Rusty Hodge, general manager and founder of SomaFM, monitors the content of his station from his laptop in the station's headquarters in San Francisco. (Marcio Jose Sanchez/Associated Press)

We all love tuning into a free music broadcast, but when it's time to pay the piper, who gets stuck with the tab?

That's the legal battle brewing here and in the United States over the fledgling internet radio industry.

It pits the recording industry — which owns the copyright to the music and wants its cut of any profits when that music is played — against the internet radio community.

For its part, the internet radio industry says it is willing to pay, but it wants royalties to be in line with those paid by satellite radio and traditional analogue radio stations. The fees demanded by the copyright holders — up to 16.7 per cent of revenues — threaten to kill the industry before it grows large enough to become truly established, according to internet broadcasters who say they want a deal on par with terrestrial and satellite broadcasters.

In the U.S. the recording industry association's agency, SoundExchange, is asking for an escalating scale that starts at about $0.0008 per song per listener and grows to $0.0019 by 2010. The industry says it effectively adds up to eight per cent of revenue, climbing to 23 per cent — a burden they say will kill the industry. Internet radio stations want something more in line with the deal satellite providers XM and Sirius radio have, which is about 1.2 per cent of their subscription revenues. They also note that — unlike Canada — in the U.S. a loophole in the law means terrestrial radio stations pay no royalties at all.

The fact that artists — and the record and publishing companies who own the rights to their works — should be paid when their performances are aired on radio, television or the internet is not at question in this battle. Recording industry critics, however, say the problem is that the fight isn't about mere money; it's about how internet radio is to be controlled.

"The $2,000 a month Radio Paradise would send the record companies is nothing, they couldn't care less," says Bill Goldsmith, whose pioneering Radio Paradise (www.radioparadise.com) site in northern California is listener-supported and commercial free. "This is about the future and what it might mean."

What Goldsmith and others fear is that large record companies will use high royalty fees as a stick against the carrot of side deals. The deals would give stations the right to play music from the studio if they agreed to terms such as promoting specific artists each month as selected by the studio and cut back or eliminate "indy" or independent artists and labels.

In Canada, it's a similar — though not as cutthroat — battle. The Copyright Board of Canada has held hearings on how royalties should be structured. It hasn't released its decision, though it has set tariffs for music sold as downloads online. Similar tariffs were set several years ago for blank media such as recordable CDs and DVDs on the grounds that buyers were most likely using them to burn songs.

Dr. Michael Geist, research chair of internet and e-commerce law at the University of Ottawa and an active commentator on copyright law and the web, says the industry is anxiously waiting for the other shoe to drop — and slapping internet radio with the tab for the past couple of years.

"There's some frustration the decision [the tariff on downloaded music] was rushed, and some sense it was done so because there was another case pending in federal court that the copyright board wanted to be heard on with this ruling," says Geist, referring to the ongoing court appeal of the board's decision to put a six per cent levy on song-based ring tones sold by Canadian telecommunications companies like Bell, Telus and Rogers Wireless.

Driving the demand for tariffs in Canada is SOCAN, the Society of Composers, Authors and Music Publishers of Canada — the body that collects fees on behalf of artists whose work is publicly performed. SOCAN is perhaps better known for pushing through a levy on blank CDs sold in Canada, reasoning that the discs are widely used to copy store-bought records. It also asked for similar levies on iPods and flash memory sticks and was also thwarted when it tried to get internet service providers to pay a levy based on the assumption customers were using their web access to download and share music. There are also two other levies — Neighbouring Rights (a complex collection of three different rights associated with the main copyright but not the copyright itself), and a percentage paid to CSI, an agency representing French and English reproduction rights agencies.

SOCAN wants the copyright board to impose a minimum monthly fee of $200 on any site that offers podcasts, background music for online games, or streams music as an internet radio station. It also wants a royalty rate of up to 16.7 per cent of the station's revenues. By comparison, Canadian terrestrial broadcasters pay SOCAN about 4.4 per cent of revenues plus 2.1 per cent for Neighboring Rights and .08 per cent to CSI.

How these payments will be applied to stations that simultaneously stream their live-to-air programming online is also yet to be determined.

"Basically it is a dog's breakfast and this is expected to continue well into next year before we even get close to resolving these issues," says Jean-Marie Heimrath, president of Sound Source Networks, part of Standard Interactive. The company owns Iceberg Radio, an internet radio property whose roots go back to 1997 and the earliest days of internet radio.

Many in the internet radio industry say the levy proposed is extreme, and that it could force them out of business.

There's a misconception that internet radio is a profit centre, says Heimrath.

"Everyone talks about the money being made online, but you take the search engines out and it's not much."

Heimrath adds, "The only advertising is really display ads on the site, because streamed [audio] ads don't work — they sound awful, people don't like them and the audience is geographically fragmented."

Although internet radio stations are still struggling to figure out a viable and long-term business model, there's consensus internet radio is the future of radio.

As Goldsmith notes, starting an internet radio station is easy since there are no licensing requirements. There's no need for pricey radio towers and transmitters, although there is the cost of setting up servers and related technology to broadcast online. But the flipside is that audiences online tend to be small. The total audience for Radio Paradise is about 200,000 — averaging 10,000 a month — which is tiny compared to commercial broadcast stations.

There's also the imbalance in the royalty structure, with terrestrial radio and satellite radio paying different royalty rates than internet radio.

"Record companies and their various organizations really don't get it," says Dave Marsden, a veteran DJ who was part of the Iceberg start up. He still programs it while hosting an "old school" broadcast show two nights a week at Oshawa's FM 94.6, The Rock.

"They [the recording industry] don't realize if someone hears a song on radio — in their car or on the Internet — and they like it, they might well buy that record," he says. "They're trying to stop the future. People will find a way to continue to discover music."

Mainstream media companies like Standard, which has poured millions of dollars into Iceberg, are getting frustrated at a situation they compare to being held to ransom.

"When I got back from Ottawa [and the copyright board hearings], we had to make some tough decisions," Heimrath said, noting the writing on the wall was clear that higher tariffs were inevitable (the industry had been exempt under a previous CRTC ruling). "We cut the features and the podcasts and let a lot of really good people go. If artists called and asked why, I told them to talk to SOCAN."

He thinks the royalty rate will settle at about five to six per cent, but adds that he's prepared to "walk away" if the royalty fees that ultimately get imposed on the internet radio industry are too high.

Others say they're in for the long haul and will find a way to make things work no matter which way the royalty battle goes.

"I'm going to horrify my own people by saying this, but format radio is dead. People want diversity," Heimrath says. "Instead of rigid rules though, we really need some kind of agreement that allows room for this thing to breathe and grow."