Understanding Internet Radio Royalties
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.
You’ve done it this time Spencer, Muscle13 just spontanously combusted!
Think again read it and weep. This is a matter of radio 101. And you know what – Spencer doesn’t know the radio business and he proved it to me.
See below.
LOL…..
No, he did not implode, but I am positive he will weigh in. The fact is that there is just too much at stake for internet Radio to die. It will grow. My focus is understanding it and seeing how Sirius XM reacts to this developing form of competition. The satellite signals are a big advantage, as is the fact that many phones drop signals frequently.
I already weighed in and at the new rates Pandora payed 60% of their revenues last year to royalties. Not 60% of profits, 60% of revenues. The model stinks and there is no way around it.
And you don’t know the model Spencer. You really don’t. You know who knows it- Mel and Jeff Smulyan know it.
I would say Tim knows the Pandora model better than Mel or Jeff. Tim owns the company.
Last year was last year. Watch the shift that begins to happen. There is a reason that Slacker and Pandora are finding ways to get people to pay.
Incorrect, it is 15 hundredths not 14 hundredth in 2015. Pandora doesn’t have 60 million subscribers. They have 60 million registered users. Pandora pays the per song rate which we all know is atrocious.
Now when Mel was asked on national television about Internet radio and Pandora going into the car and attracting advertising, Mel said that he didn’t know if that model would ever work. He also said there is far too much advertising inventory out there already. Supply exceeding demand is never a good thing in business. That’s why he pushes the subscription business now.
Now I ask you Spencer, who knows more about the radio advertising business – You or Mel?
Muscle…..
I do know the radio business. You simply don’t like the fact that I do.
The 2015 rate is.0014
http://www.nytimes.com/2009/07.....radio.html
http://blogs.wsj.com/ventureca.....net-radio/
Muscle…..much of Internet radio listening happens outside the car. The recent down trend in advertising impacted everyone….including satellite. Advertising does not need to be audio for Internet radio. That is why user interaction is so important to Internet radio streams.
I understand Mel, and how he works. Shall I quote him on his thoughts about satellite radio? Do you remember how negative he was about it even just before he came?
Mel is a salesman and a player. he knows what to say to make people like you think the way he wants you to think. I am not slamming Mel here. I like him. I just understand that you have to realize who is talking and why they are saying what they are.
I really have had enough of this. This blog has become a post war on radio knowledge. I see mistake after mistake in every blog post and it bugs the hell out of me. It’s time for me to let you go on with your radio business fantasy world.
Mel doesn’t like internet radio but siri/xm is offered on the internet. Mel shouldn’t be looking at the competition but spoke of Sat. 2.0. Could it be that we all want the samething a successful Siri/XM?
Internet at Sirius is designed as an add-on for sat subs for ARPU and churn purposes. It is not designed to attract new subs and Mel said that on earnings calls.
Notice Mel charges for internet. NOT an advertising model. Good luck to you too. I can’t keep correcting EVERYONE HERE!!! Bye
I feel like a freakin teacher.
Exactly, an add-on to help ARPU and churn, thats what I want from 2.0 and I think, if I understand Spencer, is what he wants. We’re in agreement! Hey, Mel we’ve solved all your problems.
Let me leave by saying one more thing. I actually think you are a good person Spencer. From talking to you on the phone you seem like a very normal and friendly guy. But your knowledge of the radio business disappoints the hell out of me. Good luck to you and take care.
Internet, wifi, and wimax all have seems and sat. doesn’t, although repeaters are needed to fill gaps.
I have been working with computer technology since 1962 and for many years I was Mr. Eager Beaver about every new thing that came out (just like youngsters of today).
After going through more evolutions that I can remember, I became Thoreauian about tech—–what do I need?
The only need I have from my cell phone is to allow me to make calls with the same reliability of a land line. They still can’t do that. In the office, I still use a land line for business calls.
Listening to radio on the cell phone reminds me of the 20s crystal sets that were put into a bowl for amplification.
SiriusXM is a kaliedoscope of everything broadcast. Internet radio is a 5 color crayon box.
If we can get this passionate about sirius/xm, imagine the meetings Mel and execs. have when their weekly payrolls and reputations, are on the line.
I stick with my view that Sirius-XM is like ESPN. Content and subs…subs and content. No one can pay what they can pay and once they have it they raise the price to the subs to keep it and the cycle goes. Also you have commercials which as the ecomomy comes back increases in ad revenue will be significant. The problem? Malone get the company for max $1.75-2.25 a share. Mels sells because his shares cost about 60 cents. He will make over 200 million.
I’ll take 1.75 – 2.25 in 1 year from now.
I think it will be there. Sign Howard….raise prices…Malone buys the rest.
I found this post today while searching royalty rates for Slacker since it was just announced AOL is dumping CBS and partnering with them instead. Here’s some food for thought guys. I has been said that without radio there would be no music, and that is true. Personally, as an artist manager I would be happy if radio, in it’s traditional sense, paid no royalties at all. It’s great exposure for artists. The problem is that with Slacker’s “Freemeium” service it is no longer a radio station in the sense it plays random tracks, but now becomes a “cloud based” jukebox where any song by any artist can be played whenever and wherever the listener desires. The listener no longer needs to purchase the music.
Run the numbers. At .0015 per song a single listener would have to listen to the same song over 400 times for the label/artist to earn the same amount from a single download sale, and the ability to sell single downloads has already greatly damaged the revenue model for the music industry. If cloud based systems like Slacker are allowed to sneak by on the same royalty arrangements as internet radio, there may not be any music in the future for the stations to play!