I promise my best content has yet to come.  Stay tuned!

In this post, I will further analyze:

#1 Internet radio is the future, yet providers can not sustain growth due to growing taxes on streaming music and a lack of clear revenue models.

I will try to provide a clear understanding of the ongoing Internet radio dilemma.  There are two basic problems that need to be individually analyzed, the high royalty rates and the lack of clear revenue options.

1. High Royalty Rates

First, there are three items that need to be introduced before you can fully wrap your head around this issue.

1. SoundExchange
2. DiMA
3. The Internet Radio Equality Act

SoundExchange represents the recording industry (record labels and artists for the most part).  They are what is known as a Performing Rights Organization, much like ASCAP, BMI, or SESAC (who represent the publishers and songwritters).  The major difference however, is that they specialize in digital transmissions (Satellite & Internet Radio among other streaming music outlets).  They are a non-profit organization with the sole purpose of collecting royalties for their clients.

DiMA, or the Digital Media Association, represent the Internet radio providers (Pandora, MTV, Real Network, etc).  They are the foremost authority in digital music and video policy.  They act as negotiators and lobbyists for the leaders in digital technology.

The Internet Radio Equality Act is a bill that the DiMA have been trying to pass through legislation for some time now.  May 1st,  2007 to be exact.  If passed, it will basically offer Internet radio providers a standard for royalty payments reasonable enough to allow the industry to continue growing versus going bankrupt.

So what’s the big deal?  In a nut shell, the recording industry wants to continue pushing the royalty for streaming music higher and higher each year, while the Internet radio providers want to pay a standard reasonable rate that will allow them to continue growing.   So, why is SoundExchange being so difficult?

Well first lets not forget that the industry as a whole is suffering.  It’s profits are down more than 50% from what they were at it’s peak in 1999.  Many consumers are trading in their shopping carts for Pandora or another Internet radio provider that offers an on demandesc business model.  How do I know this?  Well first of all, I’m listening to Pandora right now and I haven’t bought a new album in several months.  The truth is, I listen to Pandora every day, all day long while I work.  So I imagine others are doing the same.  I believe the recording industry recognizes how prevalent it has become and feels that the Internet radio providers need to offset their losses.

The problem however, is that it is not the Internet Radio providers fault.  They were not the ones that stole customers from SoundExchange’s clients.  The culprit is still the music pirates.  The music industry, however recognizes that there is no monetary relief to be had from policing the sea for pirates.  They have been forced to seek aid elsewhere.  The obvious target is the Internet Radio providers.    If SoundExchange clients were still making profits they would not be so inclined to fight against this new wave of radio.  So in the end, it’s our fault for steeling music.

A few facts:

Up until 2006, Internet radio providers payed $0.000768 for each song played over the air.  Since then, each year the royalty has gone up a bit.  Currently the rate has more than doubled to $0.0018.  In addition, the rate has not yet reached any kind of ceiling.  It will continue to climb in the coming years if a settlement can not be negotiated.

To give you an idea as to just how much this affects a growing station,  Soma-FM, a collection of eleven independent music stations out of San Francisco, put this up on its home page:

“The new fees are a staggering increase over our previous annual royalty rate of about $22,000 to over $600,000 for 2006. And the fees are even higher in 2007. Based on our current listenership, they’ll be over $1 million dollars for 2007! (Which is 3-4 times what we hope to raise in 2007.)”

Imagine how much a major station like Pandora has to pay.  It all boils down to good ole cashola.  The recording Industry needs it.  Internet radio providers don’t have it.  Quite a dilemma.

2. Lack of Revenue Options

So what are the most prevalent revenue options for Internet radio providers so far?

1. Subscription fees
2. Banner Ads
3. Revenue share from digital music sales
4. Audio Ads

So with so many options why can’t Internet radio survive the new policies?  Well first of all, subscriptions are very limited.  Some providers, like Pandora, offer a subscription service that eliminates banner ads.  But the truth is, no one minds banner ads being displayed so subscriptions result in little to no revenue.   Banner ads by far bring in the majority of revenue for providers.  The problem is that listeners tend to play the station in the background, therefore the ads go unnoticed and therefore unclicked.  This greatly reduces the amount of revenue providers bring in.

Allowing listeners to purchase songs from partner companies like Amazon and iTunes generates some revenue, however keep in mind that buying music is at an all time low.  With that in mind, no company can sustain themselves purely on music sales. Lastly, audio ads offer a great way to bring in revenue.  The problem is that the Internet radio model up until now has been free of audio ads, which has been part of the charm.  Some stations have adopted the audio ad model or at least have run trials to see what the listener reaction would be, and it does not look good.  Listeners DO NOT want audio ads from McDonalds while listening to their stations.  Bringing on an audio ad model will greatly reduce the number of listeners who will abandon Internet radio for itunes and ipods.

