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.”
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.”
posted by Rocksanne at 11:41 AM
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