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Remember a couple of years back, when everybody was talking about music-discovery service Pandora? The awesome term "Music Genome Project" was music to many people's ears. Unfortunately, burdensome royalty rates might now push this innovative service back in the box .
Pandora's Box, indeed
Pandora is among a growing number of music services harnessing the Internet's most impressive power: to drive new discoveries. You can already bypass traditional radio stations and simply listen to your Apple (Nasdaq: AAPL ) iPod, because you know you like your own music. But Pandora takes that process one step further, delivering new songs that match the music "genome" of your favorite artists.
A very detailed Washington Post article on Internet radio's dire developments reveals that Pandora happens to be one of the 10 most popular applications for the iPhone. Indeed, it lures 40,000 new listeners every day, and has 1 million music fans who listen on a daily basis. Gee, I can see why the traditional music industry would want to nip that in the bud. It must simply be too awesome.
Although Sirius XM (Nasdaq: SIRI ) had a great idea in satellite radio, which reflected myriad tastes and disrupted the longtime race to the bottom of traditional radio companies like Clear Channel, services like Pandora use technology and vision to find more stuff we like on a targeted basis.
This is nothing new, of course. Amazon.com (Nasdaq: AMZN ) , Netflix (Nasdaq: NFLX ) , and Apple have all been part of the new supply and demand with their recommendation engines. That's why Wired's Chris Anderson's Long Tail theory resonated with so many people.
This innovation must be stopped!
As usual, the music industry seems terrified of any innovation that might not cut its members as fat a royalty check as they'd like. Thanks to record labels' considerable whining, government and the music business seem to have joined forces to destroy popular services like Pandora, Last.FM, imeem, and Slacker.
The Copyright Royalty Board has upped the royalties Internet-based radio outfits must pay on songs, increasing the royalties to 19/100 of a cent per song per listener in 2010, from 8/100 of a cent per song per listener in 2006. In addition, retroactive fees mean that Pandora will have to pay 70% of its projected 2008 revenue, which appears to be a likely doomsday scenario for the service.
So far, the new royalty fees aren't even consistent. Traditional radio stations pay no royalties, and satellite radio pays a less burdensome percentage than Internet radio.
Part of the argument against Internet radio is that it brings in less revenue from advertising (which honestly, probably makes a lot of consumers like it more). The government and music industry seem to be demanding that the Internet radio services monetize... or else.
Not surprisingly, SoundExchange, which advocates for artists and major labels on royalty matters, defends the move. SoundExchange's reaction sounds like RIAA Jr., using the same old saw about defending artists and copyright owners and giving them their fair share.
I think many consumers are catching on that when the industry howls about defending artists, it's really just talking about defending the major labels' broken business model, which has been under constant assault ever since the world went digital. "Piracy" may be a dirty word, but I count historical events like Napster's (Nasdaq: NAPS ) ascent as "innovation."
The RIAA and its friends like SoundExchange are populated by companies like Warner Music Group (NYSE: WMG ) , Sony (NYSE: SNE ) (which recently announced plans to buy out BMG's share of the two companies' joint music venture), EMI, and Vivendi Universal. As far as I'm concerned, their draconian reactions to music's continuing evolution make them great examples of the types of companies and industries I avoid.
Services like Pandora do exactly what many music lovers want: introduce them to artists they may never have heard of otherwise. That innovation should be celebrated, not condemned. It promotes music that's geared to what we like, rather than forcefeeding us somebody else's tastes or marketing budget.
I often suspect the music industry also fears losing another element of its old-school model: finding mediocre musicians that appeal to only the most mainstream tastes and trends, and then pushing them down as many throats as possible.
As an investor, I do all I can to avoid companies that refuse to evolve, and thus find themselves on the wrong side of creative destruction. For the most part, I think the media industry fits that niche. Any company or industry that can perceive massive opportunity as a threat should strike investors as a long-term loser.
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