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Net radio is going to die a slow death in the United States

Take a closer look at what the press reported and what is true/false about the webcasters royalty settlement.

From MichaelRobertson.com:

Sadly, Pandora Is Still Going Bankrupt....
July 8th, 2009

As I've written about for the Wall Street Journal, the online radio business is doomed because the required per song payment to the record labels is too high to ever have a profitable business. Recently a new set of rates were announced which press reports said "averted the royalty crisis". It's true the new rates are lower, but they are nowhere close to allowing a viable web radio business. Here's a closer look at what the press reported and what is true/false:....

Webcasters can pay 25% of their revenues.
Answer: FALSE....

While a surprising number of news outlets (The Register, Associated Press and countless blogs) declared this as an option for larger webcasters, it's not accurate. Webcasters are required to pay 25% of revenues or a per song fee WHICHEVER IS HIGHER. Because these royalties apply only to pure play webcasters (meaning they play music all the time), there is no reasonable scenario in which the per song royalty will be lower than 25% of revenues, rendering the revenue share component moot. This means webcasters will always end up paying higher than 25% of their total revenues. The record labels learned this effective press misdirection ploy when they announced a "revenue share" deal with Imeem. To make the deal appear equitable a revenue share option is emphasized, but due to the deal structure it will never come into play.....

The new webcasting rates are lower.
Answer: TRUE....

The new rates have lower growth (see chart below), however the old rates were so outlandishly high that even with the discount, webcasters are doomed. Most problematic in the old rates is the per song fee which requires webcasters to pay for each and every song regardless of whether it is generating any revenue for the company. The Pandora CEO calls per song fees an "anvil". The new rates do not remove the per song fee, neither do they change the starting point. The only change in the new rates is that the growth is 5-10% per year instead 25-50% which is a small consolation.....

Web radio companies can now compete with other radio services.
Answer: FALSE....

Traditional radio pays nothing to record labels while satellite pays 6.5% of total revenues. Online radio is required to pay a per song fee, which depending on how well the web shop can sell advertising, will be 40-100% (or more) of their revenues. When a competitor has such an enormous cost advantage, it is impossible to compete. As an example, Pandora estimates they will do 1 billion hours of streaming in 2009 which requires $17 million in royalties. They estimate they will do $40 million in revenue which equates a payment to the major labels of 42.5% of their total revenues. No business can operate with such an enormous financial obligation.....

This ends a 2.5 year battle over royalties.
Answer: FALSE....

Webcasters were facing an immediate execution so instead, they agreed to bleed a slow death. But to get these lower rates webcasters have to agree to not oppose the old rate structure in legal proceedings. They'll have to immediately pay several years of back fees, which for Pandora will mean more than $10 million dollars. Pandora is hoping to raise a large amount of capital so they are publicly saying good things about this settlement like "This is the deal we have been waiting for." Behind the scenes they know they do not have a business at these rates, but they are hoping to raise money to pay off the record labels and then continue on their fight in on congress to make royalties for all radio outlets the same and in the process dramatically lower webcasting rates. However this settlement will remove much of the momentum for rate changes lowering the prospect of congressional action.....

The record labels are now entering into fair deals with technology companies which allow them to grow.
Answer: FALSE....

"Supporting new business models through innovative licensing agreements is critical to the future of our industry," said Steve Marks EVP of the RIAA. He says the settlement is proof that the music industry wants to partner with technology firms. A Sound Exchange executive said, "We're willing to take the risk in the hope that artists, rights holders and webcasters can all benefit." However, these new rates have guaranteed payments to the record labels even if a company is not generating revenue. There is no risk for the record labels with these rates. It is not a partnership when one party yields the lion share of the benefit. These new rates are typical of the lopsided deals record labels have done with net companies in the past 10 years.....

This blunt assessment of the online radio business is in contrast to most press reports, but those have been influenced by the parties with reasons to slant their words. The record labels do not want congressional action and want the perception to be that they do fair deals. Webcasters like Pandora need to raise money to survive so they need certainty in their business to entice investors. Consequently both parties are motivated to publicly say nice quotes about these new rates.....

The economics don't lie. Experienced radio man Bob Bellin says, "No start up webcasting business can give up more than 25% of their revenue and make a profit." Bill Goldsmith of Radio Paradise says that long term viability requires a payment of no more than 10-12% of total revenues for both publishers and record label royalties. The new rates, while lower, are nowhere close to being sustainable. While I've used Pandora as a reference point to illustrate the situation, the same could be written about Slacker, Last.FM, or any webcasting company. Net radio is going to die a slow death in the United States.