Audio Bee and DashGo are all about the internet. We’re all about social discovery, all about promotional placement and all about new ways to discover great music. But we’re not all about building businesses based entirely on other people’s IP and then complaining about the cost of doing business.

The latest (and most frequent) wolf-caller is Pandora. It seems like every few months they “are about to shut down” because of onerous licensing fees by the evil “music industry.” Well, the “industry” being paid here includes performers, songwriters and copyright holders. Sometimes those are the same people, sometimes several people, but they all had a hand in creating the music that makes hitting play on Pandora worthwhile.

Pandora’s claim is that new licensing fees amount to 70% of their revenues. There are plenty of businesses that operate on a 30% margin. Retail chains can manage that. In fact, even digital music stores manage to make it work - iTunes is profitable independent of the iPod. That is, it is NOT a loss leader. And it pays out roughly 70% of it’s revenue directly to rights-holders.

Meanwhile, the Pandora’s of the world claim that discovery leads to more music sales. Perhaps, but it’s also cannibalistic. The more time, and places, that people listen to Pandora, the less time they have to listen to “purchased” music. With availability now on mobile devices (iPhone), in-home equipment (Squeezebox) and virtually any computer, that’s a lot of time and places where users can consume a steady stream of new and / or familiar music. IP is valuable for it’s own sake (Pandora hasn’t made their music genome project open source), and to expect artists to recoup revenue from merchandise doesn’t necessarily compensate songwriters, or copyright owners who invested in the creation of the music.

About those royalty rate: They will rise to $.0019 in 2010. Let’s do some math: Assume average song length is 3 minutes. In 15 minutes then, a listener would hear 5 songs and cost Pandora $0.0095 in music licensing costs. Not even a penny. Now multiply by a 1000 listeners - and Pandora’s cost is $9.50. If they played 2 ads for 15 seconds every 15 minutes at a $10 CPM, then they’d have $10.50 in operating margin. But Pandora will complain - “we can’t get a $10 CPM.” Why not? Is it because they don’t have a strong sales staff? Because that rate would be cheap for terrestrial radio or television. Is it because they can’t prove the value of those ads to advertisers? If so, that is a grave problem - because if people aren’t buying more music (all signs point to that) and people aren’t buying the advertised product, then Pandora’s not good at promoting anything. Except free, professionally produced content. I’m pretty sure Chrysler would be good at promoting free cars, if only those mean steel-manufacturers would stop charging so much for the raw materials.

Meanwhile, as an indie label, we’ve yet to receive a single statement from SoundExchange, who is tasked with collecting these royalties. Why not? Partially because none of the internet radio stations (aside from traditional broadcasters simulcasting, and satellite radio) actually report the individuals songs they play. So indie artists, the presumed beneficiaries aren’t even being accounted for on equal footing with the superstars that get heavy rotation on other formats that do report playlists.

There is a fundamental problem when all assets are presumed to have zero value if there are no physical goods attached. The reality is that we need sensible IP protection, and sensible prosecution for the digital age. We’re not there yet, but certainly it is fair to ask companies making a business of streaming content to pay the content owners and creators for their role. Or let content owners opt-in. I wonder how long a Pandora with only copyright-free music would last. Maybe it would do great.

Tags: audio bee, dashgo, independent artists, internet radio, music licensing, pandora, soundexchange

This entry was posted on Monday, August 18th, 2008 at 4:52 pm and is filed under Main. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.