"The rates are disastrous," says Joe Kennedy, CEO of Pandora. "I'm not aware of any internet radio service that believes it can sustain a business at the rates set by this decision."

The situation for smaller webcasters isn't any better. And for the likes of Bill Goldsmith, who runs Radio Paradise, it's far worse: "This royalty structure would wipe out an entire class of business, small independent webcasters such as myself and my wife. Our obligation under this rate structure would be equal to over 125 percent of our total income."

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If the new rates stick, online music fans may come to expect far less innovation, variety and quality when it comes to internet radio. Some industry experts fear that even more users could be driven to illicit services that pay no royalties or those that operate from other countries.