There has been plenty of discussion lately about the viability of an Internet Radio business model and whether or not it is viable and scalable. Here at SiriusBuzz, I believe that Internet Radio is a competitor to not only Sirius XM Satellite Radio, but their Internet radio service as well. Yes, the royalties on Internet radio are higher, but the royalties are not as high as many people seem to think.

In 2007 the Royalty board passed royalty rates that were so high that it threatened the existance of Internet Radio providers such as Pandora and Slacker. The royalties were a huge burden and the news sent services scrambling to adjust their business models in order to survive. For some this meant charging fees, for other it meant beating the bushes to try to find more advertisers. It was a dynamic that clearly was oppressive to anyone that wanted to stream music over the Internet.

While the record companies do want money, the money will not flow if the music dies off. Instead what was needed was a relationship that was workable to both sides, and in July of 2009 a new deal was struck. That new deal makes Internet Radio a viable business that can continue to operate and thus pay royalties.

In simple terms companies such as Slacker and Pandora now had a structure that was livable. These companies must pay 25% of revenue or a scaled royalty per-song/per-listener, whichever is greater. The percentage of revenue is easy to digest. The per-song/per-listener is a bit more complex. The new deal went retroactive to 2006 and established a rate of $0.0008 cents per-song/per-listener. It scales to $0.0014 per-song/per-listener in 2015.

What this means is that if an Internet radio company is good at getting advertisers in combination with any fees they charge, they could well know their exposure with the fixed cost of 25% of revenue, an easy to gauge cash flow situation. In June of 2010 Pandora had 48 million subscribers listening an average of 11.6 hours per month. The company now has 60 million subscribers.

The key here is that the business model is scalable provided an Internet Radio company is able to obtain fees and garner enough advertising dollars to make the 25% rule kick in. The structure of the July 2009 deal will likely remain a key component in the coming years. The artists and labels do not want Internet radio to die. They receive substantial fees from the services, and if these services die off, the record labels would be shooting themselves in the foot.

With the advent of mobile platforms via smart phones, Internet Radio companies have been working on ways to get more interaction with users. That interaction gives page impressions which can be monetized. Studies indicate that an Internet Radio user is 10 times more likely to interact with their smart phone while listening than with their PC. This development is a huge positive for Internet Radio, and is a key reason such services offer voting on songs, album art, lyrics, chats, forums, etc. All of these aspects help Internet Radio monetize their services.

There are some that have been calling Internet Radio dead for quite some time. First it was the royalties established in 2007, then it was cell companies charging for data. Those who feel that Internet Radio will die off are being short sighted. The record industry has a lot to lose if Internet Radio dies. The facts are that the data limits being implemented by cell companies would only impact a very small percentage of users and the perception for consumers is that the cell carriers are the "bad guys", not streaming services.

For satellite radio investors, understanding the various forms of competition out there is important because the Sirius XM is in the audio entertainment business. What we know is that as a business Internet radio can work and that consumers are gravitating to some of these services. Satellite radio still has distinct advantages in this landscape and simply needs to keep those advantages in play and maintain a superior position through delivering unique content with a good signal and expanding their business model to react to the ever growing presence of Internet radio.