In light of recent news, we're re-focusing the agenda for our annual RAIN Las Vegas Summit, which will be held all day on Monday, April 16th at the Renaissance Hotel in Las Vegas. More details are coming, but in the meantime, scheduling and location information is here. Please plan on joining us if you can!

Here are some highlights from an interview in the latest issue of RoyaltyWeek conducted by Brian Zisk, Co-founder and Technologies Director of the Future of Music Coalition, with John Simson, Executive Director of SoundExchange.

Below is Part 2 of the interview. Part 1 was featured in yesterday's issue of RAIN here.

Role of Internet advertising in CRB decision
Brian Zisk: ... I will also say as a webcasting pioneer that getting advertising is much harder than anyone would imagine, and not only that but the second you start sticking ads in the stream you drive the listeners away. But that’s just a  function of the market...

[I]t appears the CRB based the rate for non-interactive on what it believed to be its nearest analogue that theybelieve is interactive webcasting. Can you speak to that a little because to me that seems like a pretty incorrect benchmark to set rates by?

John Simson: I think what the CRB did was they looked around and said, 'Where can we find the same buyers in the same sellers?' And remember the sellers are selling a blanket license to everything in their catalog... So interestingly you can actually get access to deeper, greater catalogs, obviously at much lower transaction cost because essentially once you take the statutory license everything is there...

As you say, interactive webcasting may be more substitutional because you get exactly the song you want when you want it. I think our good friend Jim Griffin would say that non-interactive webcasting is very substitutional because even though you don’t get the exact song you want, there are so many channels and so many people out there that you can pretty much get what you want when you want it, or that your listening experience is one that is so rich that you don’t need anything else.

Clearly, the webcasters were trying to use the benchmark of the composition underlying the musical work and it was rejected in the first arbitration by the first panel of arbitrators, and it was rejected again. Typically the master is valued multiples of the musical work. And I think that just reflects the relative investment in both –

Brian Zisk: Actually, internationally that’s really not the case but I guess the labels have really been able to push it here...

John Simson:... [T]he biggest challenge we have is paying tens of thousands of performers, because that is the long tail. I mean people are playing obviously much greater depth of repertoire and stuff that you never hear on over the air radio...

Relationship between SoundExchange and the RIAA
Brian Zisk: So the composition [of the SoundExchange board] is still two-thirds majors, one-third Indie?

John Simson: On the label side of the board that’s right... [E]ssentially the RIAA in function has two seats out of 18...

Brian Zisk: [T]he perception and possibly the reality was since folks like Steve Marks were leading up the legal team...

John Simson: This is an organization where two-thirds of the board, 12 out of 18 seats are either artists or independent labels. Again you can’t diminish the fact that the majors own 70% of the content that’s subject to the statutory license. They have very strong feelings about it, they’re my four biggest customers and clients, certainly we’re going to listen to them...

Brian Zisk: As you know when we had a couple of head butts a couple years ago,... a lot of it was around reporting and how difficult it was to properly account because in my experience, songs like 'Satisfaction' by the Rolling Stones will be identified correctly and some unknown track is much more likely to be misidentified and get lost in the mix.

Is there any possibility we might ever see SoundExchange making a database of the songs that they track transparent and thus making it much easier for the broadcasters to report properly?

John Simson: [W]e’re talking internationally with a number of the societies where there are attempts to standardize track numbers or standardize artist numbers. There’s an international performer database project going on right now trying to standardize that. Again, I think it’s a great idea, I think it’s something we should all be working towards.

Part 1 of Brian Zisk's interview with John Simson ran in yesterday's issue of RAIN. You can find the whole interview in RoyaltyWeek here [.pdf].

Readers interested in subscribing to the RoyaltyWeek weekly e-mail can do so through the link in towards the top left of the RoyaltyWeek homepage.

BY PAUL MALONEY
In a Bank of America conference call last week, Pandora President/CEO Joe Kennedy and AccuRadio CEO/Founder Kurt Hanson told investors that the recent sound recording royalty determination not only  would make it impossible for even the most efficient webcasters to profit, but could also have a significant impact on terrestrial radio.

