Internet radio’s troubles and the wider ramifications

Michael Arrington wrote this article on the Sorry State of Music Startups here –

In the last week or two a few things have happened that have also demonstrated that Internet radio services are struggling to stay afloat in this market

Last FM announced a paid sub model, whilst competitor imeem is rumoured to be struggling to pay suppliers (including record labels). It’s also been said that there are doubts myspace music could be making money given the amount of music they’re serving, the subsequent royalty payments it has to pay labels, and the advertising revenue being generated not being able to cover the costs.

It could be said streaming music services online are in trouble. How has this happened?

1/ No real killer commercial model. Most Internet radio services rely on display advertising … problem is display advertising is not really the best match for an audio service, especially one that generally runs in the background (ie minimised) so most of the ads aren’t ever seen nor interacted with. Generally, internet radio display ad placements bomb – low response, higher that necessary frequency. That’s not to say there isn’t a great commercial model – there is – it’s just the reliance to date has been on banners and putting an unjustified premium on these.

2/ Lack of identity. Aggregation alone isn’t enough – you need to stand for something (like all the best radio stations do)

3/ Operating costs. Music labels want a greater clip of the ticket that they have ever wanted before … server/data costs are also high.

Personally I’m not a massive user of Internet radio. I like Last FM but the rest I can take or leave. Hype Machine is good but it’s more a place to find music than a station. I’ve always felt Internet radio lacks what makes radio really solid – good DJs that can introduce you to music you would have otherwise not found. That is probably more a reflection of me and my laziness than a reflection of the wider market. Usage of Internet radio is continuing to rise.

The issues Internet Radio is facing now is a mix of two key areas – lack of sound commercial thinking and possibly excessive record company royalty demands. The problem is – if you sort out the former but the latter remains as it currently is they are still screwed. Sure, the labels have the right to tell the Internet stations their current commercial model is broken – because it is – but even if they fix it and manage to increase yield and revenues the royalty costs will make it impossible for them to operate as lean as their broadcast counterparts.

Internet radio stations/broadcasters pay a higher royalty rate than their broadcast counterparts. They pay around .4-1c USD per song. This starts to become a pretty heavy cost when there’s hundreds of millions of songs streamed per month.

It’s reported in AU the commercial radio stations combined pay around $3m per annum in broadcast royalties. This works out in AU at around 0.5% of total revenue and a marginally higher % when compared to operating profit. However Internet radio stations are paying anywhere between 50-100% of revenue in royalties. How much is this as a % of profit? No idea – to work that out you need to be operating at a profit.

So whilst the radio broadcasters in AU aren’t rolling in cash right now – they are profitable. At the same time, Internet broadcasters aren’t yet are pushing a more innovative model. I am not sure of the royalty model behind music television but assume it works on a similar premise to commercial radio and therefore isn’t operating as a loss making business.

Last FM going to a premium sub model is basically an attempt to try and generate enough cash to cover costs. Is this the answer? Probably not. However, the inside word is that there are such strong limitations imposed around their dealings with the labels that it makes more innovative commercial executions difficult. What gets me is that a station like Channel V – which is the same videos played on rotation each week … with limited on air talent and small production costs and unique content – can make money whilst something like imeem or lastfm is so far away from profit despite being a much more appealing user proposition.

You have to wonder what the labels motivation really is … the TV networks have approached the Internet in a much different way. Hulu CEO George Kliavkoff said at Ad:Tech in 2008 that the best defence was a ‘good offence’ and with Hulu what they tried to do was offer a better service that what you could get illegally on YouTube or Torrent sites. Hulu is now a very successful business – it focused its attention on making its product solid instead of treading on its competitors. And it worked.

Record labels – the opposite. Awkward web presences (sonybmg locally tried selling ads on its website through Fairfax in 2006, Universal Music’s getmusic also offers ‘advertising opportunities’), equally awkward DRM and inconsistent royalty schemes. The weird thing is bands/djs etc are generally way ahead of the curve when it comes to using the Internet as a CRM channel and understand the value and opportunity the web has presented. Take away the lastfm’s, myspace music’s and imeem’s of the world and it substantially limits band/musician audience touchpoints.

Could what we’re seeing with Internet radio be the start of a bigger issue. It’s always been assumed the Internet is a limitless tap when it comes to selection and choice across all forms of content from music to news, entertainment, information … you can find everything, all the time, 99.9% of the time for free. It might be hard for this to continue at the same levels we’re accustomed to if the companies providing this limitless selection aren’t viable and the investment dollars stop flowing due to less than convincing revenue models and limiting operational guidelines.


5 responses to “Internet radio’s troubles and the wider ramifications

  1. Neil Ackland

    Excellent post Ben! The disparity between streaming licence fees and radio are a real issue. Seems to me that music start-ups were an easy target for the labels when the game was all about audience size and VC’s were throwing millions at them.

    Now the VC rivers of gold have dried up the game is about profit. The labels could end killing off these new revenue streams unless they change their approach.

  2. Whilst I am not a fan of high label royalties for streaming music rights, I will say that there needs to be a degree of understanding for the labels as their world morphs from physical sales to digital revenues. The legal digital download market is not growing fast enough to compensate for the rapid decline in physical music sales. The labels need different deals for digital licensing to finance their future survival.

    Have the labels gone too hard on streaming pricing up until now? Yes, I believe so; however they are slowly moderating their position more as they come to terms with how to manage this new space.

    mcm has music streaming licences from all 4 major labels and via our own sites and our syndicated players, we are the largest music streaming business in Australia. Our model is working and once our critical mass reaches its required tipping point our syndication partners, our label partners and mcm will see appropriate returns. Our model is working also because our audio services contain audio ads and our high quality video services contain video ads. For rich media content, display should be a bolt on to rich media advertising. It is hard to justify display as a stand alone communication with rich media content offerings. Display also offers a declining yield where as audio and video, properly integrated in an uncluttered, high quality consumer offering, commands a good and justifiable yield that can better finance the business model.

    Finally you have to get the value proposition right for all stakeholders; first and foremost the user, then the advertiser and then the labels. Without happy and loyal users, content with high quality ad funded content and happy and loyal advertisers, keen to reach the users in that uncluttered environment with rich media ads, the publisher has no business and the labels have no revenue.

    A good article Ben and I agree with most of your sentiment, but I do say watch this space with mcm media and our new Digital Entertainment Network (launching in May) and then keep an eye on mcm’s potential in this space beyond Australia’s boarders.

  3. talkingdigital

    thanks for commenting tony … i look forward to seeing what my pelaco neighbour is working on here and overseas.

    disclaimer: tony and i share the same office building.

  4. Arrungton wrote it and he quotes Kiavkoff. Two of the stupidest people I know. I guess if you like bullshit, then these are your guys.

  5. Pingback: MCM launches Digital Entertainment Network « talking digital – Ben Shepherd

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s