The Internet Radio Dilemma
Tuesday, April 7, 2009 at 3:10AM | Chris Purifoy ..:: 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.
- SoundExchange
- DiMA
- 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?
- Subscription fees
- Banner Ads
- Revenue share from digital music sales
- 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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Reader Comments (10)
Very thorough! Thanks for taking the time to put it all in one place.
This is a great overview of the concepts. Good luck with this website. I think it is very much needed.
I can't help but feel this post is a bit one-sided. After all, isn't DIMA being a bit greedy. They did reject a plea bargain given by SoundExchange just a few weeks ago thereby confirming the current rate structure set up by the CRB in 2007. Truth be told, the heads of DIMA probably don't care that much for the small webcasters b/c it is run by gigantic corporations that are making profits elsewhere (Apple, Yahoo, Microsoft, AOL). Furthermore, Soundexchange represents the future of digital collections going forward. Why wouldn't it want the highest rates possible? Especially when they already have the CRB on their side. It only makes sense that they want the Webcasters to pay big rates b/c they are using content that is extremely valuable, even though that value is being reflected in record sales (after all, can you go a sporting event without hearing "We are the Champions").
The point is, no one has figured out a way to monetize streaming radio. Without asking for big money from the webcasters artists would be affectively saying "We are satisfied with the current technology and business model and will deal in this environment." Artists and labels want a better business model, this is akin to giving the major US automakers huge bailouts to support decaying business models that don't work.
Heads up, keep an eye on Goom Radio at http://www.goomradio.com/us/ these guys are currently getting some serious funding through VC with an ad supported concept. Though details are forthcoming it is clear that this company is doing things a little differently and garnering quite a buzz. They are incorporating traditional radio formats with user generated stations and taking the concept online AND offline. Companies like this that can see the current rate structure and form its business model to fit the structure will provide bigger payouts for artists and labels.
BTW, it isn't the music pirates that are causing turmoil in the current music market, it is the labels failure to teach consumers new consumptions habits, ie legal downloading. Napster was just a response to technology, which the labels have thus far failed to fully respond to. For example, lower the prices of lower quality mp3s, not price they comparatively to CDs.
Any way, enough of the rant...if you want more info on my take send me an email at adambeasleymusic@gmail.com or visit www.digitalmillennium.org
A lot of spin being repeated here!
What the DIMA is trying to do is create a rate that is determined by lobbyists and campaign contributions rather than by sitting down with labels and negotiating a mutually beneficial royalty deal. Every net-caster has the right to negotiate their own deal and it's no more of a hassle than getting the free CDs they all expect.
Judging by their promo, I don't think Groom really gets it. Creating your own station is better than having advertisers choose music according to focus groups but not nearly as compelling as radio programmed according to actual sales.
To me, internet radio is a shared experience and should be viewed as both a source of revenue and a source of promotion. In my opinion, I think the solution is simple, democratic and basks in the spirit of this new era. It should be a 50-50 net profit share. 50% of the revenues the service earns from subscription, ads or what have you goes to the service and 50% to the content providers. The in turn split the fees 25% to recording and 25% to publisher who all receive an equal, pro rated share (there must be equality between major and indie). Penny rates are archiac and self-defeating.
While I applaud the sentiment of wanting to "DO" something....anything...to solve this dilemma, the nature of the discussion thus far has utterly confused and muddled together problems with solutions, portraying one as the other.
It is naive.
The answer is fairly simple, the key to understanding it is to think much larger than yourself.
Echoing Bob Ohlsson, the internet is not a revenue stream. It is not a business model. "Going internet" with your music is not a business model....any more than "use the phone" is a business model. The internet changes the nature of the technology of music distribution, removes some of the "false scarcity" that used to drive the price of music...but it is NOT a business model.
dwoz
I would suggest that "internet radio" is failing not because of adversarial greed, but because it is a fundamentally flawed concept.
Let me ask this: "what is the 'product' of regular PlainOldAirwavesRadio?" THe answer is surprising. YOU are the product. The listener is the product! The revenue model of PlainOldAirwavesRadio is to take a public, subsidized resource (a radio frequency), aggregate and filter content, thus attracting an audience. The audience is then for sale to the advertisers.
What is the "product" of internet radio? The non-compelling argument thus far is that it is promotion for artists. I don't buy it for a second. That argument masks the fact that internet radio wants "almost free" content in order to aggregate an audience which will subsequently be for sale to someone.
Free content.
Free use of MY content.
Free use of BONO's content.
etc.
I want free use of a new BMW on free roads with free gas. I don't think I'll be able to get it.
My cynicism isn't born of pessimism, it's born out of my wish that the discussion rises out of the naive level it is mired in.
dwoz
How about "free" internet TALK radio, in which the talkers, the on-air personalities, the writers, the conetent CREATORS, don't get paid?
Surely that's cheap and easy to produce and should save the medium.
Right?
what? you can't GET compelling content or charismatic on-air talent for free? for the EXPOSURE?
why not?
Who says Internet radio is failing?
All of the whining about failing came after the DIMA failed to prove to the copyright judges that it is failing and needs some kind of a break on royalty rates.
Adam Beasley:
"BTW, it isn't the music pirates that are causing turmoil in the current music market, it is the labels failure to teach consumers new consumptions habits, ie legal downloading. Napster was just a response to technology, which the labels have thus far failed to fully respond to."
Content providers are outnumbered a thousand to one by the ripoffs who have been teaching consumers (not paying customers) new consumption habits, namely, steal with impunity. Can you show me a way that people can be educated to pay for what they can grab without paying for it, particularly when numerous tech sites are spreading intellectually bankrupt rationalizations for theft? I didn't think so.
Napster wans't a response to technology, it was a wholesale irresposible abuse of technology borne from complete ignorance of the law and of the dues that are paid in order to bring great music to the world.
If a person comes into a bank with a club and threatens people with a wooden club, does everybody just run away orgive up, or do they formulate a stategy to deal with the situation?
If the same person comes in to rob the same bank with superior technology, i.e. he has an M16, and he blows your head off because you looked nervous, and because he thinks the banks have too much money anyway, it it your fault because you "failed to fully respond to the technology"?