I know I posted this as a reply to a previous posters forum comment, but I think it's important enough to get a blog posting... so here:

I'm on the technology industry side of the negotiations with the entertainment industry frequently on this, so here's the current take (but I am not a lawyer... just on the business side ;)) Basically, it is illegal to play copyrighted music without a license or release to do it... you'd have a hard time convincing anyone that a distributable medium like a podcast is covered by "fair use." However, the chances of you getting prosecuted for doing it RIGHT NOW are basically nil. Why? The music industry actually quietly likes podcasts: they view it as a liberation from the traditional structure of mainstream broadcast radio and a potential stream to get music from artists that may never get radio play out there so that they can get more interest and thus revenue from their product. BUT... as with any disruptive technology... they have not figured out how they want to make money out of it and thus have no clue how to set up a license fee structure amicable to podcasting... yet.

Now, I do play full copyrighted songs in my podcasts and I do some DJ-style mixing of them. There is no loophole for DJ'ing like the previous poster said: we're all playing by the same rules and what we're doing is probably illegal. But, no entity has come out and established what the rules are. ASCAP, BMI, and SESAC (the music publishing orgs) have updated their statutory licensing agreements to cover podcasting. However, it's not clear whether you're actually obligated to pay them anything because the original laws that set up statutory licensing were made way before podcasting. And, you have to figure out which music pub. has the rights to the song you want to play... which is a pain in the butt! BUT, they are only one part of the puzzle. You also need to acquire rights to the recording, and it's a toss up who's rights you need to acquire. Most legal experts I've reviewed and heard says both the provisions of the DMCA and RIAA's current licenses don't take care of podcasts because they are assumed to be an "interactive" medium. This would mean that the license should actually come from the Harry Fox Agency which manages licenses for "mechanical playback" of recordings. But, so far, Harry Fox is not even touching podcasts... they are taking a "wait and see" approach.

Several large podcasters and associated technology companies are right now in the process of negotiating with the RIAA, ASCAP, SESAC, BMI, and Harry Fox to come up with SOME model that makes sense for podcasting. The current DMCA legislation is just absolute crap and had no forethought for something like podcasting. The music industry would rather head things off at the pass and come up with a legitimate business model that makes everyone happy versus heading back to the legislative drawing board. However, keep in mind that this doesn't even touch the mine field that is international copyright... and I personally would like to see this issue resolved as the bulk of the music I play is actually covered by non-U.S. copyright!

This likely means that in the near future podcasts that contain copyrighted material will likely need to have some sort of DRM protection to be legal, be available only to paying subscribers, and producers will have to pay some nominal fee for the rights to produce their cast with copyrighted material. I am quietly working on a business plan to solve this conundrum with a "one stop shop" if you've got some seed money and are interested ;)

Here's my advice and feel free to take it with a grain of salt, because none of this technically makes you "legal":
1) The more you post-produce your podcast so that it is technologically difficult to extract a perfect full-length track, the better. DJ-style mixing obviously helps in this regard. So does keeping your 'cast at 128 kbps MP3 and below.
2) Don't be a rogue. Once the licensing fee structure becomes more clear, be willing to pony up.
3) Make sure that at least the music you're playing you actually paid for yourself.
4) Once you start hearing of someone getting sued over a podcast, be ready to bid your hobby good-bye until the rules become clear.

Basically, spend some time to actually make a decent podcast product and keep abreast of the changes coming about and be ready to pony up... not protest... they are not evil, it's just business ;) They have a right to their money and the only obstacle is them coming up with clear rules and a streamlined process to get their money. Until then, realize you are operating on the fringes and make sure your conscience is OK with doing something that is probably illegal. Lawsuits are not the answer and the music industry knows this... that could just get them back into the legislative quagmire which would just make the whole podcast phenomenon miserable... not to mention give them worse PR than they've already got over the Napster and Kazaa mess.

Hope this helps,
Ms. Shenida