Music Industry Roundup

The music industry was much in the news in late May, with file-sharing lawsuits launched, Web royalties deferred, the payola system attacked, and an artists-and-record labels coalition questioning the homogenization of radio.

On May 24, the Recording Industry Association of America (RIAA) continued its war on file-sharing services by launching a copyright suit against Audiogalaxy. The suit, filed in a New York federal court, alleges that Audiogalaxy has made "ineffective" efforts to filter copyrighted songs from its service. RIAA senior vice president and general counsel Matt Oppenheim was dismissive of Audiogalaxy's attempts to comply with a 2001 court order that it block access to copyrighted material.

Attorneys for the RIAA claimed that although Audiogalaxy did block access to one version of Simon and Garfunkel's "The Sound of Silence," 41 other versions of the recording were available. "A first-year computer programmer could do better than they have," Oppenheim said. Audiogalaxy is one of the most popular file-sharing services to arise in the post-Napster era. Its software has been downloaded at least 30 million times, according to CNET Networks. Audiogalaxy is one of many file-sharing services taking legal heat from the RIAA, which was joined in the suit by the National Music Publishers Association (NMPA) and songwriters' organization the Harry Fox Agency.

On May 22, just a few days after announcing a plan to compensate artists for downloaded music, Netherlands-based Kazaa BV announced that it could no longer bear the costs of the legal battle with the music industry. Kazaa threw in the towel, despite a recent ruling by a Dutch appeals court that the company was not responsible for copyright infringements made by people using its software. Kazaa announced that it would fold due to excessive legal expenses incurred in defending itself against copyright infringement charges brought by major record labels. Kazaa has sold the network to another company not yet involved in litigation, a tactic the RIAA's Oppenheim categorized as "a shell game." Kazaa's move came on the heels of its announcement of a controversial partnership with telecommunications giant Verizon.

Nashville, TN-based StreamCast Networks, operator of the Morpheus peer-to-peer system, made a similar announcement that coincided with Kazaa's. "The case is in jeopardy of collapsing simply from the financial attrition of the defendants before a decision on the merits can be reached," StreamCast's attorneys wrote. Lead attorney Andrew Bridges, who successfully defended Diamond Multimedia, maker of the original Rio MP3 player, against an RIAA lawsuit, said he was withdrawing from the case because StreamCast couldn't afford "the burn rate for legal fees."

On May 21, Webcasters were given a reprieve from royalties due music publishers and songwriters. That day, librarian of Congress James H. Billington rejected a royalty rate recommended by a Copyright Arbitration Royalty Panel (CARP) in February. Billington's decision was made at the recommendation of Register of Copyrights Marybeth Peters. Webcasters had argued that the royalty rates were high enough to put most of them out of business. Some had argued that the fees would amount to as much as 78% of their revenue.

The rates will be reviewed within 30 days, according to news from Washington. Interestingly, some media conglomerates find themselves on both sides of the Webcasting royalty issue—in particular, AOL Time Warner, whose Warner Music Group would pocket funds paid by the parent company for music streamed on America Online.

"This is a dispute between industries and we have units in each of the industries involved," AOL-TW spokeswoman Kathy McKiernan told the Wall Street Journal. "We have confidence that the process will produce a rate that will work for everyone involved." AOL has decided to allow the Digital Media Association, a Webcasters' advocate group, to speak for it in royalty negotiations.

CARP's rate recommendations arose from a 1998 change in the law that may allow record labels to charge royalties for music played online. Until the royalty system is changed, radio stations—both online and on-the-air—will pay royalties only to songwriters and composers through organizations like the American Society of Composers, Arrangers, and Producers (ASCAP). European broadcasters pay royalties to copyright holders. The change means that performers may finally start getting paid for radio and Internet play; how much is still to be determined. CARP has recommended a "sliding scale" with differing rates for Web-only, radio-only, commercial, and non-commercial use. One proposal includes a $500 annual minimum payment per Webcaster. Small independent Webcasters have protested that any rates are unfair as long as some large commercial radio stations remain exempt from having to pay them.

On May 24, record labels and artists' groups called for more rigorous oversight of promotional payments made to radio stations in return for airplay. "Payola," as it is known, has been illegal since the legendary scandals of the 1950s involving disc jockey Alan Freed. Record companies circumvent the sprit of the law by providing payments through a network of independent promoters, who provide "support" to radio stations and collect "commissions" when records are played on the air.

The alliance of music labels, artists' unions, and music retailers is pushing for a legislative and regulatory crackdown on abuses of the promotional system. The Federal Communications Commission is one government agency that has recently been examining the payola issue, but hasn't yet made any recommendations. The group has also asked the FCC to look into the effect consolidation in the radio industry has had on programming. Many observers have commented that radio broadcasting is becoming increasingly homogenous, with ever-shrinking playlists of instantly recognizable hit songs. The radio industry was swept by a wave of mergers and acquisitions following the passage of the Telecommunication Act of 1996, which loosened ownership restrictions on broadcasters.