A final deal between the Digital Media Association, which is representing the Web sites, and SoundExchange, which collects royalties on behalf of the music labels and other copyright owners, isn’t expected until later this year. But “the hard stuff has been done,” says Pandora founder Tim Westergren, who has become the public face of Webcasters during negotiations.

In September, Congress agreed to let the two groups hash out new terms that would replace the ones that the government-appointed Copyright Royalty Board signed off on last year. Since then, Web radio sites, led by Pandora, have bitterly complained that rates would force them out of business.

The existing deal calls for Webcasters to pay an escalating fee to copyright owners every time they play a song for a listener. This year, for instance, Web radio stations are supposed to pay 14 hundredths of a penny ($.0014) per song streamed, per listener; site operators figure that will cost them about 2.1 cents per user, per hour.

That doesn’t seem like much, but in order to cover those fees alone (before bandwidth and other costs), operators would need pull down many more advertising dollars then they’re getting now.

Site advocates figure they’d need to be able to generate a so-called CPM rate of about $21 for every thousand visitors (over the course of an hour) under the current fee structure. That’s a hard rate for big professional Web sites to achieve. And since users generally turn on a Web radio station, then look at other sites while it runs in the background, the format is a tough sell for ad buyers.

So what’s the new rate going to be? Westergren wouldn’t comment, except to argue that the compromise still calls for “tremendously unfair” payments when compared to the fees paid by satellite radio operator Sirius XM (SIRI). That company is supposed to pay between six percent and eight percent of revenue between now and 2012.

What about conventional radio? Those stations don’t pay a penny for so-called “performance” royalties, though the cash-starved music labels have asked Congress to change that. Good luck!

The big question: Will the new rates allow Pandora, and the many smaller Webcasters, to surive? Westergren says Pandora is on track to generate $20 million in revenue this year, but he wouldn’t say whether that would allow him to break even with the new proposed rates.

But Web advertising in general is under pressure, and ad buyers say that their clients are increasingly skeptical about trying out “experimental” mediums like Web video. So unless the rates get very, very low, or Westergren’s company has hired some very, very persuasive sales people, it’s going to remain a struggle.

The RIAA and its online counterpart, the Digital Media Association, have petitioned the Copyright Royalty Board to slash the so-called mechanical royalties paid to musicians and music publishers for digital downloads, subscription music services and ringtones. Seems the RIAA and DiMA feel they’ve suffered unfairly during the transition to digital distribution and they’d like artists to share in their misery.

The National Music Publishers’ Association, noting the favorable economies of digital distribution, asks for a royalty of 15 cents per track for permanent digital downloads. The RIAA argues that a royalty of approximately 5 cents to 5.5 cents per track is more reasonable. The DiMA–which represents Apple, Amazon and RealNetworks, among others–suggests cutting that royalty further still.

Find that astonishing? Just wait; it gets worse. For streaming music services, the NMPA proposes a rate of the greater of 12.5% of revenue, 27.5% of content costs, or a micro-penny calculation based on usage. The RIAA finds 0.58% of revenue more reasonable. And the DiMA says there really shouldn’t be any royalty at all. “Fundamentally, this fragile marketplace is showing signs of promise, but it cannot be saddled with additional, excessive costs,” the DiMA argues. “The board should be careful not to impose a royalty that kills the proverbial goose and deprives songwriters and publishers of their golden egg.”

An interesting choice of metaphor and one in which the DiMA and RIAA might easily figure as the giant at the top of the beanstalk:

Fee! Fie! Foe! Fum!??
I smell the blood of a musician.
Be he ‘live, or be he dead,
I’ll grind his bones to make my bread.”

Grind his bones to make my bread, indeed.

Said Rick Carnes, president of the Songwriters Guild of America: “Our opponents have to recognize that this rate-setting is not a matter of gamesmanship for songwriters, but rather one of survival. As I stated in my testimony, in response to a question from those seeking to cut the mechanical royalty rate in half and to denigrate the importance and contribution of professional songwriters to the music industry, ‘Yes, songs are plentiful, just as rocks are plentiful. But if you want diamonds, you are going to have to pay the miners a living wage.’ “