Has the Recording Industry Killed the Internet Star?

The concept of radio as a medium for tunes is so a part of the American culture that there aren't many who remember when it wasn't used for music, but for news and information. In any medium-sized city, there are at least a handful of stations, both on the AM and FM sides of the dial and carrying a wide range of music, talk shows, news, information, humor and the occasional contest. And mixed in among most of them are the ubiquitous ads that most of us just tune out: ads for everything from houses to turnips, some funny, some catchy, some terrible.

But alive on another medium is the power of music and news and all the rest, streamed not through space by transmitters, but through the labyrinthine canals of the Internet. Streaming music and video is very much a going concern; estimates of channel traffic vary widely but agree that the thousands of stations that hold music and video in streaming form account for more than a third of the traffic on the Internet at any given time. Some of the widest venues, such as AOL's Radio programming and Pandora.com, command slices above 1% of the entire Internet traffic in their own right.

Until now?

Buried at the heart of Internet radio, including streaming video and audio source material from terrestrial radio, is the question of copyrights. Regular radio has long been immune to copyright infringement; they convinced the sellers of music long ago that the radio medium was one of free promotion, one where the music of the artists could be heard, and from which sales would follow. But the same organization which has orchestrated that masterful move has dealt a stunning blow to the new radio concept of Internet streaming material. Rather than pay for the songs as though they were songs on a radio station, Internet sites must pay for the music as though each song was a performance; the site-holders must pay the artist for every song that is transmitted to every listener, every time.

Heretofore, this requirement has been stayed by act of Congress. When the early days of the Internet were upon us, musicians and producers alike felt that the new technology would lead to a danger of severe copyright infringement. Largely for that reason, Congress chose to treat the new medium as a performance medium rather than a transmission one. However, by 2000, it had become clear that the Internet could serve better as a transmission medium than many of the terrestrial radio stations, and that the costs for performance media structure would be prohibitively high. Congress acted by implementing a workaround for small sites that did not sell the music directly: the sites instead paid a portion of the revenue generated by the site (through advertising or donation) to the music industry.

That workaround expired, and a new fee structure has been put into place. The costs are retroactive to 2006 and scale from about 0.08 cents per play in 2006 to 0.19 cents in 2010. And while this may seem laughably small, remember that under the rules as they currently stand, the site-holder must pay that fee for each time the music is streamed across the Internet to each listener, on each channel, each time.

So what?

In terrestrial radio, the music streams over the airwaves and is picked up virtually simultaneously on every set switched to that frequency. It is the same show whether one person hears it or a hundred do so. But on the Internet, even if a hundred people are listening to the channel, the packets must route differently to arrive at the recipients. And the cost must be paid for each person. Noncommercial broadcasters face another charge, a $500 fee for each "channel" that broadcasts no more than 159,140 aggregate tuning hours (number of hours times number of listeners) per month. Pandora.com is sweating this requirement big-time; the non-commercial radio station allows the creation (and sharing) of individualized channels, up to 99 per listener!

According to back-of-the-envelope figures by the industry, this requirement could spell the end of Internet radio. Radio and Internet News founder Kurt Hanson points out the following:

According to comScore Arbitron, AOL's Radio Network had an average audience between 6AM and Midnight of 210,694 listeners every day last November. Assuming that you have a rate of about 16 songs per hour, no commercials, and you add in an extra 10% on the listening audience for the six non-peak hours, that tots up to about 2.1 million songs/performances in the month of November alone. Multiply through by the going rate per song and that hits $1.65 million. Annualized, we're talking $20 million.

The current feeling here at the Radio and Internet News is that Pandora.com is running similar numbers and facing similar costs. The only difference is that AOL has a direct revenue stream (pay-for-play); Pandora does not.

A price tag that high would shut down sites. And Pandora's Tim Westergren has said that he would have to. Put another way, Soma-FM (a collection of eleven independent music stations out of the San Francisco area) reports:

"The new fees are a staggering increase over our previous annual royalty rate of about $22,000 to over $600,000 for 2006. And the fees are even higher in 2007. Based on our current listenership, they'll be over $1 million dollars for 2007! (Which is 3-4 times what we hope to raise in 2007.)"

Now for the odd side to all of this. One of the biggest elephants in the room on this is not Pandora, although the site is one of the most visited of the Internet radio locations. It's Clear Channel Communications, the powerhouse that owns hundreds of terrestrial radio stations. Why? Because most conventional radio stations these days also have a web presence, and the cost applies to them as well. Since most terrestrial stations run webcasts that just barely cover the costs of said webcasts, any additional costs would come out of the revenues brought in by the regular radio shows. Clear Channel has made it clear that, rather than lose money at the rates projected under the new cost structure, they would shutter their Internet sites.

So who's the beneficiary in all this? The main winner that is pushing this decision is SoundExchange, a 501(c)(6) corporation that represents the majority of the recording industry's record labels. In essence, SoundExchange acts as the licensing organization for current Internet-broadcasting music; it's the single point of contact for the webcasters to purchase music through. If the rate decision holds, the record labels make out like bandits.

Or do they?

Next time you have a chance to slide on over to Radio Paradise, or Pandora, do it. Click on any song in the playlist and you'll get (among other things) a minimum of four different ways to purchase the song or the album. Direct marketing at its finest and a source of untold millions (potentially) for the record labels and artists themselves. Kill the power of these webcasters and you end forever that revenue stream. Of course, SoundExchange may be out of work too; if no one is available to buy the licenses, it seems likely that the licenser will have to go away...

And the quite sad note to all this is that the listeners would still be able to get their music fix. The Internet is a very large place and the rules are very different when you get overseas, like, for instance, Britain's Last.FM. Like Pandora, it's a social networking site built around music and individualized channel preparation. Unlike Pandora, it's going to live even if SoundExchange manages to do itself out of a job.