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Royalty hike could mute Internet radio

Smaller stations say rise will be too much

Susan Kaup is on the air -- but perhaps not for long.

Kaup, 34, of Allston, runs ExploitBoston.com, a music blog that includes an Internet radio station that plays music from Boston-area rock bands like Three Day Threshold and Bang Camaro. Kaup, who blogs under the name Sooz, has been at it since 2003. But she worries about her station's future under a plan to sharply increase the amount Internet radio companies must pay to broadcast recorded music.

"I'm not sure if I'll be able to continue as an Internet radio broadcaster," Kaup said.

This month, a three-judge panel created by Congress to set digital music royalty rates decided on a big increase, retroactive to 2006, for companies that stream music over the Internet. The increase will apply not only to small broadcasters like Kaup, but also to major companies like Yahoo Inc. or Time Warner Inc.'s AOL and to Internet "simulcasts" of traditional over-the-air radio stations, which could see their royalty payments increase by millions of dollars under the new scheme.

Mark Lam, chief executive of Live365 Inc., a major Internet broadcast service, says the new rates will kill off most Internet broadcasters. "As the current law stands, we are out," he said.

That would mean the end of ExploitBoston and about 10,000 other Internet audio streams carried on Live365. Most of these streams are run by amateurs with specialized tastes in music, such as heavy metal, folk , or 1960s bubblegum rock. They create their own playlists, send them to Live365 for broadcast, and pay a monthly fee to cover Internet hosting costs and music royalties.

Kaup, for instance, pays $50 a month. This covers a gigabyte of storage -- enough for a couple of hundred songs -- as well as the cost of transmitting the songs over the Internet and the royalties for the music. "I was planning on upgrading my account in the next couple of months," said Kaup, "but with this whole rate increase, I'm not sure I'm going to do this."

Under the new royalty scheme, Live365 users like Kaup will have to pay significantly more just to cover royalty costs for the music they play. The minimum royalty payment for each Internet music broadcaster will be $500 per year. This rate will apply to small operations like ExploitBoston, which boasts a few dozen listeners.

But more popular online music broadcasters will have to pay a fraction of a cent per listener whenever a song is played.

According to the federal panel's decision, companies that stream music over the Internet will have to pay nearly 5 percent more for music they played last year. They'll also see increases of more than 20 percent in each of the next three years.

Lam estimates that his company would have to pay as much as $5 million in retroactive fees for 2006, a year in which his company took in just $2 million in ad revenues. And Live365 would have to raise its prices to broadcasters to cover the fees for 2007 and beyond.

These royalties are different from the ones paid by traditional radio broadcasters, which go to music publishing organizations like ASCAP -- the American Society of Composers, Authors and Publishers. Over-the-air radio stations do not pay royalties to the recording companies or the performers. But a 1995 federal law mandates that digital broadcasters, like Internet and satellite radio stations, must pay both publishing and performance royalties. So must traditional radio stations when they simulcast over the Internet.

In 2002, the last time the rate changed, Internet radio was just getting started; today it's become a big-time entertainment medium. A 2006 study by media ratings company Arbitron Inc. pegged the monthly audience for Internet radio at 52 million, or 21 percent of Americans aged 12 or older.

Josh Martin, media analyst at the Yankee Group, said that while Internet giants like AOL may be able to afford the new rates, many smaller Internet radio stations will have to shut down. This could actually reduce the flow of royalties to musicians.

It could also mean fewer sales of disks by up-and-coming bands, the kind often promoted by smaller Internet radio stations. "It is a very vexing decision," Martin said.

But the decision is not final; Internet radio services are likely to appeal the royalty ruling to the US Court of Appeals in Washington.

Hiawatha Bray can be reached at bray@globe.com.

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