Even if Royalties for Web Radio Fall, Revenue Remains Elusive

From The New York Times

October 27, 2008
Even if Royalties for Web Radio Fall, Revenue Remains Elusive
By CLAIRE CAIN MILLER

After a 19-month battle over Internet radio royalties, a truce between record labels and webcasters is finally in sight that would allow Internet radio start-ups to eke out an existence for at least a little while longer.

The two sides have signaled that they are nearing a compromise that would lower the royalties that online radio stations pay artists and labels for the rights to stream songs to listeners. On Sept. 30, they jointly persuaded Congress to pass a bill that would put into effect any changes to the royalty rate to which the parties agree while lawmakers are out of session.

Still, even if royalties decrease as expected, webcasters must figure out how to bring in enough revenue to cover the costs.

Whether run by scrappy start-ups or big media organizations, Internet radio stations have never found a way to make substantial money from streaming music that listeners expect to hear free. Modest advertising was enough to sustain many of the stations when royalties were a pittance, but online audio advertising is in its infancy and is likely to suffer as companies cut spending in the economic slowdown.

“Most of the operators don’t have enough audience to generate the kind of revenues they need to cover their expenses,” said Dave Van Dyke, chairman of Bridge Ratings, which analyzes the radio industry. “Only a handful can actually monetize these types of things.”

The royalty war began in March 2007, when the federal Copyright Royalty Board changed the fees that Internet radio stations must pay to stream music. Previously, bigger webcasters with significant advertising revenue paid 0.0762 cents a listener for each song, and smaller stations with less than $1.25 million in sales paid 10 percent to 12 percent of their revenue. The new policy requires that all stations pay a per-song fee that increases each year until 2010, when it will reach 0.19 cents. Until 2010, small stations can still pay a percentage of revenue.

Webcasters argue that the per-song fee is unfair, especially when compared with competitors. Satellite radio stations pay 6 percent of their revenue in royalties, with the rate rising to 8 percent in 2012. Broadcast stations pay nothing to artists and labels, under a longstanding agreement based on the notion that radio provides free promotion for their work.

“It is completely unaffordable for Internet webcasters,” said Tim Westergren, the founder of an Internet radio start-up, Pandora, who has become the de facto leader of webcasters fighting the royalty rates. He has said that the new rates would eat up $17 million of Pandora’s $24 million in revenue this year, forcing the company out of business, though he is now optimistic that a new royalty agreement will allow webcasters to pay less.

SoundExchange, the nonprofit organization that represents the artists and labels and collects and distributes the royalties that webcasters pay, said it was up to the stations to bring in enough revenue to pay musicians. Right now, webcasters are “basically giving the music away,” said Richard Ades, a SoundExchange spokesman.

Internet radio stations face a Catch-22 as long as they must pay royalties on each song they stream instead of paying a percentage of revenue, said Dave Goldberg, an entrepreneur at Benchmark Capital and former vice president and general manager of Yahoo Music. To earn significant advertising revenue, they must offer up large audiences to advertisers. However, the bigger their audience, the more fees they must pay.

When Mr. Goldberg was at Yahoo, for example, 5 percent of users generated 40 percent of costs, he said. “Unfortunately, we were incentivized to not have them listen so much, because we couldn’t sell enough ads against those few people.”

Advertising is also hard to come by for small stations without large listener bases. SomaFM, a San Francisco-based Internet radio station with 450,000 listeners, found it could make more money by soliciting listener contributions, like public radio, than it could from advertising.

Even so, a plea on the site says the station will fall $35,000 short of its budget this year. Last year, the station made a $20,000 profit on $250,000 in revenue and put all of it into improvements for the station, said Rusty Hodge, the site’s founder.

The business is costly even for big companies. In June, AOL teamed up with CBS to combine Internet radio offerings, in part because AOL found it challenging to monetize its 250-channel radio service, said Lisa Namerow, vice president of AOL Radio. CBS now sells ads for AOL’s stations.

Mr. Westergren said Pandora could stay afloat on ad revenue if royalty rates were not so high. But on Oct. 16 he laid off 14 percent of his staff, citing “the current economic turmoil.”

In general, luring advertisers has been challenging for Internet radio sites. Display ads, the only type Pandora runs, do not work well with radio, Mr. Van Dyke said. “Most people, frankly, who are listening to Internet radio minimize the browser so they’re not seeing the ads,” he said. Furthermore, many people tune in on mobile devices like the Apple iPhone, making it even less likely they will see an ad.

Stations that insert audio ads into the listening stream risk alienating users. When SomaFM tried running them, it received many complaints and listenership dropped off sharply. “Since there are services out there that are ad-free, there is a reluctance to be the first one of the major ones to put an in-stream ad in,” said Doug Perlson, chief executive of TargetSpot, the largest Internet radio ad network.

TargetSpot offers advertisers the ability to fine-tune pitches based on sex, age, location and favorite music genres — a level of specificity unavailable from broadcast radio. Over the long haul, Mr. Perlson said, he expects such specialization to take off.

Charging users to listen has not proved to be profitable. Pandora and AOL tried it for a short time, but could not get people to sign up.

Online stations do make a bit of money when listeners click through to Amazon.com or Apple’s iTunes to buy a song they have heard, though such referral fees account for less than 5 percent of revenue at most stations.

If Web radio fades away, the biggest victims could be the independent musicians who are not played on most broadcast stations.

Josh Fix, a San Francisco musician who lived in his office for a while to save money, credits Pandora for raising his profile. He recently signed on with an independent label and will embark on a European tour in February to promote his album, “Free at Last.”

