January 12, 2016
When the Copyright Royalty Board announced its new royalty rates for webcasters, the reaction was split. Webcasting powers such as Pandora and iHeartRadio were heartened by the new rates, which they see as reasonable, while small webcasters felt their businesses were jeopardized. And sure enough, a handful of small webcasters have announced plans to get out of the U.S. web arena because they can't afford the new terms. As CEO of Accuradio, one of the most successful Internet webcasters, and publisher for RAIN, which covers that terrain, Kurt Hanson is at ground zero of their issue. Here's how he sees everything shaking out.
You mentioned in a previous interview that, in your goal to be a radio station owner, starting your online radio station AccuRadio was essentially your "second bite of the apple." When did you first realize that Internet radio was going to be your second bite?
When I was finishing up grad school and thinking about working full-time in the radio industry as a career, FM was just taking off. As a young person just coming out of school, of course, I was in no financial position to be in the ownership side of the business. But here we are, in the same lifetime, and I'm in the same business -- only now, within my lifetime, a new distribution method has appeared! I saw this opportunity fairly early on -- probably in 1999 or 2000. The AccuRadio experience has taught me that it is indeed possible for an entrepreneur to build a successful brand in online radio, and I'm excited that the opportunity has occurred while I still feel relatively young.
The online radio world when you started in 2000 certainly wasn't as populated and thriving as it is now, right?
Oh, no - it was completely different. The online radio world back then was led by Yahoo! LAUNCHcast, which was the first brand of personalized radio that got any kind of traction. There were a few other services from the likes of AOL and MSN, and others from entrepreneurs like NetRadio and Live365. At the same time, broadcasters were launching their simulcast streams. But even then I felt right away that the Internet would be a great delivery system for personalizable music radio ... and that was the better angle.
Was there a tipping point where your initial feelings about Internet radio were confirmed?
I can't think of any single incident where there was this flash of insight. It was clear even back then you could do more long-tail genres - those for which there was no room on FM -- and for longer playlists. As long as you have a skip button available, the idea of each user customizing the music stream had great potential, if done correctly.
Now, of course, AccuRadio faces a slew of competitors. Describe the terrain ... is there a fierce competition between online radio services, or is it more benign?
In general, online radio services been have pretty congenial. As you can see if you attend RAIN Summits, it's a supportive community more than anything. I've welcomed lots of new entrants; they helped establish the industry in the early days so that now, 15 years later, online radio comprises maybe 15-20% of total radio listening.
How much bigger do you see Internet radio getting?
Just as the vast majority of music listening moved from AM to FM a few decades ago, I think you're going to see the same kind of transition again -- that in not too many years, the vast majority of music radio will be delivered via the Internet. Now, that doesn't mean that FM radio is dead: AM reinvented itself in '80s as a home of new forms of Talk; I envision FM reinventing itself, with Talk moving from AM to FM, while the music radio stations that survive on FM will become heavily personality-based.
Are you surprised how much the digital/online arena has evolved since you started AccuRadio in 2000?
No, I'm not surprised at all. Even back in the days of Yahoo! LAUNCHcast, I was arguing that the first big major online success would be a stand-alone brand name - a good product that's well marketed - and not a line-extended brand. So it wouldn't be AOL Radio or Yahoo! Radio, but a fresh new brand name ... and that's exactly what Pandora was! They created a well-made product; they had great marketing and PR and promotion; and they have a non-line-extended brand name.
A common complaint from radio broadcasters about the digital arena has been that the ROI for online endeavors hasn't been worth the investment. Your response:
The business model for online radio is very different than AM/FM radio in that AM/FM has very high fixed costs because you have to acquire an FCC license, but very low variable costs because most of your costs are don't change much per listener. So when you hear broadcasters complain about the business model for online radio, they're coming from the perspective of their current business model.
The business model for online radio isn't necessarily worse; it's just different. It has low fixed costs -- because you don't have to acquire FCC licenses - but has high variable costs because you have to pay for bandwidth as well as high music royalties. That's an entirely different business model. Broadcasters aren't seeing ROI based on a business model they're comfortable with, but that doesn't mean there can't be a good ROI for online radio
The CRB released its new royalty rates, which you and other smaller webcasters believe could cripple your business. Exactly how does it threaten your business and that of the others?
