The Digital Media Association and SoundExchange have failed to come to a compromise agreement on Internet radio royalty rates, setting the stage for a potentially massive realignment of the Internet radio industry.

DiMA represents such companies as Pandora, RealNetworks and MTV. The association was negotiating to amend the statutory royalty rates for webcasters as originally set by the Copyright Royalty Board in May of 2007. The Webcaster Settlement Act, passed last year, set Feb. 15 as the deadline to reach an agreement.

With the deadline now past with no deal, that leaves few options for the DiMA-represented companies.

An appeal of that CRB decision is set to begin next month. It's possible that DiMA or its individual members may continue to purse an arrangement with SoundExchange, but any agreement reached would now only apply to copyright owners who are SoundExchange members. The Webcaster Settlement Act allowed any deal reacedh with SoundExchange to apply to all copyright owners. SoundExchange represents some 95% of sound recording royalties.

DiMA members would be on the hook to pay the full CRB rates, barring a a SoundExchange-only agreement or prevailing in the appleal. Pandora has threatened to shut down completely if it was forced to pay the full royalty rates, which raised the fees due to SoundExchange and other rights holders in some cases by 300%. RealNetworks previously said it would consider severely limiting the streaming radio options currently available to subscribers.

The fact that the two parties did not reach a settlement comes as somewhat of a surprise. In the weeks leading up to the deadline, representatives from both parties expressed confidence a deal was imminent. However that changed early in the week, prior to the deadline, when talks fell apart during a conference call with all involved, according to sources. Exactly what issue sparked the fallout is unclear.

In a press release announcing the lack of a deal, DiMA executive director Jonathan Potter blamed it on SoundExchange's desire to take into account the entire revenues of a company when determining the rates owed, rather than just the revenues earned from Internet radio specifically.

"We are unable to resolve our principled differences regarding the applicability of sound recording performance royalties to various activities of multifaceted online companies, particularly when those activities and their revenue are not directly associated with the performance of sound recordings," he said.

DiMA and SoundExchange previously had come to a compromise on a separate element of the CRB rates. The initial rule was that webcasters would have to pay a $500 minimum fee per year for each channel offered. Since some services like Pandora let users create several customized channels, that fee could end up totaling more than the royalty rates themselves. The two parties agreed to cap the minimum rate at $50,000 a year.

SoundExchange has reached agreements with both the Corporation for Public Broadcasting and the National Association of Broadcasters before the deadline. The CPB deal set a one-time payment of $1.85 million that covers the fees owed by all CPB members, while the NAB settlement sets a per-song rate of $1.50 for every 1,000 listeners through 2010, and for those rate to increase to $2.50 by 2015.

The state of small webcasters remains in question as well. A handful accepted a modified version of an offer SoundExchange made Feb. 6, which set a variety of tiers for royalty payments depending on revenues and traffic-with some "microcasters" paying as little as $500 a year. Small webcasters are defined as those making less than $1.25 million a year and with less than 5 million aggregate streaming hours a month.

However a loose coalition of small webcasters negotiating in tandem with the help of various lawyers rejected the offer. Their status remains unclear.

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