Online Radio Mortgages Its Future

Yesterday, it appeared Mel Karmazin was about to get rescued by Liberty Media's John Malone, the Mel Karmazin of the cable TV business.

And on the same day, terrestrial radio was rescued from the record labels when it struck an agreement with SoundExchange (representing the music industry) to pay rates more favorable than the ones webcasters are faced with.

What's going on here?

Can we call a spade -- a spade.

The one industry that should be helped is webcasting. It is part of the digital future that has real growth written all over it.

Meanwhile, Sirius XM needs to be rescued from itself because it cannot pay its debt. Satellite radio settled with the devil earlier over music royalties and by some estimates is paying 7% of revenues to the labels. Believe me, the deal they made earlier with SoundExchange is the least of their problems as satellite radio has never really become a viable business.

Kurt Hanson, who is one of the most reliable observers of the royalty situation, tells me:

"...Broadcast radio currently monetizes its on-air audience at about $.10 per listener-hour. So the 2009 rate of $.0015 per-performance, at about 12 songs per hour, is about $.018 per listener-hour, or about 18% of revenues assuming they can monetize their online audience as well as they do their broadcast audience. The 2015 rate of $.0025 per performance x about 12 songs per hour is about $.03 per listener-hour, so that's about 30% of revenues using the same assumptions".

Kurt believes that radio is paying a high royalty rate, "but broadcasters are in the best position to monetize their listeners. (They have skilled sales staffs with years of relationships -- compared to Internet-only guys, who lack that, AND have audiences dispersed across America rather than being concentrated in one specific city.)"

Last minute negotiating is going on between webcasters and SoundExchange with the deadline already past. Why do I get the feeling these webcasters are about to get screwed?

SoundExchange will have to do a deal with Small Commercial Webcasters.

How insane is it that commercial broadcasting, which is dying at the hands of debt-ridden consolidators and satellite radio that can't even merge it's way beyond debt to profitability, have deals with the music industry that they think they can manage?

Meanwhile Pandora, AccuRadio and a host of independent operators are the ones who are breaking music and promoting artists yet they stand to get the most burdensome royalty rate.

Actually, it makes a lot of sense in the screwed up world of big business.

The U.S. government would rather bailout bankrupt businesses than help them grow in the first place. It's the American way.

In the music industry, they'd rather help the devil they know (radio and satellite radio) than help the independent webcasters who are a hit with consumers but can't afford to run their businesses facing draconian royalty rates.

The music industry's "business" is to make recordings that consumers manage to get for free.

Mel Karmazin can't sell a download from his entire satellite monopoly.

All radio stations can do is put their terrestrial signals online and even at that, they only garner another 3 or 4% more audience streaming the same old programming.

If any of this sounds crazy to you, join the club.

Here's a better plan:

1. No additional fees for terrestrial radio stations that stream on the Internet unless it constitutes ten percent or more of the station's revenue. If it does, then radio broadcasters should pay. This cockamamie agreement that the press will be mindlessly touting over the next few days is ridiculous because streaming radio on the Internet is not a business until it makes money. Help it grow. (I know that is counter-intuitive for the record labels, but try to deal with it).

2. The labels should pay Sirius XM not to play their music since they don't really sell music. Just kidding! But hell, if the one-and-done satellite monopoly can't break a hit or sell a download, did the tree fall in the forest and no one heard it? I mean -- who cares? Satellite radio is so not a business (as you'll see over the next eight months). Why are you collecting royalties from the homeless so to speak?

3. For webcasters -- part of the growth business for digital media -- give a three year "royalty holiday" to encourage them to become profitable and then, at the same ten percent level that I'm suggesting for terrestrial radio, charge royalties based on a percentage of the profit. If they make under ten percent profit, charge little or nothing. You want to tax the fat cats -- isn't that what we do in America? And stop with the restrictions on how many times you can play an artist in an hour.

Play away. Are you nuts?

Now look -- I don't expect any of this to actually happen especially as the NAB starts to sell the radio deal to the rank and file.

My feeling about the NAB hasn't changed. It is not just radio's trade organization. It is toxic to the industry they purport to serve.

The National Association of Benedict Arnold's sells out radio every time and takes credit for it with their smooth spin machine.

Wasn't it the consolidator-endorsed NAB that recently wasted millions of radio dollars -- your dollars -- on fighting satellite radio? Satellite radio -- never a threat to anyone except the NAB looking for relevance.

NAB fought for radio against SoundExchange and look what they did for you!

Got you a lousy deal -- where you pay royalties even though your webcasts are probably not going to make a significant profit. Expenses without the promise of profit. Because as I have said, online radio streaming is not a business. It's a 3-4% add on to your terrestrial audience.

Bob Bellin calls it suicide at the hands of the NAB:

"This is actually WORSE than the original deal, if you factor in what’s happened to the radio ad market, which is down 25% so far this year on top of a 10% slide last year. So X size audience nets way less revenue than it did when these rates were established – meaning that webcasters must pay a much bigger % of their revenue to the the labels than what was the original calculus, which virtually everyone who didn’t work at a record company believed made it impossible for streamers to make a profit.

A station with an AQH of 205,000 would pay in excess of $27 mil per year. By the time that station paid all of their other costs, there is virtually no way they could make a dime.

IF I were in radio I’d cancel my NAB subscription. They paid millions to lobby against the Sirius/XM merger which proved to be an embarrassing waste of time and money. Now they mortgage their only hope at survival by agreeing to a deal that nets out worse than the original one.

Ladies and gentleman, the NAB got you again -- first it helped ram through deregulation that led to consolidation as part of the Telecommunications Act of 1996.

You're witnessing what that did.

Now, the NAB has mortgaged radio's future with an unfavorable deal that sets a standard that can only hurt webcasting royalties.

When I am saddened, I think back to my home state of New Jersey from which all wisdom emanates (at least that's what they think in New Jersey).

When I used to drive down Route 72 on the way to Long Beach Island and a forest fire had wiped out thousands of acres of scrub pine I used to say, "what a shame". But I have since come to appreciate those fires that burned through to the underbrush. Although their aftermath was not pretty, the devastation eventually led to rebirth.

That's how this insane business of terrestrial and satellite radio monopoly will ultimately play out.

As Billy Joel sang:

We didn't start the fire
It was always burning

Since the worlds been turning

We didn't start the fire

No we didn't light it

But we tried to fight it

Now, on the eve of another devastating cutback at Clear Channel and continuing slashes at other radio groups, every nonsensical move takes on even more meaning.

Royalties from dying businesses are no solution to anyone's problem.

You encourage new businesses like webcasting to grow -- not bail out consolidators and record labels that could screw up a wet dream.

Artists and labels have a right to share in any profits from webcasters when webcasters can in fact actually make profits and not just pay to play the music.

And in the meantime, it would be in everyone's best interest if they helped the living instead of taxing the dead.

Radio used to lie to its listeners by mindlessly repeating liners like "fewer commercials, more music and the best variety" -- not that the audience ever believed them.

Well, that's still a problem.

Knock yourself out all you want about settling online royalty fees with SoundExchange, but you haven't even begun to solve the more pressing problems.

Like making content that people will crave and making it available to them on technology that they prefer not the technology you prefer.

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