Internet Radio Sucks It From SoundExchange

Bloomberg recently reported that AOL, Yahoo!, and Pandora are considering shutting down their internet radio operations due to the continued refusal of SoundExchange (the arm of the RIAA that collects royalty fees) to lower their preposterous royalty rate increases for song plays.

Siding with the music companies, the board in March ordered that royalties be raised to 0.11 cent for each song listened to from 0.08 cent last year. The rate is scheduled to reach 0.19 cent in 2010.

“The current math doesn’t add up,” said Lisa Namerow, managing director of AOL Radio in Dulles, Virginia. “If the rates remain as they are, it would be very challenging to sustain a business that is profitable.”

It may seem trivial when we are talking about fractions of a cent, but keep in mind this is for each play of each song for each user. When you start multiplying millions by thousands, you’re talking about significant number of pennies per year. Don’t forget that the rates are essentially doubling in the span of a few years.

The thing that caught my eye was the revelation that both Yahoo and AOL experienced a 10-11% decline in users last month. The Bloomberg report says it was due to AOL and Yahoo not linking to their radio sites anymore, but I’m still able to see links from their respective music home pages. Perhaps both companies pulled advertising or intra-site promotions. Regardless, this development is very troublesome and a portent of doom for the nascent internet radio industry.

I’ve come to expect idiotic foot-shooting from the mouthbreathers in the recording industry, but it’s always jarring when the consequences of their stupidity start manifesting. Having run an internet radio department for a decent sized company over the past few years, I can safely say that internet radio makes very little money. Like Yahoo and AOL, we had the luxury of being financially supported by other aspects of our company. I can’t speak for the other companies, but Internet radio was figured into our budget as a marketing expense. That’s right, it was used as a tool to gain and retain users. Kind of like what playing music on terrestrial radio does for the record labels. It’s the same damn thing!

SoundExchange justifies the rate increase by claiming that “it’s for the artists.”


It is not for the artist. It is for you to wring every last cent right now from every possible source available to you because you can’t figure out how to make money in the digital age. The recording industry is, in essence, killing the golden goose after it lays one egg. The only internet radio providers who can even hope to make a profit right now are Yahoo and AOL, simply because of their userbase and existing infrastructure. Virtually every broadcaster right now was either losing money or barely scraping by on the old royalty rate. By the time Yahoo and AOL pull out of the market, you can bet your sweet ass innovative radio solutions like Pandora are long gone.

The biggest reason the old rates were not as offensive was because of an option for broadcasters to pay a percentage of their revenue as the royalty payment. I don’t see why this can’t be an option now. I’m sure every broadcaster would prefer a rate increase capped by their revenue rather than be in a situation where their royalty bill is more than their total revenue.

In the long run this would be more valuable to the artists and record labels as they would be making more money each year as the internet radio industry grows. All the while they are gaining exposure as more and more people are able to hear their music. Unfortunately, the Luddites making the decisions at the record labels would rather go for the quick buck, suffocating internet radio before it even has a chance to walk.

About Andy Yen