Will Internet radio fall silent?

Bob Moon Jul 13, 2007

Will Internet radio fall silent?

Bob Moon Jul 13, 2007


BOB MOON: Yeah, you’re hearing that right. We thought you might appreciate some holiday music today, since one of the more popular Internet radio stations that offers christmasmusic247.com may not be around after this weekend.

Webcasters are facing a big jump in the royalties they’re required to pay the music industry, as of this Sunday. And many say they won’t be able to continue if they’re faced with operating expenses amount to tens of thousands, maybe even hundreds of thousands of dollars. The webcasters are still hoping the recording industry will give them a break.

And to find out whether that might happen, we’re joined by representatives from both sides.

John Simson is the executive director of SoundExchange, an organization set up by the recording industry to collect these royalties. He joins us from Washington, D.C. And Tim Westergren heads a Web site called Pandora.com, which allows users to design their own radio stations, built around their particular tastes. He’s speaking to us from San Francisco.

Gentlemen, thank you for joining us.

TIM WESTERGREN: You’re very welcome.

JOHN SIMSON: [unintelligible]

MOON: Tim Westergren, let’s start with you. The last time we spoke a couple of months ago you were complaining that this jump in royalties could force you to have to shut down your music site. And you were joining with other webcasters, petitioning Congress for some kind of relief. What’s happened since then?

WESTERGREN: Well, quite a bit. I think primarily there’s been an enormous public uproar about the rates. And, literally, I think a million people or so have called into Congress. There’s been a bill introduced called the Internet Radio Equality Act. And I think there’s the beginnings of, hopefully, a solution in sight.

MOON: Mr. Simson, what’s the future here?

SIMSON: Well, I think the new rates will go into effect on Sunday or Monday, that the parties are involved in negotiations or discussions and, you know, those are ongoing.

MOON: But we’re already hearing from many of these sites that they’re going to shut down before Sunday to avoid the risk that they would have to pay these royalties. If that’s true, why in the world would the music industry be forcing all these Web sites that essentially promote your music off the air, basically?

WESTERGREN: Well, I think what you have to recognize is that we are in a fundamental change in the way music’s being consumed. There may be fewer and fewer sales, while there may be, you know . . . They may expose people to great bands and great new artists. It’s a very different marketplace. And I think people have to understand that. And that’s what this is about. Making sure that revenue streams are being monetized, that businesses are monetizing so that there is money for performers so they continue to create.

MOON: Tim Westergren of Pandora, I saw one estimate . . . maybe 72 million listeners visit these sites. If there are so many listeners, there must be a lot of advertising potential there. Why shouldn’t your industry be ponying up right now for all these performances that you’re beaming out there?

WESTERGREN: You know, I agree with all the principles that John just laid out about compensation and recognizing when and if services are substitutional — which is a sort of a catch word where they are actually replacing CD sales. And it’s really important to distinguish between those services that are substitutional and those that aren’t. And we’ve done some very exhaustive studies of our listenership and found that 40 percent of Pandora listeners are buying more music since they’ve started using the service. And only 1 percent are buying less. So it is definitely a promotional service. That’s not to say that we shouldn’t pay performance fees, and webcasters have, since their inception, paid those fees at actually far higher rates than any other form of radio. The debate here with Internet radio is not whether they should pay or not. That’s never been the argument. It’s all about what is the right rate for it to be.

MOON: Mr. Simson, what about that?

SIMSON: Again, if you look at people who are charging $2.99 a month, $4.99 a month, somewhere in that range — and there are Internet radio services that do that — those services have profit margins of 65 [percent] to 85 percent. So our royalty is a much lower component. For the ad-supported services there’s been a lag in terms of the advertising coming online. So, I think we’re in a transitional period of time. But I do think there’s a lot of different ways that these services are being monetized.

MOON: Mr. Westergren, is this a chicken-and-egg thing here when it comes to the advertising? The recording industry is basically saying “We want the egg.” And you’re saying “We’re not ready yet”?

WESTERGREN: We were on a path to build a successful, advertising-supported business. It was going to take a year or two to get profitable. Even at the old rates. The new rates make that actually completely unattainable.

MOON: Mr. Simson, the reality is that a lot of these webcasters are saying that they are essentially out of business as of Sunday. The question here: Is that fair, or is that just too bad?

SIMSON: I think it presupposes that you agree that they’re out of business. And I don’t think we agree that they’re out of business.

MOON: And Mr. Westergren you’re saying that it’s on a day-to-day basis right now.

WESTERGREN: I can tell you absolutely straight that these numbers do not work for Pandora. We are not making money right now. We’re losing money every month. So I’d like to actually know, on Sunday are these rates gonna be enforced. Because there’s some real ambiguity about that right now.

MOON: Mr. Simson?

SIMSON: There is an ongoing business discussion going on between us and the representatives of these companies. But while that discussion is going on we expect them to comply with the law as it is on July 15th and July 16th.

MOON: Still sounds like an open question to me. I guess, as they say in the biz, stay tuned. Thank you very much for joining us, gentlemen.

WESTERGREN: Sure thing. Thanks.

SIMSON: My pleasure.

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