Back in the 1990s many Web experts predicted that Internet radio was the “next big thing” online; some went so far as to claim that Web-based radio stations would soon overtake both terrestrial and satellite radio in popularity and advertising sales. But in 2008 the outlook for many Internet radio sites is bleak, and even popular streaming music startups like Pandora are facing tough times.
The biggest problem is the recent hike in Web radio royalty payments, which are making it increasingly expensive for small to medium-sized web radio businesses to remain solvent. According to many experts, the real “bad guy” that is hindering the future of Web radio is SoundExchange, an organization consisting of representatives from the various major record labels and performance rights organizations.
SoundExchange representatives believe that the Web-based radio stations should pay a larger royalty percentage than either traditional over-the-airwaves stations or satellite radio. The rationale for this royalty increase is unclear, but seems to hinge on a vague and unproven perception that Internet radio leads to greater illegal downloading of music online.
While SoundExchange has no evidence to support this assumption, that hasn’t stopped the organization’s representatives from waging an all-out war against online radio, and increasing royalty rates to the point where very few Web-based stations can afford to stay afloat.
One clear victim of SoundExchange’s patently unfair royalty policy is Pandora, a popular streaming media station that survives on ad revenue. Tim Westergren, the president and founder of Pandora, admitted in a Washington Post interview that the company may go out of business because of the 2007 Internet radio royalty increases.
Westergren told reporters that Pandora is fast approaching a “pull the plug” decision, and that he believes webcasting has reached a critical juncture that could potentially kill off the entire industry.
Pandora reported approximately 25 million in revenue in 2007, primarily from advertising on the station’s flagship portal, Pandora.com. But according to Westergren, the vast majority of the company’s profit (70% or more) went toward paying increased royalty rates for streaming music online.
If Pandora does go under, it will be an ominous sign for the future of Internet radio, or webcasting as it is sometimes known. But they are by no means the only online station feeling the crunch; even Web giant Yahoo’s online streaming radio is facing tough times, and many smaller startups have already folded in the wake of last year’s increased royalty rates.
The major music labels have had a poor relationship with the Internet right from the start, and online radio seems to be an obvious thorn in their side. But perhaps if the labels spent as much time developing new artists as they do promoting fear-based policies toward the Web, their profit outlook would be a whole lot rosier.
One thing is for certain though: if they get their way, the major record labels will shut down Internet radio as we know it — something that benefits neither the public, nor of the artists they claim to represent.
