In recent years, the proliferation of broadband Internet connections allowing for real-time streaming audio has prompted an explosion of online radio stations augmenting what the industry calls "terrestrial radio" -- that is, the old-fashioned AM/FM airwaves. In many cases, Internet radio stations simply duplicate their bigger corporate-radio parents: In Chicago, you can listen to B96 on your car stereo at 96.3-FM, or you can stream it anywhere you can hook up your computer at B96.com. Either way, you get the same CBS/Infinity Broadcasting mix of dance-pop, hip-hop, DJ chatter and advertising.

In other cases, online radio stations provide content that is thoroughly unique: There are stations devoted entirely to Czech polka music, for example, or classical pieces played on oboe. Among the many Internet-only radio stations based in Chicago, BassDrive.com specializes in one very specific underground dance genre, describing itself as "a 24/7 drum-and-bass radio station," while DJ Lloyd Dev's station under the 365.com Internet radio umbrella is devoted entirely to house music, with "mixes from Frankie Knuckles, Lil Louis, Gene Hunt, Steve Silk Hurley and others."

These small online stations would seem to have little in common with the bigger players, which also include names such as Yahoo, AOL and RealNetworks. But a recent ruling by the Copyright Royalty Board, the three-member panel that regulates Internet radio royalties under the aegis of the Library of Congress, substantially increases the amount Webcasters must pay to play music, and many say it will dramatically curtail the number Internet radio stations that can afford to continue broadcasting.

Here's how royalties work for conventional radio: When a station plays a song, a royalty is collected by one of the three big rights organizations -- ASCAP, BMI or SESAC -- which eventually pays the songwriter and the music publisher. The actual performer isn't paid, only the songwriter is: Bob Dylan is paid whenever an AM or FM station airs the Jimi Hendrix recording of "All Along the Watchtower," but the Hendrix estate is not. Seventy-five other countries pay the performer as well as the songwriter, but the United States doesn't, and terrestrial radio stations have long lobbied to maintain this exemption by insisting the performer benefits from exposure and album sales.

When royalties for Internet radio were first set in 1995, that argument wasn't taken into account. The system required online broadcasters to pay the traditional songwriter and publisher royalty to ASCAP, BMI and SESAC, in addition to a digital performance royalty split between the performers and the owners of the recording (usually the record label), with fees collected by an organization called SoundExchange.

Until the end of 2005, when the first agreement lapsed, online broadcasters could pay SoundExchange based on either the number of songs they played or the number of hours listeners tuned in, with smaller broadcasters having the option of paying 12 percent of their total revenue -- which could be very little, if the broadcasts were free of advertising.

"Congress apparently made a determination for an interim specified period of time to assist a nascent industry, and that period of time has passed," Chief Copyright Royalty Judge James S. Sledge has said.

Under the new ruling, Sledge and his fellow judges will require Webcasters to pay every time a listener hears a song, at a rate that starts at .08 cent per tune (stretching back retroactively to the start of 2006) and rises to .19 cent in 2010. On top of that, Webcasters have to pay a $500 minimum for every Web channel they operate. (A home broadcaster probably has just one, but companies such as RealNetworks and Pandora have hundreds.)

The effect is a harsh penalizing of Internet radio. By way of comparison, the online news site BetaNews.com noted that on a per-listener scale, broadcast radio stations paid an average of about $1.56 in royalties per listener during 2006. Internet radio sites will be paying $8.91 per listener retroactive to the start of 2006, and that figure will increase to $15.59 per listener by 2008. Webcasters were quick to object to the inequity.

"We would have to provide less choice and less diverse programming," Robert Kimball, senior vice president for business and legal affairs at RealNetworks, told the New York Times. Meanwhile, in an interview with the Los Angeles Times, KCRW-FM general manager Ruth Seymour called the ruling "draconian," adding that her station would already owe more than $350,000 and will be faced with curtailing its popular Webcasts if it is forced to pay. The opposition is making for strange bedfellows: Among the organizations appealing the ruling are the commercial radio megalith Clear Channel Communications and non-commercial National Public Radio, which also announced it would turn to the U.S. Court of Appeals.

The fundamental problem seems to be that, as with file-sharing, the old-school music industry doesn't understand the new medium -- at one point in the proceedings, one of the members of the Copyright Royalty Board asked if the term "albums" could refer to CDs as well as vinyl records, according to the transcripts -- and as a result, Webcasting is viewed as a threat rather than a potential asset. If a listener hears a song on Internet radio and likes it, isn't he or she just as likely to buy it as they'd be if they heard it on terrestrial radio?

"I don't know whether Webcasters are replacing sales or enhancing sales," Bruce Iglauer, founder of Chicago's independent blues label Alligator Records, told me last Monday. "Do I think Webcasting sells CDs? I don't know if anything sells CDs now. A lot of articles are saying that CDs are dead, and they're never going to sell again."

Iglauer was one of several music industry experts who testified before the Copyright Royalty Board in favor of the new, higher digital royalty rates -- though he admits he isn't sure whether these are fair or not. "I don't know if we're overcharging digital broadcasters. The last time the rates were set [in 1995], everybody doing Webcasting said, 'This is going to sink us.' Nobody sank; they all continued. Now they're saying, 'This is going to sink us.' Do I think some Webcasters will become discouraged? Yes, it's probable some will."

Although Nielsen SoundScan and other monitors show online sales increasingly dramatically in the last few years, Iglauer says that for Alligator, sales of music via downloads haven't been enough to offset the decrease in sales of CDs.

"Absolutely we're seeing an increase in digital sales -- they went up about 40 percent last year -- but at the rate they're presently going, it will take us 10 years to get back to where we were in 1999. Both financially and in terms of personnel, our company is two-thirds the size it was in 1999."

But is this the fault of new technology, or is it just one of the inevitable twists and turns in the ever-volatile music industry? And if it's the latter, should Webcasters be the ones who are paying?

"What I testified about was the economics of the independent record business, not what would be a fair rate for Webcasters," Iglauer says. "If you ask me what a fair rate would be, I have to say that I don't know."

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