The Internet Radio Dilemma

..:: This article provides a deeper understanding of one of the issues outlined in:
..:: Defining the Music Industry Crisis.


"#1 Internet radio is the future, yet providers can not sustain growth due to growing taxes on streaming music and a lack of clear revenue models."

                                                         - Defining the Music Industry Crisis.


I will try to provide a clear understanding of the ongoing Internet radio dilemma. There are two basic problems that need to be individually analyzed, the high royalty rates and the lack of clear revenue options.


1. High Royalty Rates

First, there are three items that need to be introduced before you can fully wrap your head around this issue.

  1. SoundExchange
  2. DiMA
  3. The Internet Radio Equality Act

SoundExchange represents the recording industry (record labels and artists for the most part). They are what is known as a Performing Rights Organization, much like ASCAP, BMI, or SESAC (who represent the publishers and songwriter). The major difference however, is that they specialize in digital transmissions (Satellite & Internet Radio among other streaming music outlets). They are a non-profit organization with the sole purpose of collecting royalties for their clients.

DiMA, or the Digital Media Association, represent the Internet radio providers (Pandora, MTV, Real Network, etc). They are the foremost authority in digital music and video policy. They act as negotiators and lobbyists for the leaders in digital technology.

The Internet Radio Equality Act is a bill that the DiMA have been trying to pass through legislation for some time now. May 1st, 2007 to be exact. If passed, it will basically offer Internet radio providers a standard for royalty payments reasonable enough to allow the industry to continue growing versus going bankrupt.

So what's the big deal?

In a nut shell, the recording industry wants to continue pushing the royalty for streaming music higher and higher each year, while the Internet radio providers want to pay a standard reasonable rate that will allow them to continue growing. So, why is SoundExchange being so difficult?

Well first lets not forget that the industry as a whole is suffering. It's profits are down more than 50% from what they were at it's peak in 1999. Many consumers are trading in their shopping carts for Pandora or another Internet radio provider that offers an on demandesc business model. How do I know this? Aside from all of the data backing up the claim, I'm listening to Pandora right now and I haven't bought a new album in several months. The truth is, I listen to Pandora every day, all day long while I work. I imagine others are doing the same. I believe the recording industry recognizes how prevalent it has become and feels that the Internet radio providers need to offset their losses.

The problem however, is that it is not the Internet Radio providers fault. They were not the ones that stole customers from SoundExchange's clients. The culprit is still the music pirates. The music industry, however recognizes that there is no monetary relief to be had from policing the sea for pirates. They have been forced to seek aid elsewhere. The obvious target is the Internet Radio providers. If SoundExchange clients were still making profits they would not be so inclined to fight against this new wave of radio. So in the end, it's our fault for steeling music.

A few facts:

Up until 2006, Internet radio providers payed $0.000768 for each song played over the air. Since then, each year the royalty has gone up a bit. Currently the rate has more than doubled to $0.0018. In addition, the rate has not yet reached any kind of ceiling. It will continue to climb in the coming years if a settlement can not be negotiated.

To give you an idea as to just how much this affects a growing station, Soma-FM, a collection of eleven independent music stations out of San Francisco, put this up on its home page:

"The new fees are a staggering increase over our previous annual royalty rate of about $22,000 to over $600,000 for 2006. And the fees are even higher in 2007. Based on our current listenership, they'll be over $1 million dollars for 2007! (Which is 3-4 times what we hope to raise in 2007.)"

Imagine how much a major station like Pandora has to pay. It all boils down to good ole cashola. The recording Industry needs it. Internet radio providers don't have it. Quite a dilemma.

2. Lack of Revenue Options

So what are the most prevalent revenue options for Internet radio providers so far?

  1. Subscription fees
  2. Banner Ads
  3. Revenue share from digital music sales
  4. Audio Ads

So with so many options why can't Internet radio survive the new policies? Well first of all, subscriptions are very limited. Some providers, like Pandora, offer a subscription service that eliminates banner ads. But the truth is, no one minds banner ads being displayed so subscriptions result in little to no revenue. Banner ads by far bring in the majority of revenue for providers. The problem is that listeners tend to play the station in the background, therefore the ads go unnoticed and therefore unclicked. This greatly reduces the amount of revenue providers bring in.

Allowing listeners to purchase songs from partner companies like Amazon and iTunes generates some revenue, however keep in mind that buying music is at an all time low. With that in mind, no company can sustain themselves purely on music sales. Lastly, audio ads offer a great way to bring in revenue. The problem is that the Internet radio model up until now has been free of audio ads, which has been part of the charm. Some stations have adopted the audio ad model or at least have run trials to see what the listener reaction would be, and it does not look good. Bringing on an audio ad model has proved to greatly decrease the number of listeners.

The Internet radio industry has been fighting for life and without clear revenue models it may be lights out. Soon I will begin providing what I think are solutions to some of these dilemmas as well as continuing on my journey to analyse the issues at hand. Stay tuned!

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