Coady Diemar says royalty, scalability issues hamper AM/FM growth online

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Issue Date: 
Aug 1 2012 - 12:30pm

From Issue:

Investment banking group Coady Diemar Partners released a report today in which they suggest the prohibitive cost of streaming sound recording royalties, coupled with programming that doesn't translate well to the Internet, has led to radio's passive approach to pursuing an online audience.

A quick glance at Triton Webcast Metrics ratings (see a graph here) shows little positive growth for most terrestrial radio's online listening. The Coady Diemar report shows only 8 of 14 terrestrial broadcast companies posting online listening gains from May 2011-May 2012. The investment bankers suggest it's broadcasters' content (simulcasts with "8-12 minutes of commercial time" and lack of customization features) and "lack of scale" (it's not likely for most local radio stations to build Internet-sized audiences) that keep audience growth, and thus profitability, down.

Internet radio listening trends

Pandora, however, has used its advantages as a web-only service (customization features and the ability to build a national brand) for "phenomenal growth in reach and time-spent listening... According to Triton Webcast Metrics, Pandora’s listening in June 2012 accounted for approximately 5.98% of all radio listening, up from 3.37% of listening in June 2011... In fact, since September 2010 in any given month Pandora has captured between 78%-95% of the incremental internet listening."

So Pandora's created a huge online audience, but they face the same royalty hurdle as broadcasters. Despite an explosion of usage, Pandora's royalty obligation prevents them from being profitable. "We believe this lack of profitability is a major reason why terrestrial radio operators have not been more aggressive in marketing and promoting their online streams," reads the report.

"Venture capital firms continued to invest in Internet radio or digital music opportunities in the last year," writes Coady Diemar director Chris Ensley, despite a "lack of profitability" for companies like Pandora due in part to high royalty rates. But "most terrestrial radio companies, many of whom have public shareholders, were not in a position to incur" the type of losses associated with getting started in web radio. In Pandora's case, that totalled "$82 million in operating losses over the last six years."

AM/FM online listening flatlining or dropping for most

Those who've followed the Internet radio space since its inception will remember the industry's bewilderment at potential royalty bills amounting to many multiples of what any service was making at the time. How could something so one-sided in favor of the recording industry as the Digital Millennium Copyright Act -- which (largely) birthed the obligation for webcasters to pay for sound recording copyrights, at rates determined by the CARP (Copyright Arbitration Royalty Panel, now replaced by the CRB) -- have been passed? In 1998 there was no Internet radio industry to speak of to fight it. Had the NAB been "asleep at the wheel?"

The legend grew that broadcasters at the time weren't too worried about high online royalties. They served as a barrier to new media competition. And what did online streaming -- where audiences, and thus ad revenue, were miniscule -- have to do with end-of-the-quarter goals anyway? Radio certainly was in no position to spend $82 million and six years to find out.

As it turned out, of course, high royalties did not prevent the rise of Pandora and Slacker, nor has it prevented terrestrial radio's (still moderate) listening declines. It's also true now that broadcasters like Clear Channel recognize the importance of the Internet and see radio's gradual shift from "local over-the-air" to a market of audio content producers operating on all platforms.

In fact, Clear Channel and its iHeartRadio web and mobile platform are growing well. Ensley credits the company for being "aggressive in promoting iHeartRadio." Clear Channel has also sought clever ways of reducing the costs of streaming, like its new agreement with Big Machine (RAIN coverage here).

Coady Diemar Partners

"By combining its promotional prowess with a more satisfactory online royalty rate, Clear Channel should be able to reduce operating losses while increasing the speed at which iHeartRadio reaches profitability."

Indeed, Clear Channel and iHeartRadio may then be AM/FM's best hope, Ensley writes, especially when it comes to future car dashboards. "No radio station group on its own is likely to be able to compete with Pandora when it comes to being in dashboard on future car models." But by joining services like iHeartRadio or TuneIn, "radio companies can ensure they have a compelling service to compete with newer in-car/in-dashboard services such as XM Satellite and Pandora."

You can find the report from Coady Diemar Partners here.

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