Dissecting the Proposed Internet Radio Royalty Fees

Will online music providers be treated fairly?

A research report prepared by the radio market analysis firm BridgeRatings cites estimates that about 56.7 million listeners tuned in to Internet streaming radio every week in 2006. Compare this to about 279.6 million listeners of AM and FM radio. But BridgeRatings believes the growth rate for AM/FM listeners will murmur at around 1% per annum, while the Internet radio listener base will grow at about 27% per year. By 2010, BridgeRatings projects 147.5 million listeners will tune in for streaming radio every week.

In straightening up BetaNews' projections from Tuesday, one of our first tasks was to apply that projected growth rate in streaming audiences to the big four online streaming providers, as tabulated by comScore Arbitron: AOL Radio, LaunchCast, Clear Channel stations, and Live365.com. Based on the CRB's royalty rates for 2006, AOL Radio is expected to receive a royalty bill for last year for about $23.7 million.

We based that figure on its November 2006 ratings for average listeners during peak hours (336,364), during awake hours (210,694), plus the industry standard of 10% of that broader figure for the overnight hours. With an industry average of 16 songs played every hour, AOL Radio in November served up 569.6 million performances to individuals every week, for which it owes $.0008 per performance under the 2006 rates.

BetaNews' projections for annual royalty fees paid to the SoundExchange group by the US' top four streaming music providers, should the CRB's proposed rates become ratified.

When you apply the projected growth rate of Internet radio for the next three years, and also take into account the 2010 royalty rate of $.0019 per performance, BetaNews can now project that AOL Radio could owe $146.4 million in royalties in 2010 alone. LaunchCast would owe $113 million, Clear Channel would owe $61.7 million, and Live365.com would owe $42 million. Just the top four streamers would be billed $363 million during the same year that all 14,000 US radio stations combined would be billed $550 million.

Based on comScore Arbitron's numbers, BetaNews determined that these top four providers together supplied 11.64% of all streaming music traffic during November 2006. We estimated this by combining the listenership projections from BridgeRatings with the November scores from Arbitron. Using that percentage as a guide, we estimated the number of total US listeners during November's peak hours, and scaled that number up using BridgeRatings' growth rate, up until 2010.

This way, we could estimate the total number of performances for which all streaming radio providers would be responsible for 2010. At about 12.13 trillion performances per week alone, the annual figure is astoundingly large.

Royalties organizations typically integrate upwardly scalable fees per year into their rate schedules. Here are the differences between PRO schedules and what SoundExchange proposes.

At the projected 2010 rate, streaming radio providers would provide SoundExchange with $2.3 billion in revenue. That's almost exactly 400% of the calculated cumulative total for PRO royalties to be collected during that same year - and keep in mind, radio stations with Internet services would owe both fees.

From this perspective, the SoundExchange royalties only look four times as much. But the size of the overall markets are disproportionate, so we asked ourselves what each station is paying per listener, if the assessed charges were applied to listeners rather than to songs.

How much should Internet and terrestrial broadcasters expect to pay in royalties fees for each of its customers? Our estimates reveal the disparity.

On a per-listener scale, broadcast radio stations paid $1.56 per listener on average during 2006; and in 2010, that figure rises to $1.94 per listener. BetaNews estimates that Internet radio sites, by contrast, will pay $8.91 per listener for 2006, rising to $15.59 per listener in 2008 and staying flat beyond that time.

Thus an Internet radio music provider is likely to pay in royalties almost ten times the amount for each of its listeners throughout the year, than the terrestrial broadcaster.