which otherwise would be ignored by “big radio.”
The evidence is convincing – Internet radio listeners of all ages enjoy more radio,
discover more music and buy more music. According to a recent DiMA survey, more
than 85 percent of Internet radio listeners have discovered new artists they enjoy. Here
are some authentic listener testimonials:
"I'm 77 years old and the music I like and grew up with just isn't played much any
more. Sometimes tears come to my eyes when I hear certain songs. They bring
back so many memories. I don’t think I have heard any songs I haven't liked.
Thank you from the bottom of my heart." – Lorraine S
"[My Internet radio service is] absolutely fantastic . . . It calculates music
recommendations based on the attributes of music I enjoy and then delivers its
recommendations as radio. I've discovered so much great new music during the
short period of time I've been listening." – Jarno
"I have been 'out of the [music] loop' for a long time now, and was searching for
a new source of music to (legally) explore new musicians without the expense of
purchasing random CDs, which was my former method of musical exploration.
Your personalized Internet radio station is the perfect solution for people like me,
who love to experiment with up-and-coming artists in order to expand and
enhance our understanding of the creative possibilities in music." – Miles
"Internet radio has rescued me from the doldrums of bubble gum pop and the same
rotation of CDs I've owned for ten years. I searched for music based on the band Nine Inch Nails to see what would happen. Wow! Not only have I found new music, but I'm discovering bands I haven't encountered before. This is a tremendous gift." – Emilie
Radio that Affirmatively Promotes Recording Artists
Although broadcast radio has traditionally been viewed by record labels as one of the
most important tools for promoting new artists and generating CD sales and concert
tickets, Internet radio serves the same promotional purposes more efficiently:
• Internet radio makes it easy for listeners to buy the music they hear, because
Internet services provide listeners with the name of every song performed, the
name of the recording artist and the album name, and often provide a link to buy
the song or album that is playing, or to buy a concert ticket when the band is
performing nearby.
• Utilizing the input provided by listeners, consumer-influenced Internet radio has
more success performing new music for targeted consumers they know are likely
to enjoy it. And this success equals dollars for record labels and artists:
- Listeners to consumer-influenced radio stations in RealNetworks’
Rhapsody service purchased materially more music than listeners to
regular genre-based stations.
- 86% of Internet radio users say that through the service they have
discovered new musical artists that they now enjoy, with nearly 25%
saying that they have discovered many of new artists. Nearly 70% of
Internet radio users say that through the service they have expanded their
habits to enjoy new music genres.
• More listener testimonials:
"My first day listening to this station I ended up ordering 75 dollars worth of
albums from Amazon. They arrived Friday and I’ve listened to them all weekend,
and will probably be buying more albums." – Steve
"I have found myself listening to your station on a daily basis and enjoying it a lot.
I have also discovered new [music] and bought many CDs because of your
station." – Sylvia
"I am just fascinated and amazed by the selection of music the site is providing to
me and the easy access to information about each artist and album. This is the
coolest web site I have seen since Google Earth… and it is more useful! The
downside is that I may go broke discovering all this new music and buying new
CDs! But, I'll order them from your sponsors and try to support your site." – Ian
"At 52 I am out of the music loop. I've already found a lot of new artists using your
service. I hope Amazon is paying you for all the music CD's they will be selling
because of you. I decided to sign up for their $79 a year free 2nd day shipping
plan because of you." – Loyd
Radio That Works for Advertisers
The same targeted Internet radio audiences that make it easier for record companies to
promote artists also make it easier for advertisers to reach their target consumer
demographics.
For most advertisers, Internet radio is just like radio – but even better.
• Internet radio listeners are at their desks or at home and can easily take action online
or by phone in response to an advertisement, something that is harder to do while
driving.
• Internet radio listeners represent a very desirable demographic to advertisers: a recent
report found that Internet radio listeners are 36% more likely to live in a household
with an annual income of $100,000 or higher, compared to the general U.S.
population.
• Advertisers can micro-target Internet radio consumers for increased effectiveness.
For example, an advertiser targeting women can buy time on an Adult Contemporary
broadcast stations knowing that about 55% of the listeners are women, or can buy
time on Internet radio stations that are have significantly higher percentages of
women. This dynamic ho
lds true for many desirable target audiences.
III. Competition Among Radio Platforms – Does it Exist? Can it Improve?
As described previously in this testimony, all evidence points to competition existing
among broadcast, satellite and Internet radio – for listeners, paying subscribers and
advertisers. The interesting question for this Committee – particularly when XM and
Sirius are proposing to merge and are citing Internet radio as viable competition – is
whether Internet radio today competes fairly and effectively against satellite and
broadcast radio, and whether we ever can compete fairly and effectively when we are
hobbled by extraordinary bias in the Copyright Act that imposes far higher royalties on
Internet radio. Not only are we forced to pay higher royalties than our competitors, the
Copyright Act also limits our programming and innovation opportunities.
