The Motley Fool on Internet Radio vs The Music Industry

I often suspect the music industry also fears losing another element of its old-school model: finding mediocre musicians that appeal to only the most mainstream tastes and trends, and then pushing them down as many throats as possible.
-The Motley Fool

Excerpts from:
Putting Pandora Back in the Box
By Alyce Lomax
August 22, 2008

This innovation must be stopped!
As usual, the music industry seems terrified of any innovation that might not cut its members as fat a royalty check as they'd like. Thanks to record labels' considerable whining, government and the music business seem to have joined forces to destroy popular services like Pandora, Last.FM, imeem, and Slacker.

The Copyright Royalty Board has upped the royalties Internet-based radio outfits must pay on songs, increasing the royalties to 19/100 of a cent per song per listener in 2010, from 8/100 of a cent per song per listener in 2006. In addition, retroactive fees mean that Pandora will have to pay 70% of its projected 2008 revenue, which appears to be a likely doomsday scenario for the service.

So far, the new royalty fees aren't even consistent. Traditional radio stations pay no royalties, and satellite radio pays a less burdensome percentage than Internet radio...

I think many consumers are catching on that when the industry howls about defending artists, it's really just talking about defending the major labels' broken business model, which has been under constant assault ever since the world went digital...

Positively Jurassic
The RIAA and its friends like SoundExchange are populated by companies like Warner Music Group (NYSE: WMG), Sony (NYSE: SNE) (which recently announced plans to buy out BMG's share of the two companies' joint music venture), EMI, and Vivendi Universal. As far as I'm concerned, their draconian reactions to music's continuing evolution make them great examples of the types of companies and industries I avoid.

Services like Pandora do exactly what many music lovers want: introduce them to artists they may never have heard of otherwise. That innovation should be celebrated, not condemned. It promotes music that's geared to what we like, rather than forcefeeding us somebody else's tastes or marketing budget.

I often suspect the music industry also fears losing another element of its old-school model: finding mediocre musicians that appeal to only the most mainstream tastes and trends, and then pushing them down as many throats as possible.

As an investor, I do all I can to avoid companies that refuse to evolve, and thus find themselves on the wrong side of creative destruction. For the most part, I think the media industry fits that niche. Any company or industry that can perceive massive opportunity as a threat should strike investors as a long-term loser.


full article:
The Motley Fool
http://www.fool.com/investing/general/2008/08/22/putting-pandora-back-in-the-box.aspx

The Internet radio royalty crisis may be coming to a head...

As I see it, this RIAA/SX/CRB royalty issue is a power grab - just like Prohibition.
Prohibition was never about getting people to quit drinking - although that mantra certainly made a good sound byte - what Prohibition was really about was WHO was going to control the industry.
-R

Long but worth the read...

From: Kurt Hanson, Publisher
RAIN: Radio and Internet Newsletter
http://www.kurthanson.com

The Internet radio royalty crisis may be coming to a head, as one of the country's
most-beloved webcasters, Pandora, tells the Washington Post that it is on the verge
of shutting down over the issue.

As you know, the problem in a nutshell is that whereas all other forms of radio
in the U.S. and around the world pay about 3%-5% of their revenues as a royalty
to songwriters and 0%-7% of their revenues as a royalty to labels and performers,
last year the U.S.'s Copyright Royalty Board (CRB) set that second royalty rate
for Internet radio to the equivalent of 70% to 300% of revenues.

While there's a judicial appeal of this decision in progress, plus occasional
negotiations going on between SoundExchange (representing labels and musicians)
and various subsets of webcasters, plus bills introduced in Congress that would
roll back the CRB decision, none of these fixes may happen before Pandora's
venture capitalists decide to give up and pull the plug on the service.

What are they thinking?!

I've been talking to several journalists this week about the issue, and the
question they always ask me is this: "Trying to bankrupt your industry doesn't
make any sense! WHY is SoundExchange doing this?"

As near as I can read the situation, there are several phenomena at play simultaneously
that explain their seemingly-irrational behavior:

CONFLICTING INTERESTS WITHIN SOUNDEXCHANGE: The SoundExchange board consists of
people representing a variety of different interests - major labels, indie labels,
and musicians - and thus may be at an impasse.

Internet radio is clearly good for musicians and good for indie labels, so the major
label guys may well be thinking, "Anything that's good for them might not
be as good for us." My guess is that these internal conflicts may be blocking
any productive movement.

