More Ads Unlikely to Counteract High Web Radio Royalty Threat

The proposed increase in digital music Webcasting royalty fees is still not guaranteed, but if the threat does become reality, Webcasters agree a boost in online ad revenues won’t ensure survival. Indeed, some worry the potentially devastating impact of the rate hike could deter advertisers from exploring the medium at all.

“I don’t believe there’s anything we can do from an advertising standpoint to mitigate the CRB [Copyright Royalty Board] decision,” said Joe Kennedy, CEO of Pandora, a service that helps users refine personalized music streams based on preferences for songs or artists. The CRB earlier this month set new royalty fees effective retroactively through the beginning of 2006. If made official, pending rehearing of arguments against the proposed rates, royalties would rise from $.0008 per performance per listener for 2006 to $.0019 per performance per listener in 2010.

“The royalty decision assumes we can increase the advertising per user per hour by two and a half to three times and that’s just a wildly unrealistic assumption,” said Kennedy. “Just because there are more people [streaming music] and more advertiser dollars chasing them doesn’t mean you can stuff in more ads per hour.” The industry’s dilemma, added Kennedy, does not necessitate advertisers will be willing to cough up higher CPMs, either. Pandora has ramped up its sales force from one to nine in the past year in the hopes of grabbing more ad dollars.

“Most of our affiliates have been looking for revenue solutions for awhile,” said Jennifer Lane, president of online radio ad network Net Radio Sales, suggesting the sheer nature of the business is what is driving those efforts, not the rate leap. “I’m not sure the increased royalties are necessarily going to change that,” she added. The firm, which sells in-stream audio ads, synched in-player banners and pre-roll audio and video ads, works with over 500 small and large online stations including Cox Radio, AccuRadio and Radioio.

Multi-channel electronic dance music service Digitally Imported also is also part of the Net Radio Sales network. Digitally Imported Founder and Manager Ari Shohat told ClickZ News, “We are always trying to get as much ad revenue as possible.” He questioned the viability of a business that could sell enough ads to afford the royalty fees. “There would be nobody left listening on such a radio station either with so many ads,” he continued. The company offers display and streaming audio ads, and counts American Express, HP and Remax among its advertiser clients.

Jeff Bachmeier, president of online Eighties and retro music station Club 977 affirmed what Shohat and others have concluded, stating, “We’d have to sell over 20 minutes of ad time an hour just to pay the fees.”

Multi-channel Internet radio station AccuRadio, for instance, earned $400,000 in revenues in 2006, but would owe $600,000 in royalty fees if the ruling stands, according to VP of Music Programming Paul Maloney, who also acts as editor of industry news site RAIN: Radio and Internet Newsletter. “The advertising reality is just not there. It does not add up,” he said.

Industry insiders believe the CRB based the new rates on Web radio ad revenue assessments. A January 2007 JPMorgan report on radio broadcasting pegged the Internet radio industry at $500 million in 2006. The report estimated online radio CPMs grew from about $1 in 2003 to an average of about $5-6 in 2006, compared to about $3-7 CPMs for terrestrial radio networks and $10-12 for terrestrial spots.

Free-form listener-supported radio station WFMU has been negotiating royalty-free agreements with artists for about four years in preparation for the long-anticipated CRB rate increase. More than half of the songs in its library won’t require royalties when played, said Station Manager Ken Freedman.

“We get approached for ads all the time right now and we always turn them down,” said Freedman. The station doesn’t accept advertising on its site or in its terrestrial form, but a future service it is developing will, according to Freedman. The unnamed separate sister site, set to launch sometime next year, will be a repository of music, radio shows and podcasts, all royalty-free. WFMU expects to sell placements directly to advertisers on the site, in addition to joining a network such as Google’s AdSense; the station is in the process of hiring someone to run the new operation.

Radioio founder Mike Roe believes his firm is doing everything it can to spur ad sales. Still, he wonders whether Internet radio services will be relying on ad support as much in the future. “The bigger question is how many Internet radio broadcasters are going to consider moving their services over to a subscription-only basis,” said Roe.

In fact, he worries the royalty increase could spook advertisers. “A lot of us are wondering, ‘Will this put a dark cloud over the industry so that advertisers will be afraid of the medium?'”

In the end, though, Roe is hopeful. “I really do believe that this, too, shall pass,” he continued. “Five years ago this was not an industry.”