Online music site Pandora has been saved from closure after the music and internet industries finally reached a deal over royalty rates. It’s a major boost for the online radio industry, though there’s still a significant disparity between online and over-the-air radio.

Online radio in the US is governed by the Digital Millennium Copyright Act and operates under legally mandated royalty rates. In early 2007, the panel of judges which sets these rates decided on a steep rise which would take royalties from 0.08 cents to 0.19 cents per song starting next year.

These seemingly tiny sums mount up: in Pandora’s case, it would have taken the proportion of its revenue which it had to spend on royalties from just under 30% to around 70%, making the business financially unviable.

After a lengthy debate, which included Pandora and other online stations successfully lobbying Congress for extra time to iron out a deal, the record industry has agreed to a plan. As might be expected from such intense negotiations, it’s a far from simple compromise.

The key points are that online streaming services earning more than $1.25 million a year will either pay royalties of 0.093 cents per song (rising gradually to 0.14 cents in 2014), or a flat rate of 25% of revenue, whichever is the higher figure. Smaller firms won’t pay per-song revenues and will usually pay a smaller percentage of royalties, though some firms may pay based on their overall costs.

The deal only applies to sites which solely deal in streaming music and don’t sell other goods or services. In theory, internet firms don’t have to sign up to the deal and are open to attempt separate negotiations. However, assuming the deal gets Congressional approval (which appears likely), any firm has an automatic right to sign up for the new rates and can then operate without fear of the music industry pursuing them for extra cash.

As Pandora will likely wind up having to pay the per-song royalties, it’s introducing user fees for the first time. Users will still be allowed free accounts, but these will be limited to 40 hours per month. Those who want to exceed this limit – which around 10 per cent of users currently do – will have to pay a 99c fee each month.

Despite the deal likely saving his business, Pandora owner Tim Westergren remains disgruntled that internet radio stations must pay royalties while over-the-air stations don’t pay any fees to music companies. He’s still lobbying for a system by which all types of radio pay the same royalties.