Friday, October 03, 2008

Internet Radio Saved? Let's run some numbers!

So the legislation's passed to allow webcasters and the SoundExchange (which represents the RIAA) to continue negotiating the royalty rates the Copyright Board allowed. No one's arguing that rates didn't need to increase -- just that they needed to remain rooted in reality. And not the "reality" of the SoundExchange.

If you go to the SoundExchange website, you can see for yourself what the rates are (strangely, I couldn't link directly to the pages in question). So I decided to run the numbers for myself to try to get a handle on this business.

I had to make some basic assumptions in order to do this -- real-life conditions are far more complicated.

Here goes: for 2006-2007, the rate was calculated based on an hour of listening. One person listening to one hour (or a part thereof) equaled one unit to be paid for. If one hundred people listened to the same stream, then that would equal one hundred hours requiring royalties.

Beginning in 2008, the rate changed from an hour of listening to a price per song. Again, that's multiplied by the number of listeners. For our purposes, I've assumed that the station's playing 100% music for the full hour or 15 four-minute songs.

I've also assumed exactly 100 listeners per hour (people who only listen for part of an hour or part of a song count as a full listen, so 100 listeners may actually generate higher or lower billable hours/songs). And I've assumed the station streams 24/7 with exactly 100 listeners every hour.

Finally, on the revenue side, I've also made some ballpark assumptions. I've taken an average rate of 0.20 CPM, (cost per thousand) for the total amount of ad revenue generated by site traffic. Which means that for 100 visits in an hour, the site earns $2.00 in ad revenue. So for a year, the income would be $17,520.00.

In 2006, the rate was $0.0123 per hour. Which, for 100 listeners, means $1.23 per hour. Our hypothetical netcaster clears $0.83 an hour, for a total of $15,020.00 a year.

In 2007, the rate went to $0.0169 per hour. That boosts the rate for our 100 listeners to $1.69, leaving $0.77 for our netcaster. The net income drops to $6,745.20 -- less than half what it was in 2006.

In 2008, the rate went to $0.0014 per song. That translates out to be $2.10 for 15 songs in an hour for 100 listeners. You see the problem. With an income of $2.00 an hour for those 100 listeners, the netcaster loses $0.10 an hour, for a net loss of $876.00 for the year.

The rate's already set to increase to $0.0018 for 2009, and $0.0019 for 2010. Our netcaster loses $0.70 and then $0.85 an hour respectively. In 2009 they'll lose $6,132.00, and $7,446.00 in 2010.

Now, of course, I didn't factor in bandwidth costs and other operating expenses that the netcaster has to pay for out of that ad revenue. And online ad rates are declining, not growing, so it would be difficult to raise ad rates to keep pace.

Bottom line? It's unlikely there'll be any webcasters left in the U.S. if this goes on. Even the largest ones, such as Pandora and LastFM don't have pockets deep enough to sustain an escalating negative cash flow.

So that's where things stand now -- even after the "saving" legislation just passed.

There's one set of numbers the SoundExchange neglected to run.

(Whatever royalty rate you want) x (No listeners) = Zero money

And if Internet radio's killed off, that's the only equation that will matter.

- Ralph

Day 110 of the WJMA Web Watch.

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