In its report, ‘Internet Radio Makes Waves’, eMarketer says terrestrial radio will continue to struggle in 2009 as advertising expenditure drops by 18 percent from that in 2008, resulting in ad revenues of $14.5 billion. In fact, according to the Radio Advertising Bureau (RAB) the first quarter of 2009 was the industry’s worst quarter ever in terms of ad spending.

That doesn’t mean radio per se is doomed. Indeed, as terrestrial radio stations decline, Internet radio stations are benefiting from growing ad revenues year over year, making Internet radio one of the fastest-growing online media categories.

While Internet radio stations such as Pandora are virtually being squeezed out of business due to excessive royalty fees… and online streaming services such as Imeem need to sew up deals with the record labels to do business… a third kind of free – and LEGAL – music service has set up shop.

Called 8tracks.com, the site enables users to upload and mix their own tracks and let others listen to, or mix, them as well. Since users can’t see exactly what tracks will be played… there are limits on how many times a given artist in the same mix may be included… and you can’t play previously listened-to tracks unless you start the entire mix again… it’s entirely legal.

This is because under the Digital Millennium Copyright Act, 8Tracks.com effectively gets a compulsory license to operate as a “non-interactive Webcaster”. In other words, an Internet radio station that can stream any music as long as it pays a royalty.

Although 8tracks.com has applied for a special “small Webcaster” license to keep costs down, if the site becomes popular it will eventually need to pay the same royalties that are threatening the closure of Pandora: about 2 cents per listener per hour this year, rising to 3 cents next year. Consequently, 8tracks.com will need to generate an effective CPM of $30 or more to cover costs.

What may save 8tracks.com is keeping other costs down. According to Silicon Alley Insider the site only cost about $80,000 to build and Amazon is handling storage and bandwidth. Meanwhile, the site’s members are the ones who supply the content by uploading and mixing the music.

Source: Peter Kafka, “8Tracks: A Free, Legal Music Service We Love”, Silicon Alley Insider, August 16, 2008

Pandora, an Internet radio station that allows listeners to create their own virtual radio station based on their musical tastes may soon close as it struggles to meet its royalty commitments.

A ruling by a federal panel last year saw Internet radio stations forced to pay relatively high royalty fees in order to play music to its listeners. While normal FM/AM stations pay nothing to play music… and satellite stations pay approximately 1.6 cents per hour per listener… by 2010, Pandora and other Internet radio stations must pay 2.91 cents.

The cost of paying such royalties has already forced a number of Internet radio stations out of business and Pandora’s founder, Tim Westergren, has said that Pandora may have no choice but to follow suit. According to the company, an unsustainable 70 percent of its $25 million in annual revenues is paid in royalty fees.

Which may be exactly what the record labels want. Or think they want. After all, if more and more people are choosing to listen to music online… then killing off services like Pandora – i.e. services that are distributing the labels’ music – may not ultimately be in their interests…

Source: Michael Arrington, “Perhaps Pandora Must Be Our Sacrificial Lamb”, Tech Crunch, August 16, 2008, Corvida, “Pandora On the Verge of Closing Shop”, Read Write Web, August 16, 2008