RECORD INDUSTRY LAWYERS RUNNING THE PROCESS: Music industry lawyers have a reputation,
deserved or not, of being greedy, litigious guys who only think about short-term
victories and power plays, not what's in their industry's long-term best
interests.

These are the same lawyers who, when they were trying to shut down the original
Napster in 2001, were told "Don't do it! Napster is controllable; if you
shut it down, you'll unleash a new generation of peer-to-peer services that
will be uncontrollable. You'll be in much worse shape!" But they did it
anyway. For all intents and purposes, it's really record company lawyers who
unleashed BitTorrent and Limewire on the world.

And these are the same lawyers today who are suing grandmothers and poor people
for thousands of dollars every week in file-sharing lawsuits, really damaging their
lives, even though they're doing hardly anything to get any worthwhile PR benefit
from it.

As long as it's these guys charged with running this process, we may see that
type of behavior.

FEAR OF THE NEW: Here's a theory: The executives running the music industry
don't like new technology or new business models in any way, shape, or form,
so in their minds they've lumped us in with home-taping and CD-ripping and file-sharing.
("Anything new is bad.")

A BIGGER PATTERN OF COPYRIGHT LAW ABUSE: Copyright law was originally designed to
benefit the public - by balancing the needs of creators and distributors. What we're
seeing here, specifically in the DMCA, is part of a movement by the entertainment
industry to subvert copyright law to simply maximize the revenues of copyright owners,
with no more concern for copyright users or the general public.

That may be why SX's John Simson told the Senate Judiciary committee that the
traditional 801(b) standard for rate-setting, which balances the needs of copyright
owners, copyright users, and the general public, is "outdated."

BIG LABELS' DESIRE TO MAINTAIN POWER & CONTROL: Independent labels and artists
generally welcome the opportunity for the fair and open access that Internet radio
offers to all artists and labels. (Prior to Internet radio, radio airplay could
be accessed only by the very small number of major label artists who had the benefit
of traditional big budget record industry promotion to large broadcasters.)

As musician Matt Nathanson testified at the recent Senate Judiciary hearing, Internet
radio has broken the huge bottleneck for artist development and growth that this
system represented. On the other hand, the four major labels and their trade association,
the RIAA, see the new level playing field that Internet radio establishes as a threat
to the old system which they controlled and dominated.

The four major labels seem to have a collective blocking veto over all royalty decisions
at SoundExchange; as a result, their view has dominated SoundExchange's position,
even at the expense of its other members.

WE'RE MERELY A STEPPING STONE TOWARD BROADCAST RADIO: This whole conflict may
very well simply be part of a longer-term game plan on the part of the record industry
to try to get a performance royalty out of broadcast radio. In other words, the
big labels may be willing to kill our industry just to give themselves a better
negotiating position when they go after that industry.

By the way, as has been noted here in RAIN before, the National Association of Broadcasters
(NAB) has been very tame in its support of webcasters, even though most of its members
are streaming, perhaps conflicted because they see Pandora, et al., as potential
competitors someday. However, this weak support is going to come home to roost soon,
as SX says that for "parity" reasons broadcasters should pay what webcasters
are paying.

If Pandora is forced to shut down, the outrage will be huge - among consumers, journalists,
bloggers, working musicians, and even Congressional staffs.

That will be the tipping point that either (1) triggers a consumer backlash against
the RIAA, which, if expressed in the form of a boycott, as some bloggers have proposed,
could cost the industry hundreds of millions of dollars in record sales, (2) leads
to belated reasonable negotiations from SoundExchange, and/or (3) spurs Congress
to pass the Internet Radio Equality Act.

But Pandora doesn't deserve to be the sacrificial lamb that keeps other webcasters
alive. They're loved by millions of listeners, and they've been great for
musicians, fair to labels, and generous to their fellow webcasters.

Either SoundExchange or Congress should act quickly enough to stave that outcome
off.

Sincerely,

Kurt Hanson, Publisher
RAIN: Radio and Internet Newsletter

P.S. In RAIN today, SoundExchange's John Simson voices his opposition to a "percentage-of-revenue"
royalty rate for webcasters, but Kurt Hanson points out that labels and artists
get far more from net radio play than mere royalties. Also, a PC Mag columnist wonders
why no one considers how the webcast royalty impasse affects the public -- the supposed
beneficiaries of copyright.

Get the details in today's issue of RAIN: Radio And Internet Newsletter, at
http://www.kurthanson.com.