Webcasters and the Record Industry recently struck a deal on performance royalty rates. Webcasters are breathing a sigh of relief; everyone involved is heralding the survival of the nearly dead streaming audio industry and all sides are patting themselves on the back.

This is pure delusion – the only party who should be pleased is the record industry – because they wanted to kill webcasting and they did it. It could prove to be a pyrrhic victory though, because killing webcasting eventually could kill the record industry, but more on that later.

I’m not going to bore you with long formula derivation – just the down and dirty highlights. The CRB decision that was in effect until these “groundbreaking negotiations” would have, under the best of circumstances, given all of a webcaster’s revenue to the record industry in royalties. The new deal calls for roughly half of that.

Here’s what that would mean in practical terms: Under the old deal, a webcaster that did $10 million in revenue, would owe it all in royalties. Under the new deal, they would owe roughly 5 million, although the percentage goes up every year. The radio industry turned in roughly 25% margins in 2008, so a station that billed $10 mil would have made a profit of, on average, $2.5 million. Assume that webcasters operate with the same margins as radio and they would owe TWICE THEIR PROFIT to the record industry.

Please take note, the 25% revenue share that is part of the deal is a smokescreen, as the way the deal is written, the higher, per song rate will always apply.

To be fair webcasters can operate on less money than broadcasters, according to many. OK, assume that webcasters can operate on half the money that broadcasters do and generate revenue at the same rate per listener. (which they cant, it’s actually less than half on a good day) On that basis, they would owe their entire profit to the record industry.

So why the celebration?

Well, for one, they made an exception for webcasters with revenue of under $1.25 million. We’re talking revenue here, not profits. But the rates for the little guys are low enough (12-14%) that if you stay that small, you can make a profit. What this does, is ensure that the only webcasters that survive are Mom and Pops with no real resources. And they made the retroactive payments (to 2006) low enough that they most webcasters can afford to pay them and survive.

Why is that such a big deal?

Because webcasting was where radio listeners were supposed to go – it was going to be terrestrial radio’s natural evolution. (It should be noted that terrestrial radio agreed to a MUCH WORSE DEAL that was so bad it would be most efficient for radio advertisers to bypass paying radio stations and remit their payments directly to the record companies) But this exemption from the onerous rates isn’t all that important – $1.25 mil isn’t much revenue. That’s less than my local hardware store brings in. Here’s another example; the lowest billing station in Greenville, SC billed $1.8 mil in 1991, well over the “reasonable royalty cap”.

It’s pretty obvious that if no individual business in an industry can bill more than a hardware store, there isn’t much future for that industry. What this deal does is slow down the death march.

And that is the WORST POSSIBLE SCENARIO. Agreeing to something better but still unworkable means that when the inevitable happens – webcasters still lose money under the renegotiated deal and go back to negotiate further, they look like they’re crying wolf. The record industry says that they negotiated in good faith and webcasters didn’t meet the terms, then goes on to publicly wonder how many times they’ll ask for more forgiveness before making their first full payment. They’ll probably actually pay a PR firm a bonus for every time they can get that concept in print.

Then the record industry will say no, referencing the above.

I know that first hand because I lived it – at an actual company I managed in the same circumstances. We were getting killed by lease terms that were way too high for us to have any shot at a profit. They, in previous years (we rented space and sold ads in it) made the mistake of renegotiating lease terms that were better, but still too high to allow us prosper.

By the time I suggested a real number that would actually work and asked the leaseholders to agree to it, they had heard enough and said no. Had we insisted on that number initially – many might have gone along with it. And even if they hadn’t, the inevitable conclusion (the company ultimately folded) would have been reached sooner – before a lot of time, work and money were wasted chasing a dead end.

So if radio is a shadow of its former self (AQH down over 30% in the past 25 years and still shrinking) and webcasting is relegated to small time operators, how are the labels going to get their product exposed? Whatever their business model evolves to, some mass market vehicle where people can hear major label product seems necessary. Social media isn’t the answer because it’s too democratic – people spread the stuff they like and that isn’t necessarily the product the labels want exposed.

And if the mass market vehicles represent less mass, the labels have weakened their best, most direct mass marketing channel. I guess that’s not all that surprising when you consider this is the same industry who felt their best antidote to piracy was to sue their customers.

Perhaps the biggest webcasters think they can leverage all the misinformed happy-talk about this deal into more investor capital, giving them more time and the chance to retake their fight to congress. But lawmakers would not have much incentive to revisit an issue that both sides have publicly acclaimed, particularly given the scope of issues currently facing them.

A more likely result is one where the record industry feels emboldened by their victory here and makes another push toward royalties for terrestrial radio, further weakening their once golden goose.

This agreement is the equivalent of a chess game that has only one possible outcome, but is some number of moves away from the winner announcing checkmate. In this case, everyone seems to be on the losing end. Webcasting stays small time, never attracting the big capital or big players that can spawn a real movement and the record industry ensures that their next likely mass exposure vehicle is far less valuable to them.

It’s too bad – there wasn’t much chance for a better outcome, because the webcasters are largely altruistic tech or artist types with little funding or business experience – and they were facing one of the roughest, best funded industries out there. Fish in shark tanks usually get eaten alive.

I foresee some possible workarounds.

One is that a Native American Tribe could test its position as a sovereign nation and set itself up as a streaming capital with a different, more favorable royalty structure than the current one. If gambling laws don’t apply to them, maybe the DMCA doesn’t either.

I could also see an iPhone/iPod app with music scheduling software that could be updated every week, like a radio station playlist. Download a basic library built to your taste, rate the songs based on how often you want to hear them, and the software schedules it accordingly – sort of Pandora where you store the songs, rather than stream them. There could also be packages of predetermined formats available. Of course, it seems that lots of people don’t pay for music anymore, so there is upside for the programmers (who could presumably monetize it) and the listener, but the record industry would be pretty much left out in the cold.

Both sides are saying they won when in fact both sides are worse off because of this agreement. I can’t help but see this as another nail in the record industry’s coffin disguised as a victory – a bad deal shrouded in PR spray.

Webcasting could have been a robust viable business – instead it has been relegated to people’s basements and garages. Webcasters can hold onto the slim hope that when this arrangement fails, congress will have the foresight and courage to legislate something better. In the meantime, the clock is ticking – more slowly but just as surely.