Internet radio is prejudiced by the Copyright Act in several significant ways:
• Sound recording royalties: The Act establishes a tiered royalty structure based on a
service’s delivery technology that
- exempts broadcast radio from paying royalties to record companies and
performers;
- imposes a modest 7% of revenue royalty on XM and Sirius; and
- imposes a much higher royalty on Internet radio that for many small
webcasters will exceed 100% of their revenue.
• Programming limitations: The Copyright Act leaves broadcasters’ programming
unregulated, regulates satellite companies’ lightly, and inhibits greatly the
programming flexibility of Internet radio companies.
- In combination with the new $500 minimum royalty per station, these
restrictions ensure that Internet radio’s rich programming diversity will likely
end.
• Technological limitations: The Copyright Act prohibits only Internet radio from
offering recording devices and portable radio services, and punitively regulates
personalized radio so as to essentially eliminate the most compelling features of
Internet commerce.
• Litigation Risk: Broadcast radio is exempt from almost all copyright royalties and
restrictions, and therefore has virtually no copyright litigation exposure. Internet and
satellite radio, as innovators, suffer needlessly as a result of vague Copyright Act
provisions that do not reflect business or technological reality. And if we guess
wrong about the meaning of one of these laws, the penalty is $150,000 for each and
every song performed. This is a very powerful deterrent to innovation. I have
personally been forced to kill several innovative projects simply due to the legal
uncertainty and the catastrophic effects of making the wrong interpretation of
ambiguous language.
Speaking for RealNetworks only, and not for DiMA, I suggest to you that any XM-Sirius
merger that relies upon Internet radio as the justifying competition should be rejected
until Congress corrects the Copyright Act’s bias against the Internet. Before XM and
Sirius and are allowed to merge, Congress must ensure that there is a level playing field
that no longer penalizes those of us who use the Internet to deliver music. I know that the
Copyright Act is not in this Committee’s jurisdiction, nor in the jurisdiction of the
Department of Justice, the FTC or the FCC. But if you care about the Internet and
innovation and competition and consumers, then I urge you to focus on ensuring a fair
and balanced Copyright Act.
The Copyright Act’s Royalty Rate Structure Discriminates Against Internet Radio
Congress’ creation of a sound recording right for digital radio explicitly exempted
broadcast radio. Equally frustrating is that Internet radio is also disadvantaged in
comparison to satellite radio. Satellite radio also pays royalties to record labels and
recording artists, but our royalties are calculated using different economic and legal
standards, and as a result, Internet radio royalties are much more costly than satellite
radio royalties. Satellite radio services reportedly pay about 7 percent of their revenue to
record companies and recording artists. Until Friday the Internet radio services thought
we were paying at least 50 percent higher royalties, though for some services the
royalties were significantly higher.
As a result of Friday’s Copyright Royalty Board decision, I can confidently say that this
disparity has grown far worse, and that Internet radio royalties will now cost many
multiples of satellite radio royalties. For example:
• Loudcity, a small webcaster in Boston with two full-time employees, had been
paying about 10% of its gross revenue to record labels under the previous rate
structure. This equates to about $2,000 per month (out of $20,000 a month in
revenue). Under the new rate structure, Loudcity royalties to record labels will
now cost more than $60,000 each month, or 300% of its gross revenue.
• Accuradio in Chicago paid $48,000 in royalties in 2006 based on revenues of
$400,000. Friday’s decision will retroactively increase its 2006 royalties to
$600,000, requiring an immediate payment of $552,000 just to stay in business
for one more day.
Internet radio competes directly against terrestrial radio for a limited universe of listeners
and advertisers, and competes directly against cable and satellite radio for an even
smaller universe of subscribers and advertisers. Paying higher royalties requires Internet
radio to reduce programming or performance quality, or increase advertising prices or
frequency, in ways that unfairly harm Internet radio’s competitive opportunity.
From the vantage point of this Subcommittee and this hearing, there should be no
telecommunications or Internet policy reason for discriminating against Internet-
delivered digital media services. Law and policy must be neutral with respect to
underlying technologies.
