WASHINGTON – When the video cassette recorder became a household item in the 1980s, it was left to Congress and the Supreme Court to determine whether taping “As the World Turns” constituted copyright infringement.

This decade Napster went to court in an attempt to defend free music sharing for all. Napster lost but the VCR survived.

As new technology emerges, legislators and judges must often struggle to find where it fits in the legal framework and to consider who will be affected by its use.

Congress recessed for the summer in August without resolving one of the current manifestations of the conflict, a major clash between the recording industry and Internet radio stations.

The recording industry says it has not been fairly compensated for the use of its music recordings, but webcasters say they will be forced into bankruptcy by the industry’s proposed rates. The two sides have agreed to a stopgap measure, a deal allowing small webcasters to pay reduced rates for the next year and a half. But lawmakers hope to resolve the issue for the long term in 2009.

The battle over royalty rates

Two types of copyright are involved in songs played on the radio: one for the musical work and one for the sound recording. The musical work is the composition of notes and lyrics of a song, and the sound recording is a recorded performance of that song.

Broadcast radio pays royalty fees for the use of musical works, which are usually owned by music publishers. But they do not pay separate royalty fees for the use of sound recordings, which are usually owned by record labels.

“This situation is almost unique to the United States,” said Paul Maloney, programming director for AccuRadio, an Internet radio station. “In most other countries, radio has to pay for sound recording copyrights.”

This has been a boon for both broadcast radio and record labels, Maloney said.

“The argument could be made that without this waiver on royalties the broadcast radio industry in the United States would not have gotten as big and successful as it did,” he said. “And thus the record industry in the United States, which is the biggest in the world, would not have gotten as successful as it is today without all that promotion.”

AccuRadio, like other webcasts, began when a webcaster decided to make available a genre of music he didn’t hear over the air.

Kurt Hanson, founder of AccuRadio, had been writing an online publication about Internet radio called RAIN, Radio and Internet Newsletter, when he decided to produce a how-to piece about setting up a webcast.

“I went up to my bedroom and got a stack of Frank Sinatra and Ella Fitzgerald CDs,” Hanson said. “And I said, ‘Hey, here’s a form of music that doesn’t get any airplay on AM or FM radio.’”

Hanson eventually decided to follow his own advice. AccuRadio has grown to close to 350 channels, one of which plays nothing but 150 versions of the same song: “But Not for Me” by George and Ira Gershwin.

Today AccuRadio claims more than 400,000 unique listeners each month. But if AccuRadio must pay the royalty fees set by a federal government board, the price soon could be too high to keep the music playing.

Congress set the standard for determining royalty rates in 1998 with the Digital Millennium Copyright Act. The law called for a new Copyright Royalty Board of three judges to determine the royalty rate based on “what clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.”

Small commercial webcasters argued in favor of charging fees as a percentage of gross revenue, saying they could sustain a price below 10 percent. But the board decided upon a rate paid per song, per listener.

Webcasters, especially small webcasters, argue that this rate would force them into bankruptcy.

“We are facing a royalty rate that for 2005 probably would have been one and a half times our revenue for the entire year,” Maloney said. “There’s no way if we were to pay those rates that we could survive.

“If I play 16 songs in an hour and 100 people listen for that entire hour, that’s 1,600 performances, and I have to pay a fraction of a cent for each one of those performances every hour, every day, 365 days a year.”

But the Copyright Royalty Board argued that charging a percentage of revenue would promote inefficient webcaster business models to the detriment of composers and performers.

“It’s not up to the artists, to creators of music, to subsidize their business models,” said Richard Ades, spokesman for SoundExchange, the nonprofit responsible for collecting and distributing royalty fees. “There’s an attitude out there that music should be free, and it shouldn’t be.”

By contrast, the copyright board decided in January to charge satellite radio services such as XM Radio and Sirius a royalty rate of 6 percent of revenue, set to rise to 8 percent by 2012.

Satellite radio stations, which charge a subscription fee for their services, have in general been more profitable than Internet radio stations that rely on ad sales.

About 80 percent of large webcasters are paying the nonprofit SoundExchange 95 percent of the royalty rate decided upon by the Copyright Royalty Board, Ades said.

But SoundExchange agreed to allow small webcasters – defined as Internet radio stations earning $1.25 million or less – to continue paying reduced rates for a couple of years. AccuRadio is paying about 12 percent of its revenue, Maloney said.

That deal is set to run out in 2010, which may be bad news for fans of a certain George and Ira Gershwin tune.