Music Technology: Making It in Internet Radio

It is both simpler and more complicated, easier and more difficult to make it in the music business these days.

Take the Internet radio market, for instance. Digital recording and music broadcasting once required making rather large investments of capital for systems that could only be operated by experienced, well-trained technicians.

Today the necessary components can be bought much more cheaply off-the-shelf from digital audio technology vendors or from Internet broadcasters who can provide digital broadcasting channels and services directly to a mass market-sized army of amateur and professional Web DJs and musicians.

Lower Barriers to Entry, More Competition

Rapid advances in the development of digital music technology have led to an explosion in the amount and variety of music available to listeners worldwide, as well as to new opportunities to break into the music business as a DJ, musician or Internet radio broadcaster.

According to the International Federation of the Phonographic Industry’s, “IFPI Digital Music Report 2006,” the number of songs available online from major service providers doubled to surpass the two million track mark, while the number of legitimate online service providers grew to 335 — that’s up from 230 in 2004 and 50 as of year-end 2003.

The flip side is that the music market is becoming less and less homogenous. Instead, it is evolving into a market of masses — masses of narrow, and to varying degrees deep, market niches. Consequently, it’s more difficult for broadcasters and DJs, as well as musicians, to tap major, commercially viable veins.

Also contributing to the business conundrum is the fact that lowering barriers to entry, as economists tell us, leads to more competition — competition for music listeners/consumers, competition for content providers and more competition for advertising dollars.

There’s plenty more competition today, in what has always been a fiercely competitive market, than has been the case at any time in the recent past.

“The market is in a real state of flux right now,” said Betty Ray, senior editor and director of community at Live365.com, the largest independent Internet radio broadcaster in the U.S. — and probably the world.

“The old model of bringing up the next big pop star is harder to come by, but there are lots of people out there making music, selling CDs and creating their own networks and communities,” she notes. “It’s easier to be entrepreneurial. Overall, it [Internet radio and digital audio technology] is enabling musicians to succeed and make a living in music. It enables artists to direct their own fate to a much greater degree than was true in the past, and with a lot less in the way of resources.”

The Bygone Days: Free Internet Radio

It’s a Saturday night, and I’m burning the midnight oil writing a paper in an Internet cafe in the small southeastern Polish city of Czestochowa. I have my MS Word doc up in one window and in another, I’m listening free of charge to my favorite Internet radio program.Mr. PoBoy’s Jambalaya Jam is digitally streamed by Live365.com, a company that now boasts 4 million unique listeners a month — the biggest listener base it has ever had.

I’ve lived and worked in several countries during the past few years. Wherever I’ve gone, Mr. PoBoy and Jambalaya Jam have been there. Being able to tap into this program and has made me very appreciative of, even grateful to Live365.com and Steve Polatnick, the man behind PoBoy Creations and Jambalaya Jam.

It also sparked my journalistic interest in the Internet radio phenomenon and, specifically, how the people making it work make it work — as well as whether they are making any money doing it.

Steve Polatnick got into the Internet radio business as a Web DJ back in its infancy, in 1999, when everything you needed to get up and running was free.

“I got turned on to Internet radio by a childhood buddy [The Jester] who was doing a two hour nightly show to no one from his basement in suburbia. He was playing all his favorite tunes and having a therapy session because he couldn’t afford a shrink,” Steve recalls.

“He turned me on toShoutcast.com, but I wasn’t technically inclined, and I noticed that many broadcasts were coming from Live365.com, so I checked them out and discovered that they did everything for you. All I had to do was sign up for free and upload my MP3s and they would take care of the rest . . . and it was all free!”

That Was Then . . .

Times have changed since those heady early days. Web DJs like Mr. PoBoy now are charged to make use of Live365’s Internet music broadcasting and systems services platform. It includes access to a sideload music library containing songs and other audio materail from Live365’s roster of 10,000-plus content providers, many of whom are listeners as well.

