Internet radio continues to grow at an astonishing rate, representing one of the rare bright spots for the struggling music industry. Just last month, several companies introduced wildly popular radio applications for Apple’s (AAPL) iPhone that allow streaming music services like Pandora, AOL Radio and Last.fm to work on the mobile device. The effect: Listeners are now able to tap into thousands of stations (or online music services) across the country while walking on the street or driving in their car.
But online radio is still grasping for a way to make its burgeoning listener base pay off for investors. There is a simple yet counterintuitive method that could benefit the music industry, artists, the online radio networks, and listeners. The only problem is that it has long, unpleasant history behind it. We are talking about paid song inclusion, sometimes known as Payola.
Just the word may send shivers down the spines of radio executives. Pay-to-play has become synonymous with sleazy record producers foisting untalented musicians on the public, as DJs and stations receive under-the-table payments for playing their songs. The practice — and the fact that big name DJs such as Alan Freed and Dick Clark owned a piece of the action — so infuriated lawmakers in the 1950s that they passed anti-payola laws with heavy monetary punishments and potential jail time for violators. (Apparently, it’s existed since at least the big band era of the 1920s.)
The law did throw a legal bone to broadcasters. While it made payola illegal for terrestrial broadcasters, it gave the networks an exemption on paying performance royalties to artists. Under this theory, the artists get free promotion for their work and the networks receive their “payola” in their free use of the artists’ material.
This trade-off of free play but no payments breaks down with both Internet and satellite radio. These new media do not receive the performance royalty exemption. In fact, questions and negotiations over the price of performance royalty payments have almost killed Internet radio, and most Internet radio companies have yet to turn a profit.
Large Internet and satellite radio stations currently pay per-song performance royalty fees, a significant drain on their margins. On the other hand, with both the rationale for the law and the way it is written, these networks should not be barred from accepting payment for song placement. The barrier is therefore not a legal one, but instead a cultural one, built up and taught in the industry over the last half-century. And this barrier helps no one: not the public, nor the stations, nor the music industry, and especially not the artists.
For Internet radio, the bar on paid song inclusion is a protection that the public doesn’t need. The vast reach of Internet radio provides its own protection against the unwanted effects – listeners can’t really be held captive on a few stations in their area. Instead, they can easily turn the channel to listen to whatever they want, whether it’s a streaming station in LA or a national pure play Internet radio service. Unlike terrestrial radio, where there is a very limited range of options, Internet radio’s reach is almost limitless.
Paid placement would have its own benefits. We have seen a similar arrangement — of course not denigrated with the term payola — work well in the financially successful and user-friendly online advertising search field. In that case, advertisers can easily place bids on search results, and target their message directly to a discrete and highly specific audience. An Internet radio “pay to play” advertising service could accomplish a similar goal.
From such a system, artists, management and rights owners would gain the ability to bid for placement on the web’s best radio stations to gain exposure for new bands or to promote existing artists in the areas where they are touring. It could also be useful to push crossover hits across sympathetic genres, allowing artists the possibility of actually breaking out onto a larger stage. This is a serious advantage over the current system, which is so focused on genres that it takes a virtual miracle, plus a high priced marketing campaign, to break out.
The music industry and independent artists would benefit from a greater freedom of action. The labels will now have the ability to choose which artists get the most promotion and, thanks to the nearly instantaneous and detailed information feedback provided by Internet radio, can see in real time what works and correlates to sales. By the same token, independent artists will be on a level playing field with the big labels, and for the first time, have real control over the promotion and distribution of their music.
The stations and streaming sites would also benefit. The requirement to pay a performance royalty has made Internet radio an expensive business when compared to terrestrial radio. If a station can significantly increase their royalty free content, they can trim one of their biggest costs. And when you consider that artists and their management would probably pay a significant premium for this type of “advertising,” it could be the difference between a good business model and a money loser.
Paid inclusion would not harm the industry. The stations are not about to damage a lucrative, growing industry if it does not mesh well with listeners. With a lower royalty burden and new revenue stream, many popular commercial-free streaming audio services could still remain without traditional audio advertising. Due to the basic self-interest, these “sponsored songs” will be genre correct and reviewed for overall quality and appropriateness. The new regime should be viewed as an additional channel for music discovery. As we have seen with paid inclusion and contextual advertising, the additional channel can have the desired effect of introducing the user of the service to something that is useful. If the sponsored song does not achieve the desired effect, the “advertiser” is able to quickly recognise that it was a poor fit, and remove the song from rotation.
Radio listeners are a savvy lot. Unlike 50 years ago, everybody knows that advertising is paying for the product. The listeners are well aware that at some point in time, if they are going to get highly personalised, high quality streaming music, they will have to pay for it some way. However, unlike terrestrial radio, there are an infinite number of choices on Internet radio, and the option of exposing a listener to heavy ad play is considered unacceptable by many music services. With sponsored music as an advertising option, the large online station can afford to pay their bills while maintaining a strong listener experience.
Thanks to scandals of yesteryear, payola is a dirty word for the music and radio industry. However, as times change, businesses need to evolve or risk extinction. If the industry and the listening public can get past old sleazy connotations, they will see that paid inclusion shines the light on a new mutually beneficial regime for all involved. In the right hands, and with the right audience, it could actually represent a big opportunity for a booming new medium.
Doug Perlson is CEO of TargetSpot, Inc., an online advertising network and marketplace designed for streaming audio.
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