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Summary:

Tim Westergren, co-founder of Oakland, Calif.-based Pandora Networks is normally a cheerful fellow. His happy-go-lucky demeanor fits right in with his musical roots. Lately, his brow is wrinkled in worry, as he ponders over the decision by the U.S. Copyright Royalty Board (CRB) to raise the […]

Tim Westergren, co-founder of Oakland, Calif.-based Pandora Networks is normally a cheerful fellow. His happy-go-lucky demeanor fits right in with his musical roots. Lately, his brow is wrinkled in worry, as he ponders over the decision by the U.S. Copyright Royalty Board (CRB) to raise the royalty rates for webcasting music on the Internet.

According to some estimates, the performance royalties paid out by Internet streaming services could top $2.3 billion a year, four times the $550 million 14,000 terrestrial radio will pay in royalties. No surprise, the decision (pdf) has since then become a source of worry for start-ups that are combining Music and Social Networking features. While they are not ready to throw in the towel just yet, they are contemplating radical actions.

“It’s a burgeoning business but there are already unfair prejudices against us compared to terrestrial radio–we pay more than them,” says Martin Stiksel, co-founder of London-based Last.fm that has raised millions in venture capital from Index Ventures and well known angels such as Reid Hoffman and Marc Andreessen.

Some record labels are displeased with the decision as well and feel that it basically keeps them in the grip of large terrestrial radio networks which have too much control on the music business, not to mention questionable taste and history of payola. Unfortunately it doesn’t help the innovators.

“The most radical option would be to stop streaming into the U.S.,” says Stiksel, who adds that nearly 30% of the Last.fm traffic comes from the U.S. Last.fm fans shouldn’t be worried just yet, but Stiksel admits things are going to be a lot tougher.

Many of these services might have tweak their business model, since many of them are depending on advertising dollars as a revenue source. The more traffic they can bring to their networks, the more advertising dollars they can generate, pay off the royalties and earn a little profit. The margins are clearly razor thin, and any changes in the royalty rates pushes profitability out of reach.

Westergren, in a chat pointed out that Pandora is pretty good at generating ad dollars, but the new royalty rates aren’t going to be enough for him to stay in business. “Left unchanged, it’s over for us and every other Internet radio service, period, makes it unviable,” he says.

We employ 11 full time people in our ad sales team, and despite very high licensing and streaming costs, believed that we could make it work over the next several years if Internet advertising continues to grow. This ruling drives the licensing fees (fees that are NOT paid by terrestrial broadcasters) completely out of reach, and makes our goal impossible. [Pandora Blog]

“This seems extremely counter-intuitive to me – the labels should be doing everything in their power to make music discovery as in-expensive as possible,” says Srivats Sampath, founder of Mercora, a P2P radio start-up based in Sunnyvale, Calif.

Doc Searls in his excellent summary of this crisis writes: ” Internet radio is a canary in the coal mine of an insane Net-hostile Regulatorium that stretches from the cableco/telco duopoly to the copyright oligarchs.”

Additional reporting by Liz Gannes.

By Om Malik

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  1. The music industry has pushed itself in a complete desaster during the first web boom. Their response to napster & co was so false that it has left many scars within the music industry.
    What we see right now is that apparently nothing has changed among the big boys. Their old-fashioned, short-term thinking will hopefully be punished soon…

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  2. This strikes me as something that could be considered monopolistic. I do wonder if there is a lawsuit in the offing of the monopolistic practices of the parties involved.

    I also wonder whether the US Copyright Royalty Board decision can be appealed to the federal court.

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  3. Why does everything have to be free on the internet? Perhaps users will have to begin to determine what they want and pay for it just like in the real world. Many of these services like Pandora are very cool but the biz models around them are very poor.

    Look at FaceBook. I can tell you from experience that ads DO NOT work there. It’s cool if you want to brand but it’s not a place to go to make money on your invested dollars. Hey, you want this stuff – you find it valuable? Then cough up a few bucks a year and get it.

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  4. Mark S people expect radio to be free and TV to be free just like the past 50 years of braodcasting has taught us .

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  5. “Left unchanged, it’s over for us and every other Internet radio service, period, makes it unviable.”

    I’ve had a chat with Mercora and they’re not in the slightest bit concerned about the CRB’s scheduled increase in webcasting royalty rates.

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  6. [...] GigaOM » Air of Despair Permeates Music Social Nets Beware if you like Pandora… It could be out of business soon. (tags: copyright media music Streaming) En: del.icio.us — March 13, 2007 [...]

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  7. This latest news is bad news of course, for everyone. I recently read that MTV doesn’t even pay royalties on the videos they play. If the royalty rates were reasonable that would be one thing…if they can find a formula that doesn’t overwhelm webcasters that’s fine, but the royalties they want are extreme, unfair, and help destroy what’s left of the music “business”. One guy recently posted on Digg that he worked at a terrestrial radio station that had to pay $400/song played, simply outrageous! No wonder there’s so damn many commercials…and no wonder I no longer listen to radio anymore!!! Anyways, the RIAA should focus on eliminating middlemen and lowering CD prices…and they better enjoy their lawsuits while they can, because lots of file-sharers are making the switch to encrypted file-sharing solutions like GigaTribe, which keep people out of the radar ( http://www.gigatribe.com ).

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  8. This is just a part of a larger battle that is going on on the web which I wrote about the other day – and referenced your post in it as well http://www.winextra.com/?p=354

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  9. [...] like other internet radio providers, is facing price hikes imposed by the U.S. Copyright Royalty Board. The company has also been the subject of buyout [...]

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