Faced with huge song royalty increases, Net radio may soon face extinction. That is according to Internet radio Webcaster Pandora's founder Tim Westergren. He told the Washington Post his popular music Webcasting site is about to go offline because of increases in royalties his company must pay to the music industry. Westergren says that the Copyright Royalty Board's agreement with SoundExchange, the royalties collecting arm of the Recording Industry Association of America (RIAA), is about to increase fees Pandora pays and thereby turn its small profits into a deficit.
This year, according to Westergren, Pandora's royalty fees accounted for 70 percent of its $25 million in revenue. Based on the Copyright Royalty Board's decree, by 2010, Pandora's royalty fees will soon double from where they were 2 years ago. And that, Westergren says, will put his firm in the red.
By comparison to traditional radio stations, Westergren points out, Web radio stations are not treated equally to others music broadcasting businesses. And because of this inequity, Westergren says, Pandora and other firms like his face a murky future. Traditional radio stations do not have to pay per song royalty, Westergren points out. And satellite radio pays 6 or 7 percent of its revenues to copyright holders, or roughly 1.6 cents per hour. Net radio, on the other hand, pays for every song and every listener-2.91 cents per listener, per hour.
"This is like a last stand for webcasting," Westergren told the Washington Post. "We're losing money as it is. The moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we're doing is wasting money," Westergren continued.
This time last year, the Digital Media Association (DiMA) won a small victory when it agreed with SoundExchange agreed on a $50,000 cap for the $500 per-station fees. Also, a bipartisan Senate committee drafted the Internet Radio Equality Act, but the bill now appears to have been abandoned. Representative Howard L. Berman (D-CA) may attempt a last-minute save but even he isn't hopeful. Time has shown that these steps may have done little for the Net radio's salvation.
Tough as it is for Pandora, smaller Net radio stations will almost certainly crumble beneath the weight of these costs, which account for 100 to 300 percent of their revenue.
Westergren says desperate times call for desperate measures. Pandora, he says, will seek new methods of advertising revenue, including between-song advertisements. So expect to hear "The next half hour is brought to you by," in the near future. Ads are currently only located on Pandora's Website next to the Pandora player interface. Pandora also appears to get a cut from music sales initiated through its site.
Will we see smaller Net radio stations fail? Time will tell.
If the the royalty hike will cripple Web radio I don't see how that can be good for music fans, the artists, or the labels. Lets hope the this all gets sorted out soon and we can all keep tapping our feet to the sound of Web radio stations both big and small.
This story, "Could Net Radio's Extinction Be Close?" was originally published by PCWorld.