If you support the broadcast industry’s royalty exemption on the basis that radio
performances promote sales of sound recordings, then you should support a similar
exemption for Internet radio, as our listeners are more intense music fans, are more easily
able to connect their music purchases to music listening, and we promote a far greater
variety of music than terrestrial radio. If you care about competition, consumer welfare
and innovation, or if you wish to ensure that America’s music genius finds its largest
audience, I urge you to correct this competitive disparity. In the meantime, many Internet
radio services large and small are considering whether to wait for you to act, or whether
they should just shut down in light of the CRB’s decision to impose dramatically higher
royalties.
The Copyright Act’s Music Programming Restrictions are Overly Rigid, and Prevent
Internet Radio from Engaging in Traditional Broadcast-Style Practices.
Another disparity between broadcast radio and Internet radio is created by the
programming controls imposed by the Copyright Act, namely, the prohibition against
advance announcements of songs to be performed and the “sound recording performance
complement”, which regulates how many times an Internet radio service can perform
songs of a single artist or band, or songs from a single album. While intended by
Congress to limit the digital public performance license to traditional radio-like activities,
these provisions actually prevent Internet radio from engaging in many broadcast radio
practices that have proved, over decades of experience, to promote rather than harm the
interests of the record labe
ls and performing artists.
For example, radio stations typically announce specific songs that are going to be
performed either next or at an unspecified time in the near future, as an inducement to
keep listeners tuned to their stations; Internet webcasters are forbidden to do this. Or,
when a famous artist such as Ray Charles passes away, radio stations have complete
latitude to pay tribute by playing extended blocks of the artist’s work. In contrast, the
sound recording performance complement limits the ability of Internet radio to honor the
artist – never can we play more than two songs consecutively and four songs total over a
three-hour period. There is no evidence, however, that the broadcasters’ practices have
harmed the record industry, or that webcasters’ adoption of these practices would be
harmful. Given the clear promotional benefits of webcasting to the recording industry
and performing artists, there is no reason why webcasting should not also be permitted
this additional programming latitude to better attract and maintain its audience against
broadcast competition.
The Copyright Act Inhibits Radio Innovation That Has Proven Beneficial for Consumers
and Recording Artists.
Internet radio offers programming focused on listeners’ favorite artists and music genres,
or can even provide a station just by keying off a favorite song. These consumer-
influenced stations are proven to be more enjoyable than pre-programmed radio, to be
more capable of successfully introducing new artists and songs to a listener, and to
generate more sales of music to listeners. Nevertheless, the Copyright Act governs the
level of engagement that listeners can enjoy with their Internet radio service, and this set
of rules has proven vague and ambiguous, and has resulted in more litigation and less
innovation
By limiting how “interactive” an Internet radio service can be, Congress sought to ensure
that Internet radio services are not “on-demand” jukebox services that replace CD sales.
Unfortunately the record industry has used this vague definition to attack Internet
technologies they deem overly “interactive”, and after several years of court cases and
Copyright Office proceedings the law remains unclear and innovation in Internet radio
has essentially ceased. In this instance, the Copyright Act undermines a core value of the
Internet that is often the most compelling opportunity in e-commerce – personalization.
Future Innovation Will Demonstrate the Absurd Anticompetitive Environment.
For most of its existence, the Internet has been a “connected” or “wired” network.
Recently, however, as Tim Berners-Lee testified in this Subcommittee last week, the
Internet has become a more mobile and wireless environment. And in the last several
years mobile broadband capability will increase substantially when WiMax and other
technologies are introduced.
Next generation technologies will deliver stable broadband access to the car, which
means that Internet radio will compete directly and quite effectively against our satellite
and broadcast industry colleagues. These advances will make Internet radio even more
effective for discovering new music, satisfying consumer needs, and ultimately, and
promoting creativity by delivering additional revenue for artists, songwriters, and record
companies. It highlights the problem, however, because in the future your automobile’s
multi-band radio that delivers broadcast, satellite and Internet radio will pay three
different amounts of royalties and have three different regulatory environments for
delivering the same music to the same consumer over the same device.
* * * *
The current state of Internet radio is dominated by two facts: we pay dramatically higher
royalties than our competition, and we are subject to far more restrictions on our ability to
innovate. The future of Internet radio will be largely dictated by whether this bias is
corrected. In a mobile world, every radio receiver will receive "over-the-air" broadcasts,
and whether these broadcasts are FM, satellite, or WiFI should be entirely irrelevant
under the law.
Thank you.
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This is an important hearing, because Congress could be where these rates, which determine what we're going to be able to listen to online (legally, anyway), gets decided.
This Congressional escalation looks like it will be necessary because the Copyright Royalty Board seems to have its mind pretty well made up. The LA Times recently wrote (registration required), "The board's top judge said its guidelines allow it to consider only economic factors — not issues such as educational opportunities at college radio stations and the increased diversity of music that Internet stations may provide [my emphasis]."
