After the U.S. Copyright Royalty Board (CRB) endorsed a plan by SoundExchange (the royalty collections unit of the RIAA) to retroactively raise the fees Internet radio broadcasters have to pay, we went to the largest online radio ad sales business in the industry, Ronning-Lipset Radio. We wanted to know what this might mean to ad rates and transacting business going forward.
We found the royalty increases are so high that many online radio stations will have to go out of business or dramatically increase ad rates/units to cover the fees.
CRB's new royalty structure begins at .0008 per performance, retroactive to 1/06. Per performance for web radio is streaming one song to one listener.
Kurt Hanson's Radio And Internet Newsletter (RAIN), calculated that an average online radio station that plays 16 songs per hour would owe 1.28 cents per listener per hour. According to Consumer affairs dot com, the rates would continue to increase each year. In 2007, Web broadcasters would owe .0011, .0014 in 2008, .0018 in 2009, and .0019 in 2010. Those royalty fees only cover the actual broadcast of the songs to listeners -- the station owners would also have to pay royalties to the performers as well.
SaveNetRadio.org say a royalty fee of .0011 add up to "about 1.76 cents per hour, per listener. A station with [an average of 500 listeners] would be hit with fees of 211 dollars per day, 6,336 a month or 76,000 a year."
"This amount of money is beyond the resources of all but the very wealthiest of corporations," they said on their site.
We asked Eric Ronning and Andy Lipset: What is this going to do to your clients?
Said Ronning: "I think it's causing a lot of people to re-evaluate their businesses. It's going to cause many of them to decide if it's a viable business going forward."
Is it almost good for your own business, because online broadcasters are going to have to depend on your ad sales skills more than ever now to remain operating?
Said Lipset: "The ruling is not into the Congressional Record yet, but they've made a decision. Everybody from Clear Channel down to Little Stevie's dot com radio station will take those new numbers and apply them to their own business...As a company that sells online radio spots, one of the things advertisers and consumers love online radio so much is its low commercial load; its substantial access to a lot of interesting formats you would not otherwise have access to and its educated, qualitative at-work audience. So having more spots to sell, or forced sales of spots, frankly, that isn't the promise of what this is about."
How do you see the model changing-more spots, more expensive spots, limited listening, more paid listening?
Said Ronning: "The market will dictate what that turns into. What we know is advertisers today are investing in online radio as part of their advertising plans. They are very happy with the results they're getting for the price they're paying. It has been included and considered part of the radio mix by a substantial number of traditional advertisers.
The advertisers have set expectations and valuations on CPMs and price, etc. The online radio space is starting to express a capacity to exceed a little bit maybe the CPM base for traditional radio on network. The question is will buyers now pay a multiple that is so far over the other options? Will they now pay a premium? I think they will, but will they pay quadruple of what they were paying to meet that expectation? I think that's unlikely."
Quadruple?
Said Lipset: "Everyone will have to do their own math, but Kurt Hanson, who is also an internet broadcaster, said he would be paying 25% more than he's currently making. He asked, 'How do I do that?' He said he will have to increase his rate 50%-80% in order to be profitable.
The bigger challenge is in some cases the royalty rates that have been proposed so far out weigh any revenue potential that at the end of the day you've got people who really have to make a decision about going forward. Everybody has taken out the calculator and has said this is how many users I have, generating this many hours and this many songs. That costs me now under this ruling, this much money. That's fixed.
Then they can say that many people listening for that many hours with X number of spots generates this many impressions during the course of a week, month or year. And assuming a sellout rate and a CPM, they're doing math on that and those two things aren't adding up for anybody.
People may start putting in listening caps. From the standpoint of listener choice, consumer choice, much of that may go away. Many of these esoteric, smaller broadcasters are going to be hard-pressed to find a business model that allows them to stay on."
RBR observation:
Looks like another dot com bust coming up, thanks to greed. Hopefully this will be changed before it becomes law-it affects online-only broadcasters as well as radio stations streaming their signal.
Funny, Sirius CEO Mel Karmazin has been on the Hill in Washington, talking about how his competitor is not XM, but all forms of audio entertainment, including Internet radio. Now all of a sudden if there are a bunch of Internet stations that go away, how does it impact that line of thinking, and the proposed merger with XM?
