Streaming-music service providers bought some time last week when Congress approved legislation that will allow them to renegotiate royalty rates some claim may otherwise drive them out of business. But nobody’s celebrating yet.
Legislators approved the Webcaster Settlement Act, which grants Internet broadcasters – including providers of streaming mobile music services – until Feb. 15 to negotiate with SoundExchange, an agency that collects and distributes royalties to recording labels. The move is an effort to allow the two sides to sidestep last year’s decision by the Library of Congress’s Copyright Royalty Board that essentially doubled royalty rates for streaming services.
The act was sent to President Bush, who is expected to sign off on the legislation.
“We still have to finish up the negotiations, but now the table is set,” Tim Westergren of Pandora.com, one of the largest and most visible Internet radio services, wrote on the company’s blog. “We will continue to keep you apprised as we work diligently to complete the process.”
Caution remains
But if Westergren sounded restrained, his counterpart at SoundExchange sounded almost pessimistic. “We are hopeful, but we’ve been close at other times during the
past 18 months,” SoundExchange Executive Director John Simson said. “My hope is that we can quickly get back to the table and capitalize on the momentum.”
Westergren has been one of the most vocal critics of the CRB’s hike, claiming that current royalty rates threaten to put Pandora and others of its ilk out of business. And those rates don’t apply just to the company’s PC service – they also apply to Pandora’s mobile offerings, which include an application for Apple Inc.’s iPhone that has received rave reviews.
Pandora has gained substantial traction – it draws roughly 1 million listeners daily – with an ad-supported service that creates “stations” based on listeners’ tastes.
But a failure to come to terms with SoundExchange could be a crucial blow to the radio services that seem to be showing such promise in an otherwise bleak space. A study released earlier this year by TNS Global Telecoms found that while the use of MP3 players on cellphones is up 78% worldwide, mobile radio uptake has seen a whopping 140% increase. The market research firm also found that 45% of users listed AM/FM functionality as one of the top three factors in purchasing a mobile phone.
“The radio business has been a profitable business for us for quite a while now,” said Daren Tsui, CEO of mSpot, which powers streaming audio and video services for a host of carriers. “Even with the new rates it’s still a profitable business – it’s not as profitable, but it’s still profitable.”
More ads, more dollars
Tsui hopes to build on that success by adding an ad-subsidized service and – like Pandora – allowing users to create their own “stations.” Those plans may be scuttled, though, if a new deal isn’t struck with SoundExchange. Not only are today’s rates too expensive for a viable ad-supported model, Tsui said, royalties are partially based on the number of stations a company provides. (SoundExchange has capped those royalties at a certain number of stations, however.) And royalties are charged on a per-song basis regardless of how long a user listens to the tune – which means the service provider must pay even if a user skips a song after a few seconds as he builds a personalized station. Allowing music lovers to create, say, a couple of dozen of personalized channels could be economically impossible under the current framework.
So while mSpot and some of its fellow radio services may be generating substantial revenues in mobile music, current economics may preclude them from tapping the mass market with more sophisticated, ad-supported offerings.
“We started out consciously thinking that we want to do a model that’s not relying on advertising,” Tsui said. “I think the pros and cons of that decision are that we have a profitable business, but the business is going to be capped to a certain extent. . We want to be able to explore the advertising model, and we really need rates to be lower for that.”
