A ruling to change how royalties are collected from independent Internet radio stations has the potential to drive many of the sites out of business. The Copyright Royalty Board (CRB), a U.S. government agency tasked with overseeing the royalty process, decided to change the way most small Webcast stations are charged from a percentage of revenue to a pay per song and listener model.

The new royalty rates are scheduled to go into effect in about two months. If implemented, the change could increase royalty payments for the smaller stations by ten times what they are currently paying. In some cases, the new rates amount to more than a station's annual income. That translates to a substantially smaller group of available stations in iTunes' radio list.

Bill Goldsmith, owner of the Internet-based radio station Radio Paradise, hopes an agreement can be worked out to keep the small players in business.

"We are hoping that we can, along with a small group of other independent webcasters, negotiate a separate settlement with the RIAA, similar to the one we negotiated in 2002. That agreement allowed us to operate by paying a royalty equal to 10 percent to 12 percent of our gross income in performance royalties," he said on his blog. "However, that agreement has expired, and we are now liable for royalties, retroactive to the beginning of 2006, that are equal to approximately 125 percent of our income."

The new per-play fee structure was proposed to the CRB by SoundExchange, the RIAA's digital music fee collection organization. The structure includes a sliding scale that ramps up through 2010. The Radio And Internet Newsletter detailed the fees:

The Radio And Internet Newsletter's Kurt Hansen stated "Because a typical Internet radio station plays about 16 songs an hour, that's a royalty obligation in 2006 of about 1.28 cents per listener-hour. In 2006, a well-run Internet radio station might have been able to sell two radio spots an hour at a $3 net CPM (cost-per-thousand), which would add up to .6 cents per listener-hour."

He notes that even if with the potential ancillary revenue from Web site ad sales, radio sites can at best bring in about US$0.01 to $0.012 per listener-hour. In many cases, those numbers aren't enough to cover the annual royalties the new rate schedule imposes.

Internet radio listeners, many of whom are iTunes users, will notice the impact when independent radio stations in their radio list stop working. Unless, that is, the stations are able to work out an alternative agreement with the recording industry.

"We are at a fork in the road. Down one path is a radio universe populated entirely by large corporations, who can either afford the legal firepower necessary to negotiate a reasonable settlement with the music industry," said Mr. Goldsmith. "Down the other fork we are presented with a universe of choices, freely available to all, produced by people who truly love and value what they are doing."

"None of those choices are viable under the new rate structure," he said. "And that would be a tremendous loss for all involved."