The Sounds of Silence

Bloomberg News reported stunning news this week about Internet Radio that shook up the business community and political circles, not to mention the rapidly growing legions of Internet Radio listeners: both AOL and Yahoo are on the verge of shuttering their Internet Radio operations!

This isn't news at all to radio industry insiders who had predicted that the Recording Industry Association of America's (RIAA) bizarre royalty demands made it totally impossible for any Internet Radio operation to ever break even, let alone make a profit. The RIAA has demanded huge per listener/per song royalties that literally mean the more listeners Internet Radio attracts, the greater the financial losses.

Imagine if some group owned a copyright on hamburger buns and they demanded that McDonalds lose 5 cents on every hamburger sold, regardless of price or sales volume. Obviously McDonalds would react by closing their restaurants!

This is exactly what the RIAA has done. And yet they are "shocked" that AOL and Yahoo would consider closing their radio stations. Bloomberg reports:

Nov. 28 (Bloomberg) -- Yahoo! Inc. and Time Warner Inc.'s AOL unit may shut down their Web radio services after being hit with a 38 percent increase in royalties to air music. "We're not going to stay in the business if cost is more than we make long term," Ian Rogers, general manager at Yahoo's music unit, said in an interview. Yahoo and AOL stopped directing users to their radio sites after SoundExchange, the Washington-based group representing artists and record labels, began collecting the higher fees in July. Those royalties may stifle the growth of Internet radio, which increased listeners 39 percent in the past year, according to researcher ComScore Inc. in Reston, Virginia. Radio sites have been "dealt a severe blow," said Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co. in New York, "It seems very unlikely that at this stage a solution will be reached." Yahoo, based in Sunnyvale, California, is promoting a music service offering videos and songs for sale rather than its Launchcast, the largest Web radio site, Rogers said. As a result, the number of people using Launchcast fell 11 percent to 5.1 million in October, according to ComScore. AOL Radio users declined 10 percent to 2.7 million from 3 million. "The current math doesn't add up,'' said Lisa Namerow, managing director of AOL Radio in Dulles, Virginia. "If the rates remain as they are, it would be very challenging to sustain a business that is profitable.'' "We're really re-examining the radio model," AOL's Namerow said. "Shutting down the business is a possibility if Webcasters and the music industry don't come to an agreement."

It remains terribly unclear why the RIAA wants to kill Internet Radio. One thought is that the major labels want total control over the industry, forcing independents and unsigned artists off the air. Others believe that the big labels simply don't understand the medium and equate Internet Radio with file sharing. Still others see Internet radio as the stalking horse for future battles with AM and FM radio who pay no artist royalties what-so-ever and never have.

Regardless of the reason, the very existence of Internet Radio is threatened.

Here are some simple math facts. Yahoo's Internet Radio operation, the largest in the world, expects advertising revenue to rise 4.7 percent to $45 million in 2008. That sounds good doesn't it?

Except, the RIAA demanded royalties would increase 19 percent this year. An impossible financial burden. Moore importantly, if Yahoo actually increased listeners, the usual solution to increased costs, the royalties would rise even higher..... much higher.

Increased listeners are actually the enemy. Hence all Internet Radio operations, including Yahoo and AOL, have stopped advertising or promoting their services and have created bizarre listener caps and automatic shut downs to reduce active listeners.

The only hope is that Congress will step in and demand reasonable royalty rates. At this point Internet Radio operators would like to settle for the exact same rates already granted by the RIAA to Sirius Satellite Radio earlier this month.

The question remains as to why the RIAA wants Internet Radio to pay so much more than satellite radio. It is interesting to note that satellite radio plays virtually no independent and unsigned artists. The bland blend of music available via satellite is virtually all big record label controlled.