OMG! They killed Internet radio! You bastards!

Posted on June 23, 2007
Filed Under OMG! Old Media is Dying! |

There is a lot of discussion and debate going on about the increase of royalty rates for Internet radio providers. The SaveNetRadio coalition has even organized a boycott that many large Internet radio providers plan to participate in.

Without debating the merits of and justifications for the royalty increase, I think the subsequent backlash from Internet radio providers highlights an interesting aspect of the old media/new media conflict: despite the power of the Internet as a distribution platform, it’s clear that the ability to leverage this distribution platform to drive significant profits is not well-developed. Many Internet radio providers claim that the market is still young and advertisers are only starting to embrace Internet radio. As such, they argue that the increase in royalties is premature and will drive many of them out of business. There might be some validity to these arguments, however the fact of the matter is that content has value. If Internet radio providers cannot afford (with their current business models) to pay the amount that content has been valued at, should the entity that is responsible for licensing that content and collecting royalties be forced to devalue the content to prop up the Internet radio providers?

The same issue over the value of content is present in the online video space. A number of companies, like Joost, have been able to stike significant licensing deals, demonstrating that content owners are willing to license content to Internet services so long as they are satisfied that compensation for the content will be adequate. Google’s tensions with content owners such as Viacom, however, may be, in my opinion, due in part to the fact that many Internet companies aren’t quite sure how they can build viable businesses if they have to pay “full price” for content. Building a viable business is especially difficult for Google becuase it has already invested $1.65 billion to acquire YouTube and is facing significant potential legal liabilities over a service that only managed to generate $15 million in revenues in 2006 despite the fact that it was the most popular Internet distribution platform for video content. This is unfortunate for Google, but I believe its arrogance and inability to see that content owners occupy the position of leverage has created the situation it finds itself in.

Internet radio providers are more fortunate. Compulsory licensing enables anybody with the desire and resources to start an Internet radio service that can use the most popular music content in the world. The Beatles, for instance, had refused to license their catalog to Apple for iTunes sales, however any Internet radio provider can perform Beatles songs because of compulsory licensing. Without this, striking individual licensing deals would be an unbelievably complex task that would create a barrier of entry too high for most companies. That said, if Internet radio providers believe that the increased royalties overvalue the content they need, they are free to negotiate individual licensing deals with the rights holders. One might, however, wisely argue that doing this would be even more expensive for Internet radio providers because of the logistical nightmares this would create.

The entire situation highlights the point I made in my post Will Silicon Valley Take Over Hollywood?: distributors of content will always find that they play second fiddle to creators of content because without content, there is nothing to distribute. If Internet radio providers don’t like that, or don’t feel that they can build business models that enable them to pay what the market and content owners believe the content is worth, they just might be in the wrong business.

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Comments

2 Responses to “OMG! They killed Internet radio! You bastards!”

  1. Lux on June 29th, 2007 10:41 am

    I disagree.

    The problem is that royalties are more expensive for internet radio than for conventional radio and than for satellite radio. This is not fair. Why the double standard of prices? Because the record companies want to control radio as their advertising channel and want to fight and destroy internet radio that play many music works that are not mainstream.

    What will happen is that internet radio will abandon mainstream music works all together and dedicate to the infinite number of emerging music artists, which will only isolate the powerful record companies off the advertising media of the future.

  2. Drama 2.0 on June 29th, 2007 2:01 pm

    I can’t speak to what’s fair and unfair, but consider the following points:

    1. A battle is brewing over performance royalties for terrestrial radio, so don’t think that terrestrial broadcasters aren’t going to be potentially facing a similar situation. Record companies do not care about radio advertising; they care about being compensated for the performance of their content. Advertising is simply the primary means by which the broadcasters make a lot of their money.

    2. The possibility of a vibrant Internet radio industry exists because Internet radio providers can take advantage of compulsory licensing. An Internet radio provider, for instance, does not need to get The Beatles to provide it with a license; compulsory licensing enables it to perform Beatles music by paying a royalty. Note that, for instance, there’s no compulsory licensing system for video, and you see how that has created legal nightmares for services like YouTube. I would argue that the costs of going out and trying to do individual deals with all the key rights holders would cost significantly more than what Internet radio providers will pay in terms of the increased royalties.

    3. That said, if Internet radio providers are unhappy with the royalty rates, there is nothing stopping them from pursuing licensing deals individually with rights holders. Again, the royalty rates we’re discussing are part of a compulsory licensing system that makes it possible for entities wanting to become Internet radio providers to do so provided that they have the financial resources to pay the royalties.

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