SHIFT: How the music industry is destroying Internet radio

Internet radio — remember that? It's still around, and after years of being an also-ran in the digital-media arena, it's recently started to offer some services worth listening to and could, God willing, completely reinvigorate the music industry. That is, unless the music industry has its way. Not content to just kill Internet radio, it's also committing professional suicide. Internet radio is poised to pump new blood into the music biz, but instead that biz decided to slice open its own jugular. Nice move.

Pandora, one of the current crop of Internet radio providers, might be the first casualty. SoundExchange, a division of the RIAA, has set up a royalty-fee system so outrageous that it's threatening to shut down Pandora. In fact, the founder of Pandora, Tim Westergren, says he might pull the plug. Keep reading to see what all the bloodshed is about.

Radio As We Know It
Life used to be pretty simple. Radio stations didn't have to pay royalties to recording companies and performers to play music (though they do pay fees to ASCAP, the American Society of Composers, Authors and Publishers). Nice deal, right? Then along come those feisty satellite radio stations. Fees were put in place so satellite radio had to pay 1.6 cents per hour per listener to the music industry.

However, an obscure federal panel decided last year that Internet radio providers had to use a different pay scale. An exorbitant pay scale. It's high now, but by 2010, sites like Pandora will have to pay 2.91 cents per listener per hour. Right now, Pandora will have to pay the RIAA 70% of its projected revenue for 2008, and that bill is going to shut down the site, Tim Westergren, founder of Pandora, said when interviewed by The Washington Post. "We're approaching a pull-the-plug kind of decision. This is like a last stand for webcasting."

Pandora's Dilemma
Although Pandora is quite popular, it's still not getting enough revenue to pay the RIAA's coming bill. Westergren said they were going to turn a profit for the first time in 2009. "We're losing money as it is. The moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we're doing is wasting money." Representative Howard L. Berman (D) from California is petitioning SoundExchange and other politicians to change the rates before Pandora shuts down, but so far, no luck.

Music Bonanza
Internet radio sites like Pandora and Slacker are exciting for anyone who likes to be exposed to new music. Within minutes of going to Pandora.com, you can type in an artist, get recommendations for other similar artists, even be directed to music by that artist from either Amazon.com or iTunes.

Slacker is similar. You can listen to a station created by virtual DJs. You select an artist you like, and you'll find a station that plays songs by similar artists — exposing you to music you've forgotten about or something new you might never have stumbled upon on your own.

The point is both services are great at exposing music lovers to new tunes — songs they'll probably like and want to buy. As such, they should be wildly popular with new and obscure artists, the kind of musicians that don't get airplay on traditional radio. By showing up on a suggested-listening list, they get exposure that’s priceless. What better way to get to potential new fans?

Why would SoundExchange (and the RIAA looking over its shoulder) want to limit how artists receive exposure and publicity, and even sell their tunes. In less than a minute after going to Pandora.com and typing in an artist’s name, listeners can be directed to Amazon.com so they can buy CDs or downloads of the artists they've been listening to. Internet radio is much more likely to steer listeners to actually buy music than regular radio because they’re already sitting right there in front of an Internet-connected computer. Compare that to when you hear a song you like on FM radio, if you can even figure out who the artist is.

Both iTunes and Amazon make it simple to purchase a song, and Pandora leads listeners not only directly to the retail site, but to the exact song you were listening to. Elegant. Why would the RIAA want to punish these sites that are actually helping their artists? This stranglehold is going to kill a business model that makes it painlessly simple for folks to legally buy music.

If This Isn't Promotion, What Is?
The music industry has been suffering massively reduced revenues lately as music downloads have caused CD sales to plummet. Internet radio was a shining new business model. Not only does it give you a way to listen to your favorites, it gives emerging artists a chance to be heard. Pandora and Slacker make it easy to buy new music too. — music that you might never have heard any other way. The music business must be crazy to limit this pipeline.

There has to be a happy medium. I certainly don't mind paying for my music, no matter how I get it. I listen to Slacker radio at home, XM Radio in my car, and my MP3 players are loaded with probably 1,000 songs I've purchased from iTunes, Amazon or ripped from CDs. I wake up to FM music every morning. Funny, that's the only source that plays commercials to make money, and that's the only one that doesn’t have to pay crazy royalty fees. Terrestrial radio has been exempt from those fees, only paying composer royalties because it was thought that airplay was a form of promotion for record sales. It makes no sense that Internet radio is treated any differently.

Want even more inconsistency? Many terrestrial radio stations also stream over the Internet (or for that matter, satellite radio). If they play the latest from The Pussycat Dolls, they don’t have to pay performance royalties for the FM feed. But when they stream the song over the Internet they do.

Let's All Be Reasonable
By all means, put a reasonable royalty fee (which the new fees certainly aren't) on any and all of these services, but don't kill what could be a brilliant way for the music business to grow and expose listeners to new music. Call your Congressman, because this isn’t over yet. Content providers need to look at who they're harming most by removing potential exposure to new listeners.

There's a difference between owning a song and listening to it just once, and it calls for different business models. If sites like Pandora point listeners to a retail site to purchase the song, surely that should be considered “promotion,” and the RIAA should cut them some slack. Obviously, someone needs to pay the labels when you listen to their tunes on the Internet, but it needs to be reasonable. Reasonable enough to keep these exciting listening options up and running — and here's a novel idea — profitable.