Court Gets it Right

Here's some good news: a federal appeals court ruled that preference-based playlists are not interactive!

Just as anyone can tune the radio dial until he finds a station he likes, he can tell online services what music he likes and hear that kind of music - all under the US compulsory license, which means the online service doesn't have to negotiate special on-demand rights or prices.

This is a victory not only for Yahoo and Launch, but Pandora and every other preferences-based streaming service out there!

SoundExchange reaches web royalty deal with NAB, but not webcasters

SoundExchange collects royalties under the US Government's compulsory licensing of music for radio stations. How much to charge for a web stream, and whether royalties for performance rights are included along with SoundExchange's traditional publisher royalties has been a point of contention for about a decade.

From what I can find in the press (which leave some questions unanswered), the National Association of Broadcasters (NAB, which represents terrestrial radio stations) has agreed to $1.50 per song per thousand online listeners, ramping up to $2.50 per thousand by 2015. (No news what stations pay for their airways broadcast listeners.) That deal is for radio stations that simulcast their programming over the Internet. It's also for any online-only programming those broadcasters might also provide. That $1.50 rate will more than eat up any online advertising the stations can sell, which typically sells for less than $1.50 CPM (thousand impressions) these days - and that's assuming they can sell a display ad for every song, not a single ad for every 3-5 (or more) songs typical of terrestrial audio ads inserted into broadcasts.

So it looks like the deal with pure online broadcasters got hung up on the question of programming interactivity and what appears to be an irrational insistence by SoundExchange on a percentage of a company's revenue, rather than a simple per-song fee. Some also blame RealNetworks for screwing up a deal reached in November 2008 by at least twice seeming to agree to terms, then pulling out at the last minute. (Sounds like Rob is being Rob again.)

US law grants an automatic license to play music as long as the broadcaster follows certain rules. The main rule is the music can't be played "on demand": a listener can't push a button and hear a specific song. Online services like Pandora skirt the on demand rule by allowing listeners to program their own stations by listing some artists they like. The listener is not guaranteed what song will be played, but it's likely something she or he wanted to hear. SoundExchange deems this outside the compulsory license law and wants extra money for that interactivity. They seem to forget that I can change my car radio from a country station to a rock station to a Latino station to an urban rap station whenever I want. Though I'm not selecting the music or affecting what an individual station plays, I'm still interacting with what I'm listening to.

True on-demand streaming services like Rhapsody, Napster, Zune, and others must negotiate separately with recoding owners (labels) to play music as US compulsory license law was not written for on-demand performances.

Competing Against Free

It's not hard to understand that the most difficult problem the music industry faces today is the pervasive availability of free music. Now, when I say free, I mean stolen, but that is merely a semantic difference that is immaterial to how people are finding, playing, and acquiring music today. So I will call it "free" for the rest of this post.

Many people I talk to think free music went away when Napster went legitimate, or when the RIAA started suing their customer base. But free music is still as easy if not easier to either stream or download from the internet. Some sites only let you stream music, while others let you download. Many services are run in countries far from the music industry's influence. Other services skirt the illegal sharing problem by acting as hubs that link to music on other servers.

Here are just a few sites that let you play or download free music:

SkreemR.com - An MP3 search engine. SkreemR scans the web for MP3 links and adds them to its search index. Type a song or artist name and get a list of MP3 download links. Sure they also link to places like Amazon or ThumbPlay where you can buy MP3s or ring tones, but you can also stream and download the song for free. The finally-out-of-beta Songbird player (shown below) makes it even easier to download: it integrates a SkreemR search right in the player and converts free MP3 search results into a list complete with download buttons. You get free music to download to your PC or take with you on your portable MP3 player.



Songza - An MP3 search engine. Songza only lets you stream the results in an embedded player on their site, often in the form of a video from YouTube, but sometimes from MP3 audio source. As long as you don't mind playing music from your PC, you get all the free streams you want.

SeeqPod - An MP3 search engine that also powers other music experiences. SeeqPod only lets you stream results in an elaborate embedded playlist manager on their site. Warner filed suit against SeeqPod in January 2008. EMI filed suit in February, 2009.

Blip.fm - An addictive Twitter-like micro-blogging service with free music streams. Blip.fm lets you search for songs, and play them for yourself and the site's social network. Songs are served either from a web server where the MP3 was found, or from Amazon's AWS hosting service. Blip lets its users upload music. Though they tell users to only upload original content, they serve plenty of copyrighted music from AWS. They're ripe for being shut down by Amazon.

Project Playlist - An MP3 search engine with Facebook application. Project Playlist only lets you stream results, and add songs to a playlist on the site. You can find other people's playlists and play them. The RIAA filed a lawsuit against Project Playlist in April 2008. They claim that since they don't host MP3 files, they aren't liable for theft. EMI, in what gives the appearance of blackmail, dropped its suit after Project Playlist agreed to license their catalog.

Sideload.com - Organizes links to MP3s on other people's web sites into a streaming, locker, and mobile sideloading site. EMI filed a lawsuit in January 2009.

Note that several sites play music for free legally, either because they've negotiated on-demand playback rights from the labels (e.g. CBS Last.fm, Lala.com), or they play non- or minimally-interactive radio style playlists under US compulsory license laws (e.g. Pandora).

Though some of the illegal free music sites have no business model, or have a model that would collapse if any royalties were actually paid, the preponderance of these extra-legal sites is evidence that content owners would benefit from a simple, legal way to let innovative services access streams for a reasonable price. Without such a service, music will continue to be played, but no artists or labels will be paid for the usage.

Labels kill distribution

Pandora can't make money, may pull the plug

Here's another story about the music labels and publishers pricing a popular service out of business. Pandora is the most loved personalized radio service on the internet (in the US anyway - the British publisher association blocked them from the UK market some time ago). Due to increases in compulsory radio rates, and differences in prices between terrestrial, satellite and internet rates, Pandora can no longer survive paying 70% of their gross margin for content.

The article attempts to lay some of blame on Pandora for extending onto devices without support for their current method of monetizing stations. But it's not for a lack of trying creative solutions. Pandora has tried various ways to monetize their service, including subscriptions paid by the listeners (failed even with free trials), a la carte song upsell via Amazon Associates (that pays only 10% of any MP3 purchase back to the referring site), advertising (their current model), and others. All of which don't work given the too-high cost of the content.

So rather thanfinding a way to make the most popular music discovery service work for all parties, content owners will force Pandora's shutdown over lack of net income.

Investors will only buy music for others for so long. The labels today are betting the farm on "stupid VC" advances that will never be recouped. That's no long term music strategy - offering yet more proof for this blog's thesis that the labels will put themselves out of business and the industry will be reborn without them.