Pandora Radio - Canary in the coal mine?

This is gonna be a Very Long Post, but it concerns Very Important Issues regarding music online and the future thereof)

(For those confused by the title - before the invention of the Davy safety lamp, coalmines used to keep canaries in cages to give warning of dangerous gas buildups; the canary would keel over before the gas became concentrated enought to be dangerous...)

Anyway.

Internet radio (legal internet radio, at any rate) is very likely to be a thing of the past, not far in the future, because of the royalty rates being imposed, at least partly at the instigation of the RIAA, which seems to assume that wide internet access to music is automatically merely another front for piracy.Internet radio (legal internet radio, at any rate) is very likely to be a thing of the past, not far in the future, because of the royalty rates being imposed, at least partly at the instigation of the RIAA, which seems to assume that wide internet access to music is automatically merely another front for piracy.

In a column at PCMag.com, entitled The Internet Radio Death Watch, and subheaded

With royalty fees sucking up profits, who knows how long sites like Pandora Radio and Slacker will last,

Dan Costa writes:

Last summer, the Copyright Royalty Board doubled the fee that Internet radio stations have to pay to broadcast a song. The royalty structure is pretty straightforward. In 2008, Internet broadcasters have to pony up $.0014 to stream one song to a listener. That fee is scheduled to climb to $.0019 in 2010. It doesn't seem like much, I know, but it's likely to add up fast. So fast, in fact, that it may kill off Internet radio entirely.

{snip}

What do terrestrial radio stations pay to broadcast a song? Nothing. The rationale is that broadcasting music would drive record sales, and it did that for a long time. Now record sales are falling, downloads - both legal and illegal - are increasing, and the record labels are rewriting the rules of Internet radio.

What do satellite radio broadcasters pay? A percentage of their revenue. The real numbers are hard to come by, but satellite radio mashup Sirius XM is thought to be paying about 6 or 7 percent of its revenues in royalty fees. By comparison, paying per track will cost Pandora about 70 percent of its revenue. That makes no sense.

{snip}

Every month, 72 million people log on and listen to Internet radio. Calls like the one I got from my stepfather show that the audience is diverse, mainstream, and likely willing to spend a little cash to enjoy their music. These consumers may not be united in the fight for more sensible royalties, but they are hardly powerless.

Don't forget, vast illegal file-sharing networks are still operating just a few clicks away. The RIAA's legal Whac-A-Mole has barely slowed them down. If this unfair royalty scheme kills off legal, legitimate businesses like Pandora and the recently shut-down Muxtape, those users will simply go somewhere else. And that destination is more likely to be BitTorrent than a record store. The record industry may think it is killing off Internet radio, but it's merely opening Pandora's box.

(Read the whole column by Dan Costa here.)

Costa points out that there are currently roughly 72 million internet radio listeners monthly. At $.0019 per song per listener, if each of those 72 million listen to five songs, that's $684,000 in royalties that have to be paid.

Paid by companies that are, for the most part, i suspect, not all that financially strong to begin with, operating on fairly low advertising incomes, while ClearChannel (that cretinous offspring of the bleeding buggered rump of a syphilitic camel) pays nothing to the labels or the artists and rakes in billions in advertising billing.

A somewhat older CRAWDADDY! column about the situation (from May 2007) says:

Yesterday was supposed to be "the day the music dies." Don't worry. You didn't miss a VH1 special on Don McLean. Rather, it's a mildly clever slogan adopted by the SaveNetRadio Coalition - a group of artists, labels and internet broadcasters fighting the good fight to prevent legitimate music from being wiped off the internet. May 15th was to be D-day, when new royalty rates for internet radio broadcasters were to take effect, almost instantaneously forcing at least one-third of all internet radio stations into bankruptcy. The new rates were issued in a ruling by the Copyright Royalty Board, part of the Library of Congress, on March 2nd after a year-long arbitration process. SoundExchange, the agency responsible for collecting from internet broadcasters, not surprisingly cheered these as "hard-won, fair royalties that artists deserve."

(See two paragraphs further down and notice that "artists" have somehow disappeared from the equation, replaced by "performers" - which legally means whoever holds the rights - which is quite likely to be an RIAA-member record label.)

We are all for artists getting paid for their music, but the reality is a lot different, and the back story of how this crisis came to be is a classic tale of politics, greed and grave stupidity. The sordid details are too long to list, but I have to start somewhere. It all originated with a change in U.S. copyright law in the mid '90s that created a patently unfair and unprecedented burden on the distribution of digital media. The RIAA and the music labels strong armed an unaware industry in a stage of infancy, adding a set of fees for internet broadcasters that didn't apply to terrestrial radio and were additive to other statutory fees already being paid. They parlayed a fear of technology, bad public policy, dotcom mania, hired academic hit-men, rigged deals, and nonsensical reasoning into a jumbled mess to pass this glorious bit of double-dipping. The drama plays out as if the writers from Days of Our Lives, The Practice and The West Wing got together and wrote a comic tragedy after a weekend-long meth binge.

Up until this new law was established and SoundExchange was implemented as the collection agency, internet stations paid somewhere around 6% of revenues to songwriters (who owned the publishing copyright) through ASCAP, BMI and SESAC. These fees are paid by all broadcasters, regardless of origin, and have been in place for decades. This ruling, which took effect in 2001 (retroactive to 1998), created a new set of fees dictating that internet broadcasters pay an additional 12 percent of revenue to "performers" (those who own the rights to the instance of each recording, called a "mechanical" in the industry). While this was an additional and unfair burden on internet radio, the cost wasn't debilitating and music flourished on the web.

Now, the new and improved rates that were to go into effect yesterday will change all of this. They move from a percent of revenue calculation to a "per play" metric where every song and every new stream is counted. The change in methodology is interesting in its details, but the critical element is the net impact to internet broadcasters. It calls for an immediate (and retroactive to January 1, 2006) increase in per song rates from .08 cents per listener/song in 2006 to .19 cents per listener/song. Those numbers seem small until you multiply by the millions of songs per month listened to online. Another fun twist is that webcasters are required to pay a $500 minimum per stream. For internet stations like Pandora, which allows users to generate streams based on music listening habits, this means almost certain death. Essentially, every time a stream is generated on Pandora, there's a fee of $500 - even if the user listens but only for a minute.

SaveNetRadio estimates that internet radio services will end up paying out somewhere around "60% to 300% of their revenue in royalties." That means that for every dollar earned in advertising or subscription, these services would have to pay up to $3 in royalty fees. It doesn't take a Harvard MBA to figure out that this is not a great business model.

(See the whole article and reader comments here.)

The RIAA simply fails to understand that their old business model just will not work in the new environment. I don't know what will ...

But i do know that their current jackbooted-thug tactics won't.

(I sorta like Costa's description of the RIAA's policy as "legal Whack-a-Mole"...)

And they seem determined to take us down with them.