The Last Days of Internet Radio?

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Bad for Business

Even large companies such as Yahoo Music may not be able to afford the new rates, says the Digital Media Assn. (DiMA), which counts Yahoo as a member. "DiMA companies are reevaluating the viability of the Internet radio business," said Jonathan Potter, executive director of DiMA, in a statement. As a result, some Webcasters may have difficulty raising money from venture capitalists and may have to shutter their business or seek to be acquired by large companies that can absorb the losses. "The rates have come on the high end of what's been expected, and valuations will be lower," says Rags Gupta, a former Live365 Internet Radio executive who now consults for venture capitalists and digital media companies.

Bummer for the growing slice of U.S. listeners flocking to Internet radio. As much as 19% of U.S. consumers 12 and older listen to Web-based radio stations, according to a survey of 3,000 Americans released by consultancy Bridge Ratings & Research on Feb. 21. That's up from 15% a year ago and indicates some 57 million weekly listeners of Internet radio programs. More people listen to online radio than to satellite radio, high-definition radio, podcasts, or cell-phone-based radio combined.

A "Sinking Ship"?

To cope, some broadcasters are already considering moving operations overseas, out of the CRB's reach. Others are looking into playing fewer songs and expanding talk shows. Some may run more ads. Trouble is, most listeners want mainly music. And increasing the frequency of ads or raising ad rates won't work for some smaller sites, where advertisers haven't exactly been knocking down the door. "We were just getting our foothold, now we have to start all over again," says Bryan Payne, CEO of Spacial Audio, a seller of software and services for Internet broadcasters. "We are all on the same sinking ship."

Unless the CRB decision can be reversed or renegotiated on appeal. Indeed, the decision itself states that it "does not mean that some revenue-based metric could not be successfully developed as a proxy for the usage-based metric at some time in the future by the parties." Many Webcasters are counting on DiMA and larger Webcasters to renegotiate the deal. On Mar. 7, when a subcommittee of the House committee on Energy & Commerce will hold a meeting on the future of radio, DiMA is expected to offer criticism of the decision. Some Webcasters hope Congress will get involved and establish different royalty rates for small broadcasters. The now-expired Small Webcaster Settlement Act of 2002 stipulated that certain noncommercial Web radio stations didn't need to pay royalties at all, while other small businesses only paid a percentage of their expenses or sales.

Jeff Bachmeier, president of Minneapolis-based Web radio station Club 977, says the recording industry benefits from the existence of small Webcasters and should be willing to be a party to renegotiated terms. "I don't think the labels want Internet radio to go away," he says. After all, people often discover songs on the radio and then buy the actual recordings. A DiMA survey of 1,008 online music radio listeners and music services subscribers published in January found that nearly half are spending more than $200 per year on music, and nearly 30% are spending more than $300. Before the Internet, an average consumer only bought about $100 worth of CDs a year.

Negotiations over fees could take months, however, while the impact on the Web radio industry is expected to kick in almost immediately. "It's just sad for Internet radio because it has such high potential," says Paul Palumbo, founder of consultancy AccuStream iMedia Research. "Wranglings over copyright will limit its growth," he says. "It's going to cause confusion, concern, and pulling back."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.