Kennedy and Hanson, along with Bank of America analyst Jonathan Jacoby (who hosted the call) reviewed how the advertising reality facing Internet radio made survival under the new royalty regime impossible. But this devastating impact is not limited to webcasters, as Hanson concluded the conversation by demonstrating how the CRB decision may be taking broadcast radio's future away from them.


Internet radio is not AM/FM
Supporters of the CRB decision (first covered in RAIN here), have suggested that an efficient, well-run webcaster could  generate enough advertising revenue to handle the royalties. But after a brief discussion of the rates and the webcasters' business models, Jacoby described how this is impossible.

"Assuming the 2010 rates, that you got a $4 CPM and you were able to do six spots per hour, basically you’d be losing per listener per hour .0064 cents. So, the way that we look at it, there’s almost no way to make money," said Jacoby.

But Kennedy (pictured right) explained how selling audio ads online is fundamentally different than in the terrestrial radio field. "There isn’t that much advertiser money chasing audio ads on the Internet," he said. And webcasters get "extremely low CPMs, I mean you hear numbers of kind of $2 gross, and on a net basis, even less than that, in  terms of CPM."

"(CPMs) are significantly lower than for broadcast or even network radio at the moment," Hanson agreed. "I think the reason these royalty rates don’t work is that the Copyright Royalty Board really never looked at the state of the advertising economy in 2006 or 2007 to see if it was possible to sell enough ads at this point in history to cover the royalty rate."


Royalties and revenues
"We believe we’ve become the most effective or, at minimum, one of the most effective services at monetizing Internet radio," Pandora's Kennedy explained. "At the proposed new rates, it’s pretty simple, there’s no Internet radio service large or small that can sustain itself."

The two explained that a large, well-run webcaster might be able to generate four or five cents per listener per hour of revenue. This was enough to sustain the business under the old rates. For Pandora, the 1.17 cents per hour sound recording royalty meant 20% to 25% of revenue (before any other costs) for "excellent monetization players," Kennedy explained. (AccuRadio, under the Small Webcaster Settlement Act, paid about 12% of revenue.)

But under the new royalty regime, a webcaster like Pandora would need to pay over three cents per listener per hour in royalties. For AccuRadio, no longer able to pay on a "percentage of revenue" basis, the outlook is even more grim.

"Our retroactive royalty for 2006 is $600,000, which is 150% of our total revenues and10,000% of our profit for the year," Hanson revealed. "I think for the whole industry that there’s virtually no firms with a business (model) that can survive this new royalty rate decision if it stands.

What makes this reality more difficult is the "unlevel playing field" for radio media. Broadcast radio has no sound recording royalty obligation (for over-the-air content), and satellite radio only pays around 7% of revenue.


Broadcasters' future is at risk
In regards to whether even terrestrial stations would continue streaming their programming, Hanson said, "That’s a questionable issue — if they see it being a money sink for the next five years, I’m not sure they will." But broadcasters may have a bigger issue in this matter than streaming online.

"(Broadcasters) are in this game in that the record industry is going to be coming at them for a sound recordings performance royalty before, I believe, the end of this year," said Hanson (pictured left). "I believe the record industry has announced publicly their intent to try to get new legislation that applies a sound recordings royalty to AM and FM broadcasts.

But even more importantly, Hanson warned broadcasters that their very important future part of their business may be at risk.

"As Internet radio plays out, I think we’re seeing [that] new media and new media delivery systems end up creating new forms of content. The new forms of content that work for Internet delivery of radio — national, not local brands, multi-channel, multi-format brands... with some personalization elements — that’s what consumers seem to be embracing. Broadcasters right now could compete in that space if they chose to. There’s no reason any of the major broadcasters that you cover couldn’t launch such a brand," said Hanson.

"If this royalty rate decision goes through, (broadcasters) will be... constrained from doing that... and that won’t stop listeners from seeking out that kind of product, they’ll just get it from Australia and then European and Asian broadcasters," he warned. "Right now, they’ve got an opportunity to compete in this space which might be their long-term future as wireless ubiquitous broadband Internet gets into people's cell phones and into their cars and throughout their homes. So a great potential and they’ll be frozen out of competing in that space if this goes through."