Small & innovative webcasters will die

21Jun07

Some 3 1/2 months back I wrote a post entitled “5 reasons internet radio royalties suck” and I’ve not yet rounded out the 4th and 5th in the series so will do so here.

Quick summary on 1-3: the basis for the *already* high rates set for 2001-05 was a single deal struck by Yahoo with the Majors; it turned out Mark Cuban had agreed to an unprecedented per-stream rate in the deal (rather than the typical %-of-revenue rates paid by traditional radio and other forms of radio, in the US and elsewhere) so Yahoo could force most webcasters to use Yahoo’s broadcasting services (or go out of business) since such smaller players wouldn’t have sufficient ad inventory on a standalone basis to be interesting to advertisers who pay normal CPMs (a situation that folks like TargetSpot are looking to mitigate with an AdSense-like program for internet audio).

The result was an onerous rate that forced many (including my former employer, Live365) to take drastic measures to reduce listening, stunting growth of the industry. Despite this abnormally high cost structure (bigger webcasters pay ~33% of revenues for this sound recording royalty alone, while smaller guys may be >50%!), the industry grew steadily and today is far bigger than satellite radio. Now, a proposed increase in the magnitude of this per-stream (or per-hour) rate would push the royalty tab higher than revenues for many — and beyond the point that it would make sense to pursue webcasting as a profit-seeking business for others.

In addition to the sheer magnitude of the per-stream rate, two additional components of the CRB decision will spell disaster for all but the largest webcasters with offerings that mirror traditional, one-way radio. First, a previous exclusion for “small” webcasters (defined by revenue), allowing them to pay on a %-of-revenue basis subject to an annual minimum, was eliminated. Second, a per-channel minimum of $500 was established without any clarification as to how a “channel” was defined.

As Kurt Hanson and others have noted, and as Congress itself recognized by passing the Small Webcaster Settlement Act of 2002 (which granted aforementioned exclusion), the previous royalty rates, calculated on an unusual and onerous per-stream basis, were far more than a small webcaster could handle. So now, 5 years on, those rates are being increased by 150% and the exclusion has been removed. Without congressional intervention, the result is clear.

Two basic types of innovation have emerged in webcasting, each taking advantage of the internet’s inherent interactivity (a two-way channel) and limitless spectrum. By tracking a bit of information about a listener, whether input directly via ratings (e.g. LAUNCHcast) or tacitly by scrobbling (e.g. Last.fm), a station can be personalized to ensure he hears music of greater likely interest, encouraging exploration of a broader variety of music. Additionally, given the right online tool, a music fan can literally create a station — an online mixtape, in a sense — to be shared with others (e.g. Live365, Finetune). Whether programming is personalized or DIY, a much larger number of stations result under these innovative (and, for the medium, apt) approaches, which would be summarily extinguished by application of a $500 minimum to each “station” (if conceived in this way).

As many of you know, a bi-partisan bill is now in review by both the House and the Senate, and it was announced today that the House Small Business Committee will examine these issues in a hearing next Thursday.

I’m cautiously optimistic about change over the long term, but it seems uncertain whether the CRB decision will be remedied in time to save most webcasters. It would be a shame if the only webcasters left standing were large conglomerates wedded to the diversity-squelching approach of radio past.

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