The Day Internet Radio Died

The cyberspace halls are pretty quiet right now. Several Internet radio providers are staging an aural hunger strike, going silent today to protest pending royalty rate hikes that may put many of them out of business.

The Save Net Radio coalition includes several online webcasters that you may have never heard of. However, many of the big names are also coming through with the gag order. Over at Live365.com, all 10,000 of its hosted stations will take the day off. Yahoo!'s (Nasdaq: YHOO  ) LAUNCHcast Radio, RealNetworks' (Nasdaq: RNWK  ) Rhapsody, and Pandora's music discovery service will also flick off the "On Air" switch. Many of the participating webcasters will stream a conference where participants will explain the model-killing implications of a substantial royalty hike that will go into effect on July 15.

Internet radio specialists, as well as many conventional broadcasters that simulcast their programming online, are concerned. For now, smaller providers are paying 11% of their online revenue in song royalties to the SoundExchange collection organization. It's about to get a whole lot worse.

Silence today, more silence tomorrow
When the new rates kick in, stations will have to pay a set amount per track. That would be fine, if only Internet radio had evolved to the point where it can be monetized to cover the tab.

It can't, at least not as a free service. Consumers are unlikely to accept tollbooths, given the plethora of seemingly free music alternatives these days.

A Radio And Internet Newsletter (RAIN) study of five independent broadcasters shows that the new royalties would go from consuming 11% of their revenue to 315% this year and 360% come 2008. That's even before you consider the sometimes costly overhead to keep many of these stations streaming.

The larger broadcasters will also take a hit, even if they have easier means of monetization. They are already paying per-track royalties, but those are also being jacked higher. The same study lumped Time Warner's (NYSE: TWX  ) AOL, Yahoo!, Viacom's (NYSE: VIA  ) MTV, Pandora, Rhapsody, and Live365 together. By next year, the old rates would have consumed 27% of their Internet radio-related revenues. The new fees will swallow an estimated 58% of the generated revenues.

The Copyright Royalty Board's decision will sting the big players and obliterate the lesser ones. Given the crippling royalty rates, today's silent treatment may be little more than target practice for a very quiet tomorrow.  

The 11% solution dissolves
Even the 11% that small broadcasters are presently paying may seem high, especially compared to terrestrial radio's free ride or the satellite radio model where XM (Nasdaq: XMSR  ) and Sirius (Nasdaq: SIRI  ) pay 7.5% of online music revenues in performance rights royalties.

In a cruel case of casket tightening, the new royalties will also be retroactive to last year. In other words, Internet radio is going to start sounding a lot more corporate once the standalone indies succumb to vulture pecking.

The survivors -- if you can call them that at this point -- will be those with paid subscription models or those who pad their programming with more ads than music. Some of the more innovative breathers like Pandora and Slacker will have hardware-assisted life support.

My ears are starting to hurt already! It's true that many of the smaller webcasters that will implode in the coming months were flimsy businesses run by music-loving hobbyists, but who can argue that we'll be better off without them? Unfortunately, ambassadorial passion carries a stiff price tag these days.

The music makers will hurt too, of course. Eleven percent of something is more than 360% of nothing. Again, you don't need a calculator to figure that one out. Outlets for free music will narrow, and that may hurt the labels more than they think. Music fans will turn to promotional websites of unsigned artists for free downloads or head back to illegal peer-to-peer networks, robbing the major and indie labels of the eardrums they owned when Internet radio was a financially feasible business to run.

I can't be the only one who sees this. Unfortunately, it may take a few decapitations for the industry to realize that silencing the microphone -- for far more than one day -- may find it paying the dearest price of all.

Time Warner and Yahoo! are Stock Advisor recommendations. XM is a former stock pick in theRule Breakers newsletter service. Internet radio may be silent today, but you can take in all of the investing idea content you can handle with a free 30-day trial subscription offer to either service.

Longtime Fool contributor Rick Munarriz respects artist royalties. He still gets the occasional BMI pocket change even though his band was let go by Columbia Records ages ago. He still thinks this is a terrible idea. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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