Can you hear me now?

Written by Brett Thomas

April 21, 2007 | 08:32

Tags: #bankrupt #charts #death #fees #internet #licensing #money #radio #record #sales #technology

Companies: #riaa

"Video killed the radio star" is what they've always said. But how about "Copyright killed the radio star?" It's just not as catchy, I'll admit. But it may just be true -- at least, for certain radio stars.

How many of you here have listened to Internet radio? Ah, good, a fair number of hands are up. You in the back, put your dog's paw down, he doesn't count. But seriously, quite a few people around here have, and there's plenty of good reasons why.

Of course, those of you with your hands up probably know it may not be around much longer. The RIAA has set its sights on web radio, and has imposed a "take no prisoners" royalty structure. On the surface, it seems almost as if the RIAA is shooting itself in the foot...but it's not.

If you haven't listened to net-casted radio, I highly urge you to give it a try while it's still around. There are an incredible amount of "channels" for such a young technology, and they cover a wide spectrum of music. In fact, much of what can be heard on Internet radio can only be heard on Internet radio -- not everything is a multi-platinum hit single.

As a business concept, Internet radio seems like a win-win, particularly when you take a look at conventional radio.

Setting up a conventional radio station takes a lot of money, and there are only so many frequencies to broadcast on. Because of this tremendous barrier of entry, the ownership of "slots" (frequencies) and physical broadcasting stations, particularly in the US, is hot property. Many stations up until around 1990 were owned by independent companies, providing a lot of variety in what you could hear as you skip across that dial.

However, radio stations are supported by ad revenue, and they function as an unfortunate middle-man to an ad agency. The agency has to pay these small stations for its ads to be played on the radio, which cuts into the profits. Since the biggest advertising media agency in the US happens to be very rich and radio stations happen to not make large profits, there was only one solution -- buy the stations and cut out the middle men.

"It seems almost as if the RIAA is shooting itself in the foot...but it's not."

From the mid-nineties on, if you lived in the US, you were probably listening to ClearChannel Communications on up to half of the stations. Nowadays, you're definitely listening to ClearChannel on over half of the stations in the US. Did you know that the ads are now actually timed so that the average person cannot skip stations and not hear one?

In order to reach the largest amount of listeners (after all, the stations aren't competing so much, since they're all owned by the same parent), the music has been reduced down to the top hits from the biggest artist of each genre. And to encourage you to listen to the same station, many songs are played on more than one, so you don't even have to flip that dial.

This giant ownership of the industry has led to some really poor music selection on this side of the pond, hasn't it?

And so, Internet radio was born. Streaming music straight to your computer is a lot cheaper and easier than the tremendous equipment and electricity required to generate a proper FM broadcast. All you need is a net connection, some software, and to pay some licensing fees.

In fact, it was so much cheaper that people and companies alike started small stations, playing indie music, less popular cuts and deeper, more narrowly focused playlists that resonated perfectly with smaller audiences.

The new technology reaches a lot less people per station, but can subsist on a lot less advertising revenue. Ad revenue that companies are more willing to pay, since the target demographic is that much more controllable. It's small business to the rescue, playing a greater selection of music than ever before.

So why on earth would the RIAA want to shut it down? The answer, my friends, isn't blowing in the wind... unless you're seeing dollars and pounds float past. If so, let me know -- I want to move in.
The answer is sales. The RIAA isn't pushing for every artist, it's pushing a few select products. One star selling a million records is worth a lot more than one hundred stars selling ten thousand records each, even if the end numbers seem to tally up the same.

The reasoning is the old accounting principle of fixed versus variable costs. For those not initiated in b-school jargon, here's a quick overview. Variable costs are ones that can grow or shrink depending on how many units are sold, like a royalty payment -- we'll say 20 cents (10 pence) per copy sold. If a million records are sold, you owe more in royalties than if a thousand are.

Fixed costs are like recording fees, marketing expense, cover art design -- no matter how many records you sell, those costs don't change. We'll say you spent $1,000,000 (around £500,000) to produce the record.

Because of this, if you want to know how much you've really spent to make one single CD, you divide the fixed costs by how many units have sold. Then you add in any variable costs.

So if you've sold a million units, each CD has cost you $1 ($1m fixed / 1m sold) + $0.20 (royalties), or $1.20 -- enough to make a handsome profit per unit moved. If you have only sold 10,000 copies, though, each CD costs you $100 ($1m fixed / 10k sold) + $0.20 (royalties), or $100.20. No matter who's buying the CD, you're not making a profit.

In business, you want to get your fixed costs down as low as possible, so that you don't lose money on products that don't sell, and your gains can easily be quantified by how many units you do sell. This is why when the RIAA cries about piracy, it only cares about the Britneys and the Linkin Parks of the music world. The "costs" to these artists are quantifiable, because almost every sale generates an expected profit -- the fixed costs are negligible compared to the royalties when you have that many units sold.

"The RIAA isn't pushing for every artist, it's pushing a few select products."

It doesn't hurt that these million unit artists are also the ones generating your merchandising, licensing fees for advertisements, ticket sales for concerts, and brand publicity for your label. And that's exactly why the RIAA loves ClearChannel, and it will never love the Internet radio scene.

With the new fees that the RIAA has dictated through its front-end the Copyright Royalty Board (let's be honest, there is no semblance of independence in the board after this), a large majority of the Internet radio stations will be bankrupted come May 15th. Of course, those that stick around will be the ones that played a low variety of songs and appealed to the widest audience for advertising dollars.

These low-expense, high profit stations would be perfect pickings for ClearChannel's move into the digital realm, even allowing it (and companies like it in other parts of the world) a more multi-national audience. High-profit stations that can open up an entirely new type of market, and a cost of entry that is nowhere near so painfully expensive -- and in the meantime, the music played will leave the RIAA tickled pink.

If losing a lot of variety in order to hear more pop tarts doesn't sound like music to your ears, the battle isn't quite over yet. There's a site dedicated to this latest fee-asco (and the things that we can all do about it) at, and it might be worth your time to check it out.

Unless, that is, you really want to hear the next in line after Britney Spears. Can you hear me now?
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