WASHINGTON — As Joe Kennedy fights against the Internet radio royalties that he says could kill his online music service, the Pandora chief executive carries a weapon: a Stiletto.
Not the old-fashioned, sharpened-steel knife popular with hoodlums and mobsters. This is the high-tech Stiletto 100 Portable Satellite Radio from Sirius. Kennedy brandishes it when he meets with members of Congress to highlight what he calls the inequity of the royalty rates.
The Stiletto has two antennas. One picks up Sirius' satellite signal, and the other connects via Wi-Fi. But songs played over those connections pay different performance royalty rates, and Internet radio stations say the payments are sapping their businesses.
"It's the same station, the same songs," Kennedy said, holding the sleek white-and-black radio during a visit to Capitol Hill last week. "It's absolutely absurd."
It was Kennedy's third trip to Washington in the last month as he pleads for Congress to help resolve the dispute between some Internet radio webcasters and SoundExchange, the organization that collects and distributes digital performance royalties. Those royalties are for the specific recording of a song performance, as opposed to royalties to composers and music publishers for the music and lyrics.
The Copyright Royalty Board, a special panel of federal judges, significantly hiked the royalty rates last year and eliminated a provision that allowed small webcasters to pay 10% to 12% of their revenue instead of a flat per-song fee for each listener. The judges also ruled that those fees should gradually rise, more than doubling by 2010 to 0.19 of a cent.
Pandora and many other webcasters were outraged. Those fractions of a penny are multiplied by the number of listeners for any given song and can add up to millions of dollars a year. Internet radio operators complained that their royalty payments would exceed their actual revenues.
Some small webcasters shut down before the new rates kicked in July 15. Others went to federal court to try to overturn the new rates. That appeal is pending.
Meanwhile, under pressure from Congress, SoundExchange announced in July that it would not seek immediate payment of the higher rates as it tried to hammer out a deal with webcasters. SoundExchange is free to negotiate different rates on behalf of the musicians and record labels.
SoundExchange said that those negotiations were still moving along, but Kennedy said they had broken down.
John Simson, SoundExchange's executive director, said the new rates wouldn't hinder Internet radio's growth.
"While there still are a few who are loudly predicting the demise of Internet radio, a la the boy who cried wolf, the on-the-ground reality is saying something quite different," he said in a news release last week.
SoundExchange spokesman Richard Ades said many webcasters were paying the new rates without a problem. He noted that this year's rate of 0.14 of a cent per song per listener means that it costs only $10 a year for a person listening to 15 songs an hour for 40 hours a month.
At Oakland-based Pandora, which has 13 million registered users on its free, ad-supported site, the tab for 2008 would be $18 million under the new rates, Kennedy said. That's most of the company's projected $25 million in revenue.
"It's taking 70%-plus of our revenue," Kennedy said. Pandora is paying SoundExchange the old rate, which amounts to $10 million for 2008, but he doesn't know how long that can continue.
He noted that the Copyright Royalty Board last year set new rates for satellite radio that started at 6% of revenue in 2007 and rise to 8% by 2012. Old-fashioned, over-the-air radio stations don't pay performance royalties.
Reps. Jay Inslee (D-Wash.) and Don Manzullo (R.-Ill.) introduced the Internet Radio Equality Act in spring 2007 to nullify the royalty board decision. It has attracted a substantial 148 co-sponsors and helps put pressure on SoundExchange. But a Senate version by Sen. Ron Wyden (D.-Ore.) has only five co-sponsors, meaning the chance of anything happening this year is slim.
Kennedy and Pandora founder Tim Westegren are trying to sound the alarms.
"We're screaming at the top of our lungs, waiting for somebody to do something," he said.