ederal copyright regulators set a critical ground rule for the fledgling Internet radio industry yesterday, cutting in half a proposed royalty rate that Internet companies must pay to record labels.

Still, the adjustment fell short of what many said would be necessary for them to stay in business. Under the ruling, radio companies will pay the recording industry 0.007 cent each time they play a song over the Internet. Webcasters, who have been slow to find advertisers despite drawing large audiences, had hoped that the rate would be set at a percentage of revenue, a move that they argued would allow them time to build a new outlet for music.

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"For a lot of independent Webcasting companies, this is going to take them out," said John Jeffrey, executive vice president of Live 365, a network of 47,000 stations. "There's going to be less music put out on the Web, and that's not good for artists or anyone else."

But James H. Billington, the librarian of Congress, who ruled in consultation with the Copyright Office, said a percentage-of-revenue rate would not have been fair to the record industry. Because "many Webcasters are currently generating very little revenue, a percentage-of-revenue rate would require copyright owners to allow extensive use of their property with little or no compensation," the report said.

The ruling left record labels unhappy, too. The Recording Industry Association of America, which represents the major record labels, criticized the rate as too low. The association has long argued that Webcasters should pay copyright holders just as they pay their bandwidth costs and salaries.

"The import of this decision is that artists and record labels will subsidize the Webcasting businesses of multibillion-dollar companies like Yahoo, AOL, RealNetworks and Viacom," Cary Sherman, president of the recording association, said in a statement, adding that the rate "simply does not reflect the fair market value of the music as promised by the law."

The decision by the librarian of Congress signals an end to a long struggle between the record labels and Internet broadcasters that began with a 1998 copyright law in which Congress gave Webcasters an automatic license to play copyrighted music so long as they paid a royalty fee to be agreed on later.

The deal was seen as a necessary trade-off by an industry with little influence, even though conventional radio broadcasters have never paid a royalty for using sound recordings because of the promotional value to record labels of having their songs played over the air. Like broadcast radio stations, Webcasters also pay about 4 percent of their revenue to compensate composers and music publishers.

But the record labels and Internet companies failed to agree to a rate, and the task was handed to an arbitration panel appointed by the Copyright Office last summer. Since many companies had declined to negotiate with the recording industry, its conclusions on a fair rate were based largely on one major deal between Yahoo and the industry's trade association.

In February, the panel suggested splitting the difference between the two sides' proposals, with Internet-only Webcasters paying 0.0014 cent for each song played and with terrestrial broadcasters retransmitting programs on the Internet paying 0.007 cent.

Small Webcasters protested that the rate would dwarf their total revenues. In rejecting the arbitration panel's report, Mr. Billington said that parts of the recommendations were "arbitrary or contrary to law." The new rates do not distinguish between retransmissions of traditional radio broadcasts and Internet-only streaming.

The first payments for companies that play music online are due in November. Back payments will also be due for any music played online since Oct. 28, 1998. Either side can appeal the decision in court.