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Copyright Board determines services must pay 10.2 cents in royalties for every 1,000 plays, a victory for streaming companies

After years of deliberation, the Canadian government has finally determined how much digital music-streaming services must pay in royalties every time a user listens to a song – a decision that could open the door for some of the most popular digital music sites in the United States to come north of the border.

On Friday, the Copyright Board of Canada issued a decision on the royalty rate that music streaming services must pay for the use of recordings. The ruling covers the period between 2009 and 2012, but finally offers some clarity as to how much streaming services can expect to pay in royalties in Canada.

The lack of clarity on royalty rates has likely contributed to some streaming services thinking twice about expanding into Canada. "It takes a little bit of time to make decisions, and in this digital world we live in, things change every three months," said Vanessa Thomas, managing director of Songza Canada, a digital streaming service that has operated in the country since 2012. "I think that's been a barrier to entry."

The copyright board determined that services such as Songza, which offer users streaming music through custom web-based stations, must pay 10.2 cents in royalties for every 1,000 plays. The rate represents a victory for the music services, which had argued for a similar number. In contrast, Re:Sound, the agency that collects royalties in Canada on behalf of musicians and performers, had asked for a much higher royalty rate – between $1 and $2.30 per 1,000 plays.

On average, the board estimates, a Web streaming service with $130,000 in revenues will pay royalties of about $7,000 a year.

The ruling brings to an end, at least temporarily, a dispute between Re:Sound and a host of streaming services over digital royalty rates. Some of those services, such as Pandora, aren't currently available in Canada, but joined in the copyright board hearing anyway – likely in an effort to create the most favourable financial conditions possible before bringing their services north of the border.

"We are encouraged by the ruling," a Pandora spokesperson said. "The [copyright board's] decision has potential to encourage investment in innovative technologies and increase consumer choice in Canada."

While royalty rates for commercial radio and retail outlets that play music are fairly well-defined in Canada, rates for digital streaming were not. For years, services such as Songza opted to sign interim royalty deals with Re:Sound, rather than wait on the copyright board to make up its mind. Other services have avoided the Canadian market altogether.

The copyright board decision is focused exclusively on one of the fastest-growing areas of digital music – non-interactive and semi-interactive streaming services.

Interactivity refers to a user's ability to select what music is played. Traditional radio stations are non-interactive, because the listener can't chose the songs. Fully interactive services, such as YouTube, allow users to pick specific songs and listen to them as many times as they like. To avoid being classified as fully interactive, streaming sites allow users to skip only a certain number of songs every hour, and put other limitations on the listening experience.

Streaming services make money by running ads on their web sites, by partnering with sponsors to create branded digital radio stations, or by selling subscriptions.

According to the International Federation of the Phonographic Industry, streaming music service revenue jumped 50 per cent last year, even as traditional music downloads through sites such as iTunes dropped 2 per cent – the first such decline in history.

But many streaming services have yet to see the financial fruits of that growth. Songza, for example, has some three million users in Canada, but has yet to turn a profit.

There are already myriad royalty schemes by which companies that play music pay musicians and licence owners. In Canada, for example, brick-and-mortar stores that play music are charged royalties based on their store capacity. Because it is difficult for clothing stores and gyms to keep a detailed log of which songs they play, Re:Sound assumes that the music selection is essentially in line with what commercial radio stations play.

Ian MacKay, president of Re:Sound, said on average a Canadian radio station will pay about 10 per cent of its revenues in royalties for the music that makes up about 80 per cent of the station's daily content, and most non-music businesses that play music in the background will pay an essentially insignificant amount.

"I think lots of other industries would be happy with that deal," he said. "The average corner store is paying about a hundred bucks or less a year in royalties."