If Pandora is the Canary...Who's Mining the Coal?

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.


Reader Comments

Your 2¢, in chronological order — add your comment below.
1  Rick Roderick on August 21, 2008 4:16 PM

I agree. The value to the listener is not being considered. I have wondered about a model in which the listener would buy a license to be able to hear all streams or all of one type or stream. For example, I might pay $50 that would give me access to most radio stations on the Net that are on the air now. For $75 or $100, I would be able to access programming that might play a single artists or several selections by a single artist in a row.

Another thing that is wrong with the model is that it assumes that all music is worth the same price. Classical music and traditional jazz are not highly sought after by most commercial media. Should the price of licensing them be the same as for the most popular rock and country artists?

2  Tom Webster on August 21, 2008 4:56 PM

Rick, differential pricing has been with us for decades--not so much for types of music, as you suggest, but based on the media's age. For example, A movie costs 10 bucks to see new, 4 bucks to rent a year later, a marginal amount (per movie) to watch on HBO two years later, and "free" to watch four years later on network television. But this sort of model would force Internet broadcasters to do a lot of accounting!

3  Jason Schlitz on August 22, 2008 10:35 AM

While I hate the bloodsucking royalty mafia with all of my being, in fairness there is already a process that tries to accomodate the popularity of the artist. In THEORY, more popular artists attract more listeners, therefore in a per impression pay model you will pay more roaylties if you play more popluar (or mainstream) formats and artists than if you play a less popular or niche format. A contradiction to the theory would be that there would probably be more providers of mainstream formats, thereby fractioning the audience and the income potential of each provider. This is where a revenue based model would seem to make more sense...ow...my brain hurts.

4  Lou Pickney on August 22, 2008 11:31 AM

I love Pandora and would hate to see it snuffed out because of the unstable music licensing rights cost. I've contemplated a number of internet-based music site possibilities, but I've shot most of them down primarily because of the royality issue and the inability to project any long-term stability with that.

5  frankie on August 22, 2008 4:42 PM

What is interesting is that no one is using commonsense when it comes to this royalty issue. You cant force a business model on an industry.

you cant stop technology
you cant turn back the clock
to reprogram the mind set of the young that grew up not fearing the athority figures that control the music
but
you can spend millions policing the world but at what cost

6  Dick Carr on August 23, 2008 3:28 AM

The comments in your recent report are some of the most on target of any blogs I've seen. The answer to all of this is CONTENT. Technoolgy will require adjustments to how best to deliver. But, where modern music programming drops the ball has to do with a failure to "tell a story". There is always a time and place for the "story" but, you can't just throw it at someone. The analogy is the same with music...years ago programmers were led astray by consultants when it came to creating music flow. Consultants were more interested in the year the song was recorded and where it appeared on a chart. Because of that, young programmers never learned what older programmers once learned. You program music like you tell a story...you balance tempos, textures and messages. Presentation of music is everything and what is said about the music is how personalities were once developed...not by bombast and "attitude".

Dick Carr

7  Mark Pfeifer on August 25, 2008 8:09 PM

Actually, the problem is the fault of Congress. Congress passed the Digital Milennium Copyright Act that set the ridiculous terms for the Copyright Royalty Board to judge internet radio royalty disputes (which totally favor the recording industry).

For more than a year Congress has had legislation before it (with more than 200 sponsors in the House) to solve the problem in an equitable manner that would treat internet radio similar to satellite and cable radio. Congress though refuses to pass this legislation, says "It is not our business" and just tells the parties to negotiate. However, the recording industry refuses to really negotiate since it holds all of the cards due to the way the Digital Millenium Copyright Act passed by Congress was written. Congress could solve the problem it created very easily and should have already in the current session. I do not understand why foreign-owned record companies are more important to Congressmen than the radio consumers and streaming radio stations in all of their districts.

8  Nikhil Shah on August 26, 2008 4:36 PM

There's a statistic that's been intriguing me for a while and I'd love to get an answer to. Perhaps my world view is slightly shifted due to my age and musical leanings...

The question is how much music (whether radio shows, DJ mixes, songs) is consumed via illegal channels such as Zshare links, Yousendit.com, pirate online stations etc?

Amongst certain genres this must be fairly high. Surely affordable/sustainable fees that allow this content to be delivered legitimately rather than illegally (where no-one monetises - not the labels, not the publishers, not the artists) is only a good thing.

Lots of small slices of a very large pie vs. no slices of no pie? It's a no-brainer to me.

9  Tom Webster on August 26, 2008 8:52 PM

It's tempting to blame congress; it's tempting to blame the CRB or RIAA. But let's say Congress stepped in and overturned the CRB's ruling, and mediated between webcasters and rights holders to reach a compromise sum. Presumably, that sum is a non-zero amount, which means that webcasters will have to get listeners to pay either in a cost-per-action model or with their attention in an interrupt model.

How much would you, as a listener, pay for a jukebox on the Infinite Dial?

10  Neil Hepburn on August 26, 2008 11:36 PM

The question of sustainable business models is a big one. CRB royalty costs dwarf streaming costs, and most Internet radio stations can barely keep afloat with those costs.

We explored numerous business models, including: revenues from music sales (e.g. iTunes sales); web advertising (e.g. banner ads); targetted audio advertising; and subscriptions. For now, it would appear that subscriptions are the way to go, with targetted advertising being #2. Selling music is the most obvious - but it's a bit risky since many people are set in their ways, and have already established buying patterns. We have since proposed Subscription Profit Sharing, whereby revenues are distributed pro rata to the stations based on listenership usage. For a relatively nominal fee (

However, there is currently expectation of "free" as long as you're sitting at your computer. I am convinced that Internet radio will continue to be in a slump until wireless broadband, either through cheaper wireless rates or the adoption of WiMax enables Internet radio on-the-go. The litmus test will be when Internet radio becomes a standard feature in new cars. Yes, Chrysler is offering something like this, and the iPhone gets us there - but just for WiFi HotSpots (useless while driving) or overpriced 3G networks.

There is also the even bigger problem of marketing Internet radio's value proposition. I personally know Internet radio is excellent because I'm a heavy user. For me it has become an indispensable entertainment resource like television. But I still struggle to communicate this satisfaction to my peers. Basically I have to get them to start listening, point them to a few stations I know they would like. I've won numerous converts this way, but it's a long battle. For me it is reminiscent of the challenges when the first microwave ovens were marketed to consumers. It took the big manufacturers like Panasonic over a decade to achieve consumer acceptance.

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