My name is Rusty Hodge. I am the founder and general manager of SomaFM.com, LLC, (Soma FM), an internet radio broadcaster with 14 themed channels of music programming. Each month, over 400,000 people listen to SomaFM, and we have over 100,000 “long term listeners” who have listened to us once a week for a year or more.

We specialize on playing music that can’t be found on the AM/FM dial- music that there is a demand for yet which isn’t being served by traditional, corporate broadcasters. We operate like a traditional broadcaster: we do not have individually-customized streams or the ability to skip songs you don’t like. Everyone listening to one of our channels is listening to the same programming at the same time.

We are a small, for-profit company. Besides myself we have only one part time employee and a small number of mostly volunteer DJs. Any profits are re-invested into the company to fund our growth. Because of this approach, we have not had to take any external investment or VC money. This means we don’t have investors who are looking for an “exit strategy” or to sell us to a larger media company. The goal was to create a sustainable broadcasting company that would expose our listeners to music they would not otherwise be able to hear. 80% of the music we play is from independent artists and labels, the 20% that comes from major labels is “back catalog” or songs that would otherwise fade into obscurity.

We raise money to operate through listener support, and some advertising on our website. But in the past, we’ve tested different ways of making money, and we found that we could raise more money by encouraging our listeners to support us directly, rather than through advertising. That revenue translates into a $4 CPM per hour rate, or is comparable to running 3-4 minutes of audio advertising per hour at the current ad rates.

While over-the-air broadcasters pay no royalties for sound recording performances, and satellite and digital cable music services pay in the 7-7.5% of revenues range, internet radio broadcasters have had to pay per song, per listener. In our case, this means that we would be liable to pay more than 250% of our revenues in royalties.

In the past , smaller commercial webcasters like SomaFM have operated under the “SWSA”, but this act expired in 2006. This act let small webcasters pay 11-12% of their revenues instead of the per song, per listener fee. While this kept many of us from going “off the air” permanently, it is still unfair that we have to pay more for the same music usage as the big satellite broadcasters, and way more than the large corporate terrestrial broadcasters pay.

Despite Congress asking SoundExchange to come to a private agreement with small webcasters, all that was offered was an extension to the SWSA agreement but with decreased revenue and “audience size” cap of an average of 6830 simultaneous listeners. Once that number is exceeded, we have to switch to the per-song, per-listener method, and our royalty rate would go from 12% of revenue to over 200% of revenue. In short, this means we have to make sure that our businesses don’t grow past a certain size or else we’ll be bankrupt by royalties.

SoundExchange and the RIAA have suggested that webcasters direct-license music, and therefore do not need to license under the Section 114 compulsory license. While this sounds fine in theory, the fact that webcasters like SomaFM play music from so many different rightsholders make this completely impractical. And like other “mainstream” internet radio services- direct licensing from the 4 major labels would only cover at most 20% of what we play.

Furthermore, all the direct licensing deals that I know of have involved “equity positions” from the major labels. I’m not sure about you, but I would most definitely not want to have one of the major record labels owning a substantial amount of an internet radio broadcaster: the labels would then have too much control over what music gets played on internet radio, and you know that would mean less and less exposure of music from independent artists and labels.

If we can’t get a workable royalty settlement soon, we’ll be forced out of business.

What is worse: The trend in VC-funded music services for the last couple years has been to operate without any licensing until they can gain enough audience to make them a substantial player and get the attention of the RIAA. At that point when they’re facing lawsuits, they make retro-active licensing deals with the majors (which usually include equity positions). Independent artists then get squeezed out and don’t get the royalties they deserve, yet aren’t in a financial position to sue for the royalties they’re owned as RIAA-member labels can.

Just as I would never accept “payola” to feature a song or artists, we would not want a record label to have a position of control of our station and drive our musical choices not based on artistic merit but only on financial grounds. Direct licensing encourages the same behavior that payola does: broadcasters choosing music based on money rather than artistic merit. This should not be the case.

These royalties are so high because the DMCA instructs the copyright office to set rates based on the concept of “willing buyer / willing seller”, rather than the more standard rates based on balancing the interests of the rights owners, the users of those copyrights, and the general public.

The general public does not benefit from limited exposure to copyrighted works. The more variety of works that the public has access to, the better it is for not only the listeners, but for the independent artists and musicians who would otherwise not receive exposure for their works.

If this balanced approach was taken, royalties would be much lower than they are now. I urge the Judiciary Committee to first tackle this problem with the way the royalty rates are set before looking to extend these royalties to terrestrial broadcasters.

I would also urge the Judiciary Committee to come up with a royalty scheme that achieves parity across all broadcast services, regardless of how they are distributed. Digital or Analog makes no difference to the listener.

Creating a fair royalty structure for webcasters is the first step in achieving rate parity across all broadcast services, and would equally benefit the public as well as artists and broadcasters.

Thank you for your time.

Sincerely,

Rusty Hodge
SomaFM.com LLC
San Francisco, CA

Comment

1. Well said. I was encouraged to hear that Sen. Brownback, from my home state, seems understand the issues and is trying to be helpful.

   — Thomas Sailors · Jul 30, 04:31 PM · #

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