“It’s almost impossible to get on the radio,” he said. Online, though, “someone hears the music on Pandora, blogs about it and then others pick up on it.”

Mr. Goldberg of Benchmark Capital said the labels would be hurt if Internet radio disappears and the 54 million listeners go elsewhere. “People are still going to listen to free music,” he said. “They’ll just go places where the labels don’t get paid.”

Discovering Krautrock -- in Germany

Discovering Krautrock -- in Germany
By Dave Graham
Thu Oct 2, 7:15 AM ET

Few scenes in rock history have won such fame abroad yet been so overlooked at home as the wave of music West Germany spawned in the late 1960s known as Krautrock. Four decades on, that is changing.

As the maverick rockers enter their 60s and 70s, interest in the bands is reviving in Germany: new documentaries are being made, and a book hailed as the first comprehensive overview in German hit stores this summer.

Devotees of British rockers Oasis are also receiving a dose: guitarist Noel Gallagher said recently his band's new single had a Krautrock sound.

"We're more accepted now," said Mani Neumeier, 67, a leading light of the era and drummer of underground stalwarts Guru Guru.

"We're doing more gigs than we have in 20 years. It's partly due to our 40th anniversary, but also because Krautrock has become more fashionable again in the last three to four years."

Nearly two decades since reunification, growing political self-confidence has helped nurture interest in Germany's postwar musical legacy, said Henning Dedekind, author of "Krautrock," the 300-page German cultural history of the scene.

"For years Germans had an awkward relationship with their cultural past, but it's changing," he said. "Plus we know all about Elvis and the Beatles already, but not the German bands."

The myriad output that at times defied categorization often struggled for acceptance, even though the student protests of 1968 and the hippy era were catalysts for major change.

"The prophet is sometimes a nobody at home," said Lutz Ulbrich, guitarist of Agitation Free, one of a handful of bands then holed up in West Berlin, right up against the Iron Curtain.

Elsewhere in Europe, the new gospel spread quickly with the backing of DJs like John Peel. Generations of punk, indie, synth-pop and techno acts have hailed the German sounds that were by turns unhinged and rigidly disciplined.

Julian Cope, who revived interest in the music with his 1995 book "Krautrocksampler," said it was unique on the continent.

"I can think of no other single musical time that sustained such a high-achieving experimental scene," he said. "It was perhaps because of their collective need to dance themselves out of the Hitlerian malaise rather than wallow in self-pity."

UNCLE ADOLF'S DUST

From Amon D��l II's thundering psychedelic garage to Cluster's hypnotic electronica and the jagged sound collages of Faust, Krautrock's impact has been cited on acts as diverse as David Bowie, Aphex Twin and Queens of the Stone Age.

Contemporaries like Hawkwind were among the first to catch the bug: the Teutonic grooves remain infectious today.

"A big influence," Steve Terebecki, bassist of Texan trio White Denim, said of Krautrock. "I'm not sure who the superfan is, but I'm always pushing Kraut on the other two."

Though Krautrock has become a byword for musical excellence among fans, few of its architects relish the label, which began life as a "pejorative remark from some British journalist" according to Amon D��l II guitarist John Weinzierl.

The unique approach adopted by the bands -- and the home audience's misgivings about their music -- were both part of the country's postwar search for identity, said author Dedekind.

"The public wanted to see themselves as international citizens to distance themselves from being German," he said.

Bands were also anxious to direct their amps and fuzz boxes against the political establishment, which in 1968 still contained many Nazi-era officials, said Guru Guru's Neumeier.

"There was a thick layer of dust everywhere left by Uncle Adolf, and we wanted to really blow it away," he said.

Anglo-American domination of the record industry was a further obstacle to German acts, which needed time to find their own voice in the Cold War aftermath of the Nazis' defeat.

"After the war, we had no self-confidence to put down roots on our own turf, musically or otherwise," said Holger Czukay, bassist for Cologne-based Can. "It only really began in 1968."

By the time the new dawn broke, German acts had absorbed the impact of everything from free jazz, rock'n'roll, psychedelia, and British beat to avant garde composers like Karlheinz Stockhausen. And they were determined to sound different.

"Everything I learnt from Hendrix and Clapton was out," said Michael Rother, guitarist of Duesseldorf duo Neu!, whose Motorik beats became a hallmark of the period. "Blues was forbidden. That wasn't me. Mozart and Chopin: that was European music."

SUPERHUMAN FLAVOURS

The iconography of the musical rebirth that followed took on a superhuman flavor in early albums.

Guru Guru's debut urges mankind to prepare for the arrival of UFOs. An image of comic book supervillain Galactus "The Devourer of Worlds" emblazons the cover of Can's first LP. Amon D��l II named their opener "Phallus Dei" (God's Penis).

Resting chiefly on about 100 albums issued by the late '70s, the international reputation of Krautrock has cast a long shadow over later acts at home, many of whom have recently leant more toward the domestic, German language market.

Eight Krautrock LPs featured in a recent "100 top albums of the 1970s" list by U.S. online music site Pitchfork Media. Four German albums in total made the site's '80s and '90s lists.

The spirit which fired bands 40 years ago is now all too often absent among their successors, said Guru Guru's Neumeier.

"A lot of bands just want a hit, so they don't take many risks," he said. "We need to see a bit more idealism."

Many German musicians of the era blame money for corrupting modern music, and some, such as Amon D��l II's Weinzierl, believe capitalism has brought society full circle since 1968.

"It's like Monopoly. Near the end of the game when one person owns everything, the rest get up, flip the board over and shout 'kiss my ass!'" he said. "I see parallels to back then, only this time I fear it will be much more violent."