“Industry Can’t Support Rates” says key analyst

BY PAUL MALONEY
The very analyst whose ad revenue estimate is the basis of the SoundExchange argument that new royalty rates are affordable and reasonable has clarified that estimate in a new report which concludes the new royalties would severely damage Internet radio.

In a March 23rd letter to “SoundExchange Members and Friends,” executive director John Simson wrote, “Over the past five years we have seen an explosion of broadcasters bringing their stations online, expansion by the large webcast services and in increase in advertising revenues from 50 Million to 500 Million Dollars.”

SoundExchange has repeatedly trotted out the “$500 million” figure as the bedrock of its argument in support for the Copyright Royalty Board’s royalty rate determination, which was announced on March 2nd.

In the new report, JP Morgan analyst John Blackledge estimates “audio streaming and some graphic ad revenue in 2006 was about $100-$150 million,” just 20-30% of a revenue total which SoundExchange says would make the new royalties affordable for the industry .

The April 4 report says it’s “likely” the new rates would limit “growth of the Internet radio medium, given that the smaller Internet radio webcasters would likely have trouble generating enough revenue to support the cost growth arising from the new royalties, as well as potentially larger entities weighing the benefits of investing in Internet radio.”

Audio ad market just a fraction
of SoundEx cited estimate
In his January report on the industry (covered in RAIN here), Blackledge wrote, “We believe the Internet radio ad market was roughly $500 million in 2006.”

While many webcasters greeted these numbers with some apprehension, SoundExchange, the record industry body that collects and distributes webcast royalties, seized upon the projection in its defense of CRB rates. In addition to the March 23rd letter, SoundExchange spokesman Willem Dicke cited the projection when speaking to the Associated Press (here). And the group’s executive director John Simson often uses the report as the main thrust of his contention that effectively-monetized webcast operations should be able to afford the royalties.

What isn’t made clear in SoundExchange’s pleas is that Blackledge’s estimate includes not only revenue from advertising the vast majority of webcasters utilize (e.g., audio ads and some graphic ads), but also the much larger pool of potential ad revenue available to large Internet companies with a wider range of more sophisticated advertising vehicles.

“While our overall Internet radio ad estimate is ($400-$500 million), this figure is inclusive of music video related ad revenue, sponsorship, banners and buttons as well as news/talk/sports related revenue and other non music related revenue which would not be subject to the performance royalties.”

Blackledge adds, “We would note that the five largest Internet radio entities, CCU [Clear Channel], Yahoo!, AOL, MSN and CBS likely account for over half of the Internet radio ad market.”

“We believe audio streaming and some graphic ad revenue in 2006 was about $100-$150 million all-in, industry-wide,” and, as a result, “is a useful starting point when discussing the new royalty rates.”

Royalty rates would outpace
industry revenue growth
Given this reality, the report predicts that not only will sound recording royalties become the largest single expense for webcasters, but that they will claim an increasing majority of webcasters’ revenue.

Blackledge estimates an obligation of “about $61 million in (sound recording) royalty costs in 2006 (or about 52% of the $116 million in audio streaming/graphic ad revenue), with the royalty costs increasing significantly over the next several years likely outpacing Internet radio ad revenue growth.”

Certainly, webcasters have other operating costs like bandwidth, composer royalties, administration, and utilities to pay, and the analyst warns many smaller Internet radio operators could go bankrupt, “given that just the royalty costs alone might actually equal or exceed current revenue.” Operations like Yahoo! and Clear Channel might just simply turn off their unprofitable streams.

“It could also be argued that if there were fewer Internet radio entities,” the report concludes, “the sampling of new music and new artists could decline, given that Internet radio with its wide range of music formats is used as a vehicle for music sampling, which can be argued ultimately leads to purchases of music via retail outlets and/or Internet downloads.”

The report is called “Internet Radio Scorecard Feb ‘07: Examining the Impact of CRB’s New Royalty Structure, If Implemented” and was released to the press this week.