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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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DECEMBER 10, 2002 SPECIAL REPORT: TINSELTOWN AND TECH Web Radio's Personal Edge Stripping off the Top 40 straightjacket, online listeners enjoy their own playlists while hearing new music -- and many are buying what they hear
That's why Redfield has turned to Internet radio. For $4.95 per month at Listen.com's Rhapsody Radio Plus service, he can program his own personalized online "station" with six to eight artists that he has chosen. Rhapsody's software then adds 10 or 12 other bands that Redfield is also likely to enjoy, based on their style of music. It's the perfect solution: Redfield avoids mass-market pop songs and at the same time is introduced to bands he might otherwise never learn about. "Half my problem when I'm listening to songs on the radio is that I don't hear the song title or the name of the artist. Or I do -- and I don't remember it," he says. Not so on Rhapsody, which displays the song title, band name, and album cover for every song -- and provides a link to a place where Redfield can make online purchases of the albums he enjoys. DISCONNECTED. If you believe the music industry, online piracy is behind the decline in music sales, which fell 7% in the first six months of 2002, according to the Recording Industry Association of America (RIAA). But the experiences of music lovers such as Redfield suggest that declining sales result more from a disconnect between what the industry wants to push and what consumers want to hear. Traditional radio, historically the record labels' top promotional ally, plays a tiny fraction of the music released every year. The average radio playlist ranges from 33 to 38 songs. Compare that to Rhapsody Radio, where an average preprogrammed playlist runs to 1,000 songs, and the shortest list boasts 400. Conventional radio's shorter lists help powerful record-company promoters boost sales of artists who make the cut -- but they're increasingly turning off serious music fans. Certainly teenagers, who represent 21% of CD buyers, are turning their backs on old-fashioned radio. According to research and ratings outfit Arbitron, only 10.7% of consumers between the ages of 12 and 17 regularly tuned into radio during the summer of 2002, down from 11.6% in 1999. Instead, hard-core music fans and tech-savvy teens are turning to Web radio, where the selection of tunes is limitless, searchable -- and customizable. BEYOND LISTENING. Since 1997, 28 million people have registered for online radio station MusicMatch's free player, and 130,000 have subscribed to its $4.95-per-month service. This makes it the most popular paid-music service on the Net. And more than 4 million people have downloaded Radio Free Virgin's Internet player, which offers 45 online "stations" to paying subscribers and a more limited list free of charge. Virgin's offerings include funk, soul, alternative rock, even a station dedicated to Broadway show tunes. Online listening often translates into sales: According to Arbitron, online music fans who listen on a weekly basis buy 21 CDs each year. Those who listen at least once a month buy 18 CDs. Compare that with the habits of the average American, who buys 13. Says Bill Rose, Arbitron's director of Webcast services: "Web radio is a great promotional tool. The more people listen, the more they buy." As recently as this summer, digital-media pundits had all but written off Web radio. The music industry was demanding sky-high royalty fees that threatened Webcasters, large and small alike. And unlike traditional radio, which uses a blanket signal to cover an area no matter how many people tune in, online radio stations must pay to send an individual stream to each listener's computer. Webcasters call it the "paradox of popularity": The more customers you have, the higher the cost of doing business (see BW Online, 6/21/01, "Web Radio Pioneers Sing the Blues", 4/2/02, "Saving Web Radio: The 5% Solution"). P2P RADIO. Today, however, Web radio is making a miraculous recovery. On Dec. 5, President Bush signed into law legislation that will allow small Webcasters to pay royalties as a percentage of revenues, rather than swallow a per-song/per-listener fee. Webcasters with more than $1 million in annual revenues will pay $0.0007 per stream per listener as ordered by the U.S. Copyright Office. On the technology front, online stations including Radio Free Virgin and National Public Radio are beginning to employ peer-to-peer architecture to lower the costs of streaming. Instead of broadcasting an individual stream to each listener from a central server, the stations enlist the computers of listeners (with their permission) to rebroadcast streams to other listeners nearby. Zack Zalon, Radio Free Virgin's general manager, says this new technology has cut the station's bandwidth costs by an average of 40%. Best of all, because online radio is streamed, not downloaded, it sidesteps the copyright obstacles that plague even the legitimate services that let listeners download music onto their PCs. With streaming, users can't copy the songs they hear online. That means Webcasters are free to play popular artists who have refused to let their music be distributed (legally) online -- marquee names like the Rolling Stones, the Beatles, and Madonna. SALES INCENTIVE. It may not be too big a stretch to say Internet radio could be a partial salvation for the ailing recording industry. For one thing, online radio solves the vexing "when you play it, say it" problem when DJs don't announce a song's complete details after a 10-in-a-row set. Online, the DJ has no need to name the artist or song title, since all Internet players display that information continuously while the song is on. And online broadcasters have a big incentive to sell CDs: The royalties they earn on sales after sending listeners to affiliated online music retailers can help offset the royalties they pay on the songs they play. Some stations, such as AccuRadio.com, show listeners pertinent information on the most recent three songs played to encourage CD purchases even after a song has ended. Internet radio also lets online broadcasters take risks that radio jocks can't. Traditional DJs are discouraged from playing unproven songs or no-name artists for fear that listeners will turn the dial. Online-radio listeners, by contrast, can skip a song they don't like without tuning out. The result: Cyber-radio can be much more adventuresome when it comes to playing unfamiliar fare and introducing new acts. A NEW RIAA TUNE. When MusicMatch added an obscure track called Double Drums by acid-jazz band Peace Orchestra last August, sales of the group's Reset album surged, though they won't approach the gold or platinum sales marks (500,000 copies or more). Since its release in August, more than 7,000 copies of Reset have been sold. That's about twice the rate of Peace Orchestra's first album, which debuted in early 1999 and has been selling just over 30,000 copies per year. According to MusicMatch, Double Drums' popularity also boosted sales of other acid-jazz albums. The results are promising enough that even the usually technophobic RIAA is changing its tune. "We agree that traditional corporate radio doesn't always offer the most diverse playlists," says Jonathan Lamy, an RIAA spokesman. "Webcasting offers an innovative and effective way for fans to enjoy more diversity, more artists, and more music." And most important, it can encourage listeners to buy more music. Thanks to Internet radio, Web technology could finally fulfill its promise of expanding and enhancing the music business, rather than -- as the recording industry has feared -- destroying it.  By Jane Black in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | DECEMBER |
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