The battle for Internet radio heats up

Last Tuesday, workers who like to plug themselves into their favorite music genre while sitting at their desks stumbled upon some dead air. Many top providers of streaming Internet-radio services, from Yahoo! (NASDAQ: YHOO) Launch to Live365 and Pandora participated in a "Day of Silence" to protest the threat of impending royalty increases that would have a detrimental effect on the industry. Broadcasters that carry their tunes over the cyber airwaves only are facing a dark day on July 15th, when 17 months' of retroactive royalty payments (at staggeringly high rates) come due.

The silent airwaves, together with a petition effort at SaveNetRadio.org, may have made a modest impression. According to Forbes, SoundExchange - formerly a division of the Recording Industry Association of America - said Friday it will extend a cap on a portion of the fees owed by Internet radio operators. The $2,500 cap on an annual $500-per-channel fee currently charged to Internet radio stations may be a tiny sigh of relief to both web-based station operators and avid listeners who feared last Tuesday's silence was a grim omen of things to come.

But the industry is hardly free from worries. SoundExchange is currently willing to extend this cap through 2008; the Digital Media Association, which represents Internet radio stations including CBS Corp.'s (NYSE: CBS) Last.FM, does not want to accept anything short of an extension through 2010. Additionally, the Internet stations are facing a per-song royalty charge of 19 cents starting July 15, up from current levels of 8 cents per share. Nonprofit and small commercial Internet radio outfits are currently being given the concession of lower royalty rates.

The prospect of silent Internet airwaves is certainly not one I relish. For the past 8 or so years, I've relied on Internet radio to keep me sane at work, introduce me to new artists, and maintain a lively discourse with my co-workers (does Tom Petty belong on Slacker.com's "90s Alternative" station? Hardly). I truly hope the battling forces can work out an agreement that is fair and pleasing for all sides.

Beth Gaston Moon is an analyst at Schaeffer's Investment Research.