As you've probably already read, the CRB's rate decision was, for most webcasters, $.0017 per song per listener, completely dropping the "Small Webcaster" option that was about 14% of revenues for services with less than $1.25 million in revenues. If you play, say, 16 songs an hour, that $.0017 rate works out to about 2.7 cents per listener-hour, which is not unreasonable if you're a Pandora or an iHeartRadio. Big firms like that have hundreds of salespeople and no problem getting meetings with buyers at agencies, so they can probably sell 7 or 8 cents per hour in advertising, which means they can make the rates work.
But if you're a small webcaster specializing in a specific niche of music - like electronic, folk, mainstream jazz, Broadway, or world music - you might not even be able to sell 2.7 cents of advertising per listener-hour. That means this one royalty rate, just for the sound recording, might consume over 100% of your revenues!
"How did this happen?" you might ask. I can answer that: The CRB judges could only look at rate proposals from the services that participated in the CRB process. Unfortunately, to participate properly would cost maybe $50,000 to $100,000 or more in legal fees, so no small webcasters were able to afford to participate. None of the big guys proposed a "Small webcaster" rate, and none of the small webcasters were present to make a proposal, so the judges had no basis to offer such a rate.
You mentioned on previous CRB rate hikes, webcasters were able to lobby Congress to pass legislation that provided a "carve out" to base the royalty on total revenue. Will you and other webcasters do that again?
When the "Web I" decision came out in 2002, and again when the "Web II" decision came out in 2007, each time I was able to organize a protest called "Day of Silence" on which most webcasters went silent for a day, asking their listeners to contact their senators and congressman to pass a law that would encourage and allow a negotiated settlement. And, both times, that worked!
This time, however, I would have less hope for success, as the majority of Internet radio's AQH is now comprised of big guys (e.g., Pandora and iHeart) whose position is that they are reasonably happy with the CRB decision.
And, on top of that, Congress is much more fractious than it used to be, and I'm not sure how easily any sort of bill, however reasonable, gets passed nowadays.
Several radio groups have pacted with labels about digital licensing of their music. Is that an option for the smaller webcasters?
I cannot imagine that the lawyers at major labels would be willing to spend time negotiating rates with a webcaster that only has an AQH of, say, 1,000 or 2,000 listeners. That doesn't seem like a practical solution to me.
Worst-case scenario: At the end of 2016, what would the pureplay terrain look like?
As we enter 2016, in terms of services that cover a wide variety of genres, I believe there are about six significant brands of pureplay online radio: the Webcast Metrics-rated brands of Pandora, Slacker, and AccuRadio, and what I perceive are the biggest non-rated brands -- Live365, 8tracks, and Jango. (All the other players are divisions of larger corporations, like iHeartRadio, or primarily music subscription services, like Spotify, that happen to have a "radio" component within them.) I could easily imagine that set of six going down to four by the end of the year.
As for genre-specific brands, there are many - Digitally Imported, SomaFM, Radio Paradise, GotRadio, and dozens of others. Although I'm not familiar with everyone's financials, I fear that all of them are going to have trouble operating on an ad-supported basis in the U.S. That means any or all of them might be forced to geo-block the U.S. or switch to a pureplay subscription model, which I believe would be a shame for almost everyone involved.
How can that be averted?
The ideal solution would be if SoundExchange would realize that a vibrant Internet radio ecosystem is good for almost everyone, including their members, and, realizing that current advertising CPMs for a small webcaster simply can't cover the CRB decision's royalty, would voluntarily offer to reinstate a Small Webcaster license for 2016-20.
If I was SoundExchange, I would raise the minimum size for eligibility up to $3 million - in acknowledgement of the fact that that's still too small for a webcaster to be able to get appointments at major ad agencies. But for larger firms, I might increase the royalty rate from 14% of revenues to something, on the additional revenues, along the lines of 25% of revenues. That would be an accommodation that I think everyone could live with.
What impact has Spotify and other streaming services have had on online radio?
