The rate hike leaves some streaming startups in danger of extinction.
By Mike Montgomery
2016 has started out on a sour note for Live365. The online radio service, which specializes in user-curated music, announced that it has had to lay off a significant portion of its staff and will likely shut down later this year.
The reason: A decision by the Copyright Royalty Board to raise the rates non-interactive Internet streaming services like Pandora have to pay for the right to spin music. In December, the board raised the rate from 14 cents per 100 plays to 17 cents.
Three cents is trivial, right? Not exactly. It might not sound like a lot of money, but for small Internet streamers like Live365, it’s the difference between survival and ruin. It’s hard enough to run a business when 50% or more of a non-interactive streaming company’s revenues go toward royalty payments. It’s even more challenging when what’s left over can’t be reinvested into innovation or marketing in order to enhance the customer experience or grow the listener base through marketing and promotions.
Live365 isn’t the only victim of the CRB’s decision. SmoothJazzChicago, a site run by radio vet Rick O’Dell, is also shutting down. O’Dell cited the new royalty rates as one of the main reason he’s turning off the lights.
While the rate hike certainly harms the bigger players, it’s devastating to a whole tier of streaming companies that either serve niche audiences or were just getting off of the ground. There’s no doubt it’s also affecting the army of entrepreneurs in Silicon Valley and elsewhere who are currently hard at work on the next big thing for Internet music, not to mention the venture capital that will instead go toward startups that don’t have to give away the lion’s share of their revenue in order to avoid collapse.
The board’s decision is going to have a chilling effect on the streaming music industry. As barriers to entry get higher and higher, the online streaming world will consolidate in the hands of a few giant players. It might be good for Apple and Google, but it’s certainly not good for consumers and artists.
And that’s a shame because technology is turning the music business around in so many ways. The wide adoption of streaming has greatly reduced piracy. Streaming companies are joining up with ticket sellers (see Pandora’s recent purchase of Ticketfly) to make buying concert tickets more convenient than ever. Companies like iHeartMedia are investing in virtual concert experiences that will connect artists and fans like never before.
This is only the beginning. The sky is the limit when it comes to ways that technology can grow the music business. But if the government continues squeezing the streaming industry, Silicon Valley’s venture capital community will look investment its money in less financially-risky innovations.
There’s no question that artists should be earning more money for the amazing work they do and while the royalty rate boost was, on the surface, reasonable considering the drastically higher rate increase the CRB could have imposed, a better way to increase the money flowing to artists would be to encourage the growth of innovation in the music industry. More listeners streaming more songs will mean a bigger pie for everyone who deserves a slice. New ways to expose music fans to new experiences will benefit everyone. That means creating an environment that is friendly to new entrants and encouraging of innovation and its virtuous cycle. Raising rates, even by supposed pennies, sends the opposite message.
Although streaming might already feel like the de facto way of listening to music, the industry is really only in its infancy. By raising royalties, the CRB risks stopping entrepreneurs in their tracks while encouraging music listeners to find their tracks the old fashioned way – by downloading their songs on iTunes and ensuring a music monopoly for Apple. The best way to serve musicians and music lovers is to keep the rates under control. If it becomes too expensive for streaming companies to stream, consumers are likely to turn back to piracy. That’s a future that the music industry and government alike should do everything in their power to avoid.