The End of Internet Radio?

On April 16, three men -- a retired bankruptcy judge from Alabama, a former litigator with expertise in transportation industry economics and a career attorney for the Copyright Office -- made a decision that has profound implications for the future of webcasting, and for the music and Internet industries in general.

These three judges on the recently empaneled Copyright Royalty Board decided to raise webcasting royalty rates drastically, to levels proposed by SoundExchange, a digital music collecting society presided over by record labels and musicians unions. Specifically, the board’s ruling denied webcasters’ requests for a stay and a rehearing, effectively closing the door on further deliberation over the royalty rates and requiring that webcasters begin paying the new rates by May 15 of this year, due retroactively from the beginning of 2006.

Supporters of this decision argue that these new, higher royalty rates will ensure that musicians are paid fairly for their work as the music industry shifts its focus from traditional media to the Internet. Currently, record labels and recording artists don’t receive any royalties at all from terrestrial radio, which is required to pay only composers and publishers. However, detractors argue that the new rates are ruinously high and will lead to bankruptcy for the vast majority of webcasters, eliminating a resource that entertains more than 70 million Americans and financially supports tens of thousands of recording artists.

In order to learn more about the webcasting business, and the potential effects of this ruling, we spoke with Tim Westergren, the founder of popular Internet radio provider Pandora and one of the most vocal proponents for lower webcasting royalty rates.

AramSinnreich: What, exactly, is Pandora, and how does it work?

Tim Westergren: Pandora offers personalized radio over the Internet. The secret to our product is the music genome project, which is this enormous collection of songs that have been musicologically analyzed, each along close to 400 musical attributes, by a team of 50 trained musicians. We use this musical DNA to connect songs and create playlists.

We launched the radio service in November 2005, and in the past year and a half we’ve accumulated close to 6.5 million registered listeners.

Sinnreich: What’s Pandora’s business model? How do you make money?

Westergren: It’s advertising-supported. Our primary costs are licensing and streaming, and the core personnel. But a business like ours scales, so the whole thing is, build a large listener base, and then you start to get the advantages of scale. We sell visual advertising right now, and we recently experimented with audio ads. But we haven’t made any decision about whether that’s something we would pursue long-term.

I can’t tell you too much about our financials, but we’re not profitable right now, and [until the CRB ruling] we were looking at a year or two from now being able to turn a profit. It’s a relatively small-margin business, and it’s all about getting a big audience.

Sinnreich: What are the new webcasting rates, and how do they affect your bottom line?

Westergren: As a webcaster, we pay a performance royalty for every song that we stream. It’s a royalty that’s not paid by terrestrial broadcasters, and is paid at a much lower rate by satellite broadcasters. Until this ruling, the rate that we paid was 1.17 cents per listener-hour, which equates to about 0.076 cents per song streamed to each listener.

The new rates, which are retroactive to the beginning of 2006, are immediately higher than that. They go from 0.076 to 0.08 cents per song, and then they go up incrementally over the subsequent five years. And by the end, they’re at 0.19 cents per song. That’s close to a tripling.