Written Aug. 21, 2008 by Tom Webster in Internet Radio with 10 Comments
Today's PC Magazine has an article about Pandora's recent public musings about its demise, should they in fact have to pay the licensing fees set by the Copyright Royalty Board. This news, along with the recent shuttering of Muxtape, is meant to serve as a harbinger of doom for the Internet radio industry, and indeed the title of the PC Magazine article is "The Internet Radio Death Watch."
The article makes the point that Pandora is the canary in the coal mine--if they can't make it in Internet radio, who can? (I might argue that my little canary died well before 2008, but it's not exactly a race worth winning!) Internet radio proponents, of course, place the blame on the greedy RIAA, while those on the other side claim that Internet radio needs a business model. If you are a traditional radio broadcaster reading this, it is tempting to sit back as an observer and either lament the troubles of Internet radio or roll your eyes and say I told you so. Unfortunately, you don't have the luxury of merely observing this battle.
What the current battle between Internet broadcasters and copyright-holders represents is simply a pricing disparity--a disagreement about what recorded music is "worth." Perhaps the two parties will run some more numbers and come up with an economic model that fairly represents the economic interests of both parties, and maybe that model makes some sense on paper.
What such a model would fail to take into account, however, is a third input: the value that the listener places on digital music. This input is more troublesome, in that it is clearly a moving target, and it's moving south. Previous licensing and pricing models allowed for the fact that "free" music had some element of scarcity--you could only hear the new Madonna song (for free) on the radio, so all of the other elements could be modeled successfully.
Today, free music is not a scarce good, but an economic commodity. This is why placing a value on a "play" by one of the hundreds of thousands of Internet radio outlets is not the same thing as placing a value on a play by an FM station circa 1980. With so many cows out there, the price of milk has to drop.
The central challenge of music radio on the Internet is to try and come up with the real value of moving an economic commodity online that is based upon not just the value of the good, but the price consumers are willing to pay for that good, which is asymptotically approaching zero. Merely providing the commodity is not enough to create value--value must be created in other ways if consumers are to be expect to pay a cost, either with their wallets or their attention.
All of which brings me back to those of you observing this from broadcast radio, and thinking about Pandora as the canary. Where are your businesses headed right now? Hopefully to the Internet. That makes you an Internet broadcaster, and that puts you squarely in the same mine that might just claim Pandora and a host of other online-only properties. If they can't solve this, all broadcasters in the online music space are going to start suffocating.