Feature: Tuning out Web radio

Hundreds of Web radio stations are going dark because they claim that new royalties, currently set at a fraction of a penny per user per song and retroactive to 1998, will bankrupt them. Broadcasters are crying foul because they feel they are victims of a squeeze play (they're right). Supporters of the royalties, like the Recording Industry Association of America Inc. (RIAA, which actually wants the royalties set higher) say the royalties are justified and the rights holders are entitled, by law, to compensation (they're right, too). This is the latest, but certainly not the last, battle over digital copyright and distribution (and money) that we're going to see over the next few years as lawyers, lawmakers and lobbyists decide how it will all work. Or not.

"Free music has screwed everybody," writes my friend, who is a writer and musician, in an e-mail to me, responding to my query about the state of music on the Web. "The whole thing is a gigantic mess, and the wheels are already in motion on so many fronts that it is far too late for this."

"This" was my naïve suggestion about how to solve the problems currently plaguing Web radio and music on the Web in general as I saw them--namely that artists and their labels were letting copyright and licensing fees stand in the way of moving to a digital distribution model, which would benefit them in the long run--that if they would just "cool it a little," all interested parties could work together to deliver a product or service that would fairly compensate the artists and labels while not gouging the broadcasters or consumers. I thought Web radio was part of this solution and that the royalty grab by the artists and labels would kill it. Not anymore. Turns out that Web radio has a mix of problems that I can't solve, but the market is doing its best to answer questions about the viability of Web radio.

On advice of my writer/musician friend, I turned to Lee Black, an analyst at Jupiter, to help me zero in on why streaming tunes on the Web was such a problem. Let's start with the royalties, he suggested. The more listeners and the more music a webcaster plays, the more in royalties it owes. There will be incentive, Black says, to stream fewer songs to fewer users in order to keep costs down. "The royalties just made webcasting even more expensive," Black says. "And it's a variable cost, too, depending on how many songs you have and how many songs you play."

The next issue, according to Black, is bandwidth, which actually costs webcasters more money than the royalties would. In traditional radio, infrastructure (the broadcast tower) costs are fixed for the most part. On the Web though, your costs are based on the number of listeners you have. To accommodate more users and stream higher quality sound, you need to move more data, which can drive your costs up. "The fundamental problem is the bandwidth becomes prohibitively expensive to deliver on a per user basis," Black says. "Broadcasting is far more scalable because the incremental cost goes down as you add users."

The third failure of webcasting is a lack of advertising. Because most radio advertising is local, says Black, the fact that the Web can reach people hundreds or thousands of miles away doesn't matter to advertisers. "People do enjoy radio online, but it's not a big enough market for skeptical advertisers or skeptical clients of advertisers to justify those media buys."

The short-term answer might be a subscription fee to cover the costs of the royalties, as some are trying, but such a move would likely drive traffic down which would result in even less advertising, so the gains here will be marginal. For now, it seems that the content best suited for webcasting is news and sports, which also require their own degree of licensing. Music will be left for the big boys--Yahoo, MSN, AOL and the rest.

Eventually, music will move from a broadcast/streaming model to a download/subscription model that will allow users to copy songs to CDs, but we're still years away from that and we'll live with hybrids like MusicMatch, PressPlay and Listen.com. Although the industry has been slow to recognize it, Black says there are opportunities for the content providers. "With each new distribution channel comes one more revenue stream for the content that you own," he says.

Yup. My friend is right. Free music did screw everybody. In fact, I've got a song from his former band in my MP3 library. Didn't cost me a cent. Sorry I screwed ya, pal. But I wouldn't want copyright and licensing fees to stand in the way of our friendship. How much do I owe you?

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