facing the end?

Internet RadioI’ve made no secret of the fact that I like The internet radio service is one of my two favorite (iLike is the other) ways to discover new music. Pandora might be shutting down soon however.

With the increase in royalty rates dictated by the CRB recently, Pandora is facing a situation in which 70% of their revenue will be eaten up by song royalties. That doesn’t leave a lot for paying the bills, and staff, let alone expansion.

Founder Tim Westergren says Pandora’s funding comes from venture capitalists who won’t be inspired to continue supporting a business who’s revenue model is broken.

We’re losing money as it is. The moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we’re doing is wasting money. We’re funded by venture capital. They’re not going to chase a company whose business model has been broken. So if it doesn’t feel like its headed towards a solution, we’re done.

Jon Simson, of SoundExchange, has said Pandora needs to adopt a new business model that includes audio ads placed between songs, if it is to survive as a viable business. Pandora, however, doesn’t seem to keen on that idea. Pandora’s thinkers feel that such a model would be a turn off for listeners and simply drive them away.

Pandora is hoping for relief from Washington lawmakers, who they are hoping will alter the royalty system as it currently stands. They feel the disparity in revenue percentages paid by internet radio (70-300% depending on which internet station you talk to), when compared with satellite radio (6%) or terrestrial radio (0%), is unfair and should be amended.

On the other hand, SoundExchange points out that satellite radio brings in a total revenue of $115 per listener per year, whereas internet radio stations average only $3.50 per listener per year. Their argument is that the percentage must be higher to generate a similar amount of royalties for a similar amount of listening. The thought process being, if the internet radio stations can’t figure out how to earn income, that’s no one’s fault but their own.

On the one hand, I understand the sentiment. If I were the creator of a product, which others sold, and one retailer sold it for a price I liked while another told me they needed a steep discount because they couldn’t sell it for much, I might choose not to sell to that retailer.

On the other hand, at a time when the industry is hemorrhaging due to slumping CD sales, some revenue is better than none. I don’t buy the argument that the industry needs time to develop, it’s had the time and just hasn’t developed a revenue model that will generate the kind of royalty rate SoundExchange would like to see. But they are generating a royalty. 25% of something, is more than 70% of nothing.