Radio Royalties on Repeat Mode

Image via Wikipedia The latest (yet not new) story on Pandora claiming they will pull the plug if there isn't relief on the proposed new streaming radio royalty rates has people talking again. The discussions and debates on these potentially crippling rates (see previous posts and savenetradio.com) are heating up again thanks to the Pandora story (and the recent RIAA-backed shutdown of Muxtape).

I agree that it is a very complex issue - with many parties to be considered. Webcasters, songwriters, artists, record labels, technologists, legislators, consumers. There are some that think that the music "establishment" (aka major labels, RIAA, SoundExchange) are doing everything in their power to reverse the clock so they can go back into history and undo some of their previous actions. The hope is, that in doing so, they create a better future for recorded music sales - one in which they own and control every piece of the pie. Others go so far to say that the labels actually have a vested interest in *killing* streaming radio as they see it as actually a replacement to sales. By killing the existing ecosystem, they can start over (an idea I don't totally disagree with). It's like those movies where some madman wants to nuke the planet so we can "start anew" and cleanse the sins of humanity's past.

I don't really know where I am going with this... other than, this is how I see the most recent actions of the "establishment". I may be somewhat naive, this is how this whole thing seems to be playing out:

Act 1

• labels give terrestrial radio the rights to broadcast royalty-free (to generate awareness and sales of physical product)

Act 2

• labels want more promotion so they start *paying* to get the content played (payola)

Act 3

• labels told that "pay for play" is illegal and start looking for additional (free to them) promotional outlets

Act 4

• labels want more promotion so they give MTV rights to royalty-free broadcast of music videos

Act 5

• labels see other parts of the music ecosystem starting to make money (or *not* make money, but attracting users) and think "hey, that should be ours too"

Act 6

• labels start demanding/increasing payment on plays (where they used to gladly pay for such a thing and would still be doing so if the federal government deemed it illegal)

Act 7

• streaming/radio ecosystem can't afford to be in the radio business and all exit - or move to royalty free programming (talk, news, etc.) - this is in addition to MTV/VH1's continued shift to reality TV and away from music

Act 8

• labels don't have any promotional outlets to get their content heard

Act 9

• labels continue to explore new media distribution outlets for their content (commercials, soundtracks, etc)

Act 10

• due to limited inventory and increased competition to get song "placement" labels offer royalty-free content

Act 11

• go to Act 1

“The definition of insanity is doing the same thing over and over again and expecting different results” - Albert Einstein

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SoundExchange Only Cares About the Labels?

Are SoundExchange and RIAA trying to screw the artists and only interested in (re)building a business for the 4 major record labels? I can't say for sure, but Kurt Hanson lays out a very interesting theory. Below is just an excerpt... I recommend you read the whole thing...

RAIN: Radio And Internet Newsletter: "If webcasters had in fact accepted SoundExchange's proposed 'solution' from last week, what soundexelse could AOL Radio do in 2008 but accept? They'd be looking at bankruptcy otherwise... and they'd be prevented from going to Congress for help!

So in offering to discount AOL Radio's royalty obligation from $66 million to $24 million, the big four labels could not only get increased airplay for their priority acts, but they could actually increase their royalty take an additional 20%! Sweet!

But because it's not a statutory license, the artists would GET NOTHING!

And as for the independent labels, most of them want airplay. If this scenario plays out as I've hypothesized, the conditions that the major labels impose on webcasters might leave little room on station playlists for indie-label product anyway,riaa so I would bet that the indies would eventually start offering waivers — i.e., 'Play our music and we won't charge you any royalties.' In that event, they would also GET NOTHING!"

Net radio operators lose a round | News.blog | CNET News.com

Sigh...

Net radio operators lose a round News.blog CNET News.com: "In a potential blow to Internet radio services, a federal copyright panel on Monday largely upheld a contentious decision that would elevate royalty fees Webcasters must pay to record labels. "

I'm not sure when the Copyright Royalty Board and the RIAA will realize this, but after spending years trying to encourage legal and royalty paying music services, they are very close to succesfully killing most of them.

When users can no longer get free, ad-supported, music guess where they are going to turn?! Free "gray" services that don't generate a dime for the labels or their artists.... now they just get a bigger piece of the incredible shrinking pie.

Radio No! (Part 2)

As you can imagine, the web is buzzing with news and opinion on the future of Internet Radio after last weeks announcement on the new royalty rates. In fact, Om Malik has a quote from Tim Westergren (founder of Pandora) in which he says, "left unchanged, it’s over for us and every other internet radio service, period. Makes it un-viable. We’re staying online because we’re hopeful that sanity will eventually win out. This is a ludicrous ruling.”

If you agree (as I do), then you should check out:

http://www.save-internet-radio.com/2007/03/02/save-internet-radio/

Whether you don’t want to see your favorite internet radio station go off the air, whether you just hate the RIAA, whatever the reason: please, help us get this senseless, greedy policy designed to do nothing but line the pockets of the record industry overturned. Write to, or better yet call, your representative, your senators, and the Copyright Royalty Board. Tell your friends and family, write on your blog, digg this - help get the word out and help to Save Internet Radio!

They also have a nice walkthrough calculation where a small webcaster with 1000 listeners on average could easily rack up hundreds of thousands of dollars in royalty obligations.

Also, David Porter (formerly of Live365) has his own calculation on what that means to the amount of advertising a station would need to have to just break even.

So if we assume an average CPM of $5 for audio ads - probably a bit aggressive, at least at this stage - the webcaster would need to run at least 6 ads per hour in 2010 to cover the required SoundExchange payment. Again, to say nothing of composition royalties, bandwidth, contribution to overhead and profit.

And Rags Gupta (also formerly from Live365) has some thoughts on the implications to the industry.

• There's greater certainty for Webcasters as they've been waiting to know these rates for a while, which may have had a chilling effect with respect to their getting funded (I've counseled at least a couple of VCs looking at webcasting companies to wait until the rates have been set).
• It may also impact any M&A activity that may have been swirling (like the Last.fm/Viacom).
• Some services that allow a greater form of interactivity, like Last.fm or Pandora, may well be subject to higher rates keyed off the statutory ones based on any deals they've negotiated directly with the labels.
• Webcasters will need to respond by either upping the ad frequency, finding other revenue streams (as some have already done by inserting video ads). Some may have to use webcasting as a loss-leader to acquire users that they monetize via other means.
• Finally, if these rates do stick and streaming volume stays the same or goes up (ie companies don't fold their webcasting operations), this will mean greater revenue for labels and recording artists, who are looking for additional revenue sources under every stone these days.

There is still some hope in that these rates can be appealed. Let your voices be heard.

RIAA Cartoon