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Synergy goes sour

TW AOL on both sides of music royalty

WASHINGTON — When Warner Bros. Records exec David Altschul testifies today at the U.S. Copyright Office on royalty rates in the digital age, he’ll take some tough questions from opposing attorneys –including those representing another corner of his very own company.

Everyone knew there were bound to be some tensions and surprise twists when AOL and Time Warner came together to form the world’s largest entertain-ment conglom, but the irony of the soured synergy wasn’t lost on those battling it out in a cramped room not far from the U.S. Capitol.

Altschul, senior vice chair and general counsel of Warner Bros. Records, is on the side of the Recording Industry Assn. of America, which is urging a three-member arbitration panel to accept its proposed royalty rate for music streamed over the Internet.

Webcasters, including AOL Music’s Spinner.com, say the license rate laid out by the RIAA is far too high, and will cripple Internet ventures. AOL Music is on the list of witnesses expected to testify on behalf of webcasters.

Long process

The costly proceeding — known as CARP, short for Copyright Arbitration Royalty panel — may stretch on for nearly a year, with both sides presenting testimony over the next six weeks. The proceeding, which got underway Monday, was ordered by the Copyright Office after the two sides were unable to settle on an acceptable royalty rate.

On Tuesday, Time Warner AOL issued a rather solomonic statement which didn’t directly address the fact that two divisions of the same company are duking it out, a highly unusual, and some might say dysfunctional, occurrence.

“At the end of the day, the CARP hearings are designed to resolve differences on rate issues among industries. AOL Time Warner has confidence in that proc-ess. We expect it to produce results that work for both the labels and the webcasters,” an AOL Time Warner spokesman said.

In the next week, Warner Music Group exec veep Paul Vidich will likewise testify on behalf of RIAA’s royalty proposal. Warner Music Group, parent com-pany of Warner Bros. Records and several other popular labels, is a member of the RIAA.

Separate branches

AOL Music is an entirely separate division from Warner Music Group, with the former focusing on digital delivery platforms, and the latter, content. While the two divisions keep in touch and sometimes work together, they remain separate branches of the AOL Time Warner family tree.

RIAA and a coalition of musicians’ guilds want the arbitration panel to set the royalty rate at 0.4¢ per song , or about 15% of a webcaster’s revenues.

On Tuesday, RIAA prexy Hilary Rosen came under intense questioning as to whether the rate is indeed fair, and is one supported by the marketplace. The RIAA has submitted to the arbitration panel for review 26 licensing deals reached with webcasters, apparently based on the rate in question.

An attorney for the webcasters implied that the RIAA has been strong arming webcasters in cutting the deals, setting a number of conditions.

Loosely speaking, webcasters want the royalty rate to be calculated at roughly .014¢ per song, or about 1% of a webcaster’s annual revenue. Other webcasters lining up against the RIAA include RealNetworks and Viacom’s MTV.

Sometime in August, AOL Music exec Fred McIntyre will testify for webcasters.

Those sitting on RIAA’s side of the aisle include the American Federation of Television and Radio Artists , the Assn. for Independent Music and the American Federation of Musicians of the U.S. and Canada.

Rosen testified that streaming music is a crucial revenue stream for labels and artists. She said the recording industry should have the opportunity to be like the motion picture biz, which exploits its copyrights in secondary markets, such as video rentals, pay-per-view, cable and broadcast.

“The recording industry is a risk-filled business, where commercial success eludes the vast majority of sound recordings released each year,” Rosen said in her testimony. “The vast majority of sound recordings sell relatively few units.”

A number of recording artists are scheduled to make personal pitches to the arbitration panel, stressing the benefits the new royalties will bring.

(Jill Goldsmith in New York contributed to this report.)

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