The Internet radio industry has been fighting for life and without clear revenue models it may be lights out.   Soon I will begin providing what I think are solutions to some of these dilemmas as well as continuing on my journey to analyse the issues at hand.   Stay tuned!

-Grenville Kleiser (1868-1953)

With this in mind, I would like to attempt to identify the main problems that have threatened to destroy the vision that was born on the streets of Tin Pan Alley.  I urge readers to add to the list and help me begin this journey towards resolution.

Nine of the issues that make up the current Music Industry Crisis.

1.  Internet radio is the future yet providers can not sustain growth due to growing taxes on streaming music and a lack of clear revenue models.

2.  360 deals strain everything and everyone causing countless problems yet they are a necessary evil for struggling funding partners (Labels, publishers, Management, etc. . ).

3. Social networks and other web 2.0 outlets provide easy and personal access to fans yet the growing number of networks dilutes the overall message and dramatically increases the time spent marketing.

4. Apple has been an incredible innovator in the quest to a brighter music industry. We owe them a great debt.  However, their unprecedented high market share in digital music sales mixed with their stubborn and controlling business models leave no bargaining room for funding partners (labels, publishers, etc..).  Growth and innovation in this important industry sector (music retail) is therefore stifled without the ability for competitive trials.  In addition, Apple’s 30% take on each track sold leaves little for the artists and songwriters.

5. Physical Retail stores have lost the ability to turn a profit unless attached to a one stop business model (i.e Walmart, Hastings, Best Buy, etc.).  As a result the true music pushers, independent music retail stores, are almost extinct.

6.  Traditional radio, though still an important promotional front, has lost much of its glory to the on demand world of iPods, satellite radio, and Internet radio.   It has therefore become increasingly more difficult to predict market trends without a standard radio format to follow.   The result is a much higher risk/return ratio for funding partners (Labels, Publishers, etc..), which in turn limits the number of acts that ever see a major market entry.

7.  The RIAA in an attempt to combat the growing number of music pirates, proclaimed war on piracy by means of civil suits with individual copyright infringers.  Many average American citizens were made an example of with outrageous and bizarre settlements.  The music industries’ minds were in the right place.   They had intended to create the perception of risk for stealing music and in turn, change consumer thinking.    In the end however, it only generated a false image of a “Greedy Recording Industry”.   This wall between the consumer and the industry has instead furthered the cause for this viral pirating trend.

8. Video and audio sharing networks act as a breeding ground for the spread of illegal music in the form of audio and videos.  These new networks cut into the profits of funding partners (labels, publishers, etc.) yet act as a wonderful way for independent artists and major artists alike to receive viral promotion.  In addition, simple mathematics states that all of the illegal media sharing portals can not be shut down.  Lawsuits cost money, and the recording industry doesn’t have much.   Instead, the industry goes after the major outlets one at a time.  But for every 1 that is shut down, 7 more are built in its place.  Let us just say that this fire is out of control.

9. And let us not forget, stealing music is still more convenient to the average consumer than buying music.  In addition, the only way to fully shut down music piracy would be to turn on “Big Brother” and violate very important privacy privileges.  Therefore, it can never truly be stopped as long as we live in a democratic society.  The solution must lie in connotation and change.  Though it may appear that the RIAA is doing more bad then good, they have it right. The battle ground is in the mind.

These concepts are far from comprehensive.  They are only a spring board for thought and a declaration for change.

In coming articles I will further analyze each problem providing a deeper understanding of the task at hand.   Please jump right in and discuss.  The path to change will take all of us doing our part.  I’d love to share my personal mission with you and would be delighted to hear any of yours.  Feel free to reach out if you have something worth saying.

Next Article:   The Internet Radio Dilemma.

]]> http://chrispurifoy.wordpress.com/2009/02/28/defining-the-music-industry-crisis/feed/ 1 chrispurifoy http://chrispurifoy.wordpress.com/2009/02/28/journey_to_resolutio/ http://chrispurifoy.wordpress.com/2009/02/28/journey_to_resolutio/#comments Sat, 28 Feb 2009 05:31:03 +0000 chrispurifoy http://chrispurifoy.wordpress.com/?p=7 ]]> This is the first post for this blog.  I want to thank everyone for stopping by and taking time to read and interact.  I know that most people that visit won’t get this message, but all the same…Thanks to all.

I will be using this blog to throw around ideas and concepts concerning solutions to major and minor recording industry problems and eventually will use it to publish my thesis,  A Seven Point Plan to Solve the Music Crisis.   Many of the posts in this blog will be rooted from my notes over the past few years.  Please see the Mission section for more specific info on the purpose of this blog and the goals I plan to achieve.  I encourage feedback and dialogues both good, bad, and ugly.   I hope that together we can solve many of the problems prevalent in the music industry and in the end, aid in it’s recovery and restoration.

My very best wishes,

Chris Purifoy
President, Founder
BandFind Inc.
Social Music Technology