It's very interesting: Larry Rosin has these "Share Of Ear" studies that talk about consumers having two different modes of listening to audio. The majority of their time, they listen to a radio-like product. A smaller percentage of time, they listen to their own music collections. I believe Spotify offers a new way of listening to your own "personal record collection;" that's largely complementary to radio listening, just as it used to be with albums, tapes, CDs and mp3s.
Using the term "streaming" for both types of audio does muddy the water; it's confusing unless you make a clarification.
So streaming has little or no impact to AccuRadio's business?
No, we don't see that AccuRadio hasn't been significantly impacted ... Maybe a little bit, because all of the on-demand services do have a "radio" offering within them.
Where do you see AccuRadio's future growth, and how does the new CRB rated impact it?
We've been having really good success the last year or so, as we're focused AccuRadio more and more on the P35-64 demo and the at-work usage case. The more we focus on the workplace, where loads of people listen on desktop PCs at work for lots of hours a week, the faster we grow. For all intents and purposes, to that audience, we have almost every genre they could possibly want - and loads of channels within each genre -- so growth for us is just dependent on turning up our marketing efforts and generating more word-of-mouth. Throughout my radio career, we've always know that there are a huge number of quarter-hours available for at-work listening. Online radio is perfect for radio listening at work; it's what has always worked for AccuRadio when we've focused on it, so we'll just continue to focus on that.
What kind of marketing will you use to spread AccuRadio's "word?"
A lot of online marketing, from buying text ads and display ads to increasing our SEO efforts and doing lot of e-mail marketing ... Basically, everything we can think of to increase visibility
Do you consider traditional radio a rival or a complementary service to your audience?
Good question. Clearly, Internet radio is a different way to get radio programming to the consumer, so in that sense, we're a competitor to AM/FM radio, but what I've been arguing for the past decade or more that broadcasters ought to compete in the arena and build their own unique online radio brands.
Do you consider iHeartRadio a unique online radio brand?
Yes, but the focus of iHeart, I believe, isn't to draw a huge audience beyond its simulcasts. It reminds me of the early days of FM, when FM stations were just simlucasts of AMs. FM only took off when it started taking advantage of new formats and brands designed specifically for the new medium -- formats like AOR, Beautiful Music and later Smooth Jazz and Classical. To simulcast your radio stream, I don't think that's the big opportunity. The big thing broadcasters should do is create new formats and new brands beyond the simulcasts.
Of course, creating new brands for a radio's digital platform require an investment of time, creativity and money - the latter of which seems to be in short supply these days when you're expected to show fiscal growth by the quarter.
This is true. There's a great book on this subject, "The Innovator's Dilemma," by Clayton Christensen. In every industry that sees new technology of this type, it's very hard for legacy firms to compete in the new technology, because it doesn't make sense to do it "right now" when the corporate needs are measured quarter by quarter. The audience growth opportunity is too small to have a positive effect in one quarter, so in the short run, it makes no sense - but in the long run, it does make sense.
What new technology do you see in the future that would impact AccuRadio?
There certainly will be new services and new types of creative content and new user interfaces. Whether there's something new in the technology beyond Internet delivery, that's beyond my visionary skills.
Besides the rate hike, what other potential obstacles could stunt online radio's growth in the near future? Or has the rate hike pretty much obliterated other concerns?
Royalty rates could still be an issue, as we discussed earlier, but audience-wise, online radio has been on a clear, almost straight line of audience growth for last five to six years to now, where the industry is up to an AQH more than 2 million (Mon-Sun 6a-12m). And this is even before Internet radio, for all intents and purposes, really gets into the car!
And when do you see that happening in a big way?
We'll start to see significant in-car listening when we see Apple CarPlay and Android Auto get meaningfully into the dashboard, which I believe is starting this year. These products are already in stores in the aftermarket category, but once it's installed in new cars, like satellite radio is, that's when it will take off. You may not remember, but FM started as an add-on unit to the AM car radio, and FM didn't take off until it was built into the dashboard. Online radio won't take off in cars until it's embedded with a nice easy-to-use interface. Right now, connecting cellphones via Bluetooth, where you're navigating from the phone, is similar in approach to the FM adapter.