Q: How is what you're doing legal?

A: 8tracks is a non-interactive internet radio service that has elected to operate under the compulsory license for webcasting established in the Digital Millennium Copyright Act of 1998. The compulsory license covers 8tracks' transmissions of copyrighted sound recordings (and the server copies created by 8tracks to facilitate such transmissions), and the royalties that 8tracks pays to SoundExchange, an entity designated by the Copyright Royalty Board to collect and distribute compulsory royalties, are allocated equally among the copyright owners of sound recordings (typically a record label) and the recording artists (both featured and non-featured) on such recordings.

Under the terms of the compulsory license created by Congress, a non-interactive webcaster can transmit any sound recording that has been lawfully released to the public, provided that the webcaster complies with various statutory and regulatory provisions, including:

  • Following a set of programming rules that limits the number of songs that may be transmitted from any one album or any recording artist on a given channel or playlist during a three-hour period;
  • Pays a royalty rate either negotiated with representatives of copyright owners or established pursuant to a proceeding conducted by the three judges on the Copyright Royalty Board;
  • Reports to copyright owners the songs that have been transmitted on the service, pursuant to negotiated reporting requirements or requirements adopted by the Copyright Royalty Board, so that SoundExchange may allocate and distribute such royalties to individual copyright owners and recording artists.

In addition, 8tracks has licenses with ASCAP, BMI and SESAC for the public performance of musical works (the notes and lyrics in a sound recording), the royalties for which are distributed to publishers and songwriters.

Q: How much do you have to pay for royalties under the compulsory license?

A: The royalties paid to labels and artists for the use of sound recordings under the compulsory license for webcasting are expensive. The current rate is approximately one-tenth of one cent per track streamed, per listener. While fractions of a penny may not sound like a lot of money, these costs add up quickly, particularly as each additional listener results in incremental cost. For example, streaming one song to 10 listeners represents 10 performances, the same as streaming 10 songs to a single listener.

As the average song length is roughly 4 minutes, a service like 8tracks can stream roughly 15 songs per hour (assuming no audio advertising or DJ commentary). Thus the current royalty rates cost us approximately 1.5 cents listener per hour, which means that 8tracks must earn a net CPM from advertising of at least $15 per HOUR to cover the cost of streaming sound recordings. In addition, 8tracks pays musical works royalties to ASCAP, BMI and SESAC, which generally comprises 3%-5% of revenues.

At the moment, 8tracks opts into a Small Webcaster license offered by SoundExchange. This license provides for royalty payment on the greater of a percentage-of-revenue or percentage-of-expense basis, subject to a minimum fee, which will allow us to grow our user base — and our potential for advertising — before having to pay the more onerous compulsory rates owed on a per song, per listener basis.

Q: Can you explain the rules that 8tracks has to follow under the compulsory license?

A: An objective of the compulsory license is to ensure that a listener's experience is similar to traditional radio and essentially non-interactive (i.e., you can't hear a specific song when you want it), so as not to substitute for music purchase.

Hence, the rules of the compulsory license require that the sequence of playback cannot be pre-determined by a listener, and the listener may also not know what song he or she will hear next (i.e., no pre-announced playlist). Accordingly, a user cannot see the all of the songs included within a playlist at the outset and then fast-forward or rewind to songs of interest (which would make the service interactive). Similarly, there are limits on (a) the number of songs that can be included from any one artist or any one album on a given channel or playlist within a 3-hour period, and (b) the number of tracks that can be skipped per hour on a given channel.

At 8tracks, we feel that there's something unique and compelling in handcrafted programming — as with traditional radio in the 1970s, the mixtape in the 1980s and DJ culture in the 1990s. One individual — the DJ — knows music well and introduces a set of listeners to it. This does not require an on-demand experience, and in fact, typically precedes it, as listeners discover and acquire those tracks they enjoy. (8tracks will shortly provide links to Amazon so listeners can purchase the music they like.)