Polatnick’s and Jambalaya Jam’s audience has grown substantially since 1999. Today, he’s attracting more than 1,500 listeners a day who tune in for an average 40 minutes at a time. Ironically, his programming activities have gone from an economic break-even point to costing him money to keep them going.

“I guess it was self-supporting in the early days when Live365 was free and Napster made up for the holes in my collection,” Polatnick explained. “Then Live365 started charging for their services and the record companies got the government to pass laws about how many songs per hour or per day you could play from a single artist or album,” he said.

Subscription sales and advertising are two big revenue streams, both for Live365 and its Web DJs. Live365 runs its own streaming advertising on all free-listener programming. This isn’t the case for preferred members or on programs whose Web DJs hold a Live365 PRO license, which are ad-free.

Web DJs and music programmers who have a PRO license can sell and stream their own advertising on their programs, however, and all music programmers can promote their own Web sites and ancillary businesses, including merchandise sales.

Polatnick is selling Mr. PoBoy branded merchandise via his own Web site, which listeners can get to via a hyperlink on Live365. He has considered upgrading his license to Live365’s PRO level, which would enable him to sell his own advertising and stream it on his programming, but hasn’t done so yet.

“It’s really tough to make it in Internet radio right now,” Live365’s Ray acknowledged. The bursting of the Internet stock market bubble in 2000 and the ensuing economic downturn hurt fledgling Internet radio broadcasters, but the real blow came in 2002 — in the form of new industry royalty rate regulations handed down from CARP, the Copyright Arbitration Royalty Panel.

“Royalties are paid on a per-performance basis rather than as a percentage of revenues, as is true for satellite radio,” explained Ray. Furthermore, both Internet and satellite have been put at a disadvantage compared to traditional AM/FM radio broadcasters who pay no royalties — either performance-based or percentage of revenues — at all, she pointed out.

Building Communities Around Deep Niches

Internet radio broadcasters earned their place in the music marketplace by serving and cultivating active listeners and using interactive digital technology to build up new niche music markets and communities around them, Ray said. They tapped into their listeners not only for listening time, but for talent and content as well.

Those Internet radio broadcasting services that survived the bubble’s burst, the flagging economy and the imposition of the record company royalty rates had to find and forge new e-commerce-based business models.

For those that wanted to preserve and build on their unique ability to develop large numbers of “deep niche” markets by tapping into their listener base, it meant finding a way for new, aspiring talent — Web DJs, musicians or other traditional broadcasters — “to grow and become big. So, yes, the lower end [of the market] is very valuable to us,” Betty Ray said.

Live365 shares revenues with its Web DJs and music programmers in two ways: by paying “bounties” for attracting preferred member subscriptions and by passing on part of subscription fees based on the number of preferred member, as opposed to free listener, hours they attract on a monthly basis.

Live365’s WebDJs can also sell their own advertising and promote their own ancillary businesses, Ray emphasized. She pointed to the success ofRock.com, a Live365 channel that has succeeded in building up a large audience and selling branded merchandise.

“They’ve built a big brand and grown into a big rock n’ roll network,” she said. “They’ve built a business on Internet radio. I think that will be less of a rarity as more listeners come online, but there will also be more competition.”

In order to keep its Internet start-up and alternative indie music roots alive and growing, Live365 continues to add to its content by signing deals with record labels, as well as with high-tech industry giants such as Microsoft and Apple.

The company also continues to find and work out ways of helping its communities of small, individualistic broadcasting “hobbyists” to grow their businesses. As the Internet radio market grows, it is attracting interest from non-music companies such as Bacardi. The rum and spirits producer has developed a Live365 radio channel and is using it to promote and advertise its own core business, Ray said.

With the idea of adding to the technological toolkit of all its broadcasters small and large, Live365 was among the first to introduce software, dubbed “Studio365-Live,” that enables its Web broadcasters to stream music live from pubs, clubs and music halls.

It is partnering with a wide range of companies in the digital music business to continue building its listener base and keep abreast of technological innovations. It has partnered with Apple’s iTunes service and recently began podcasting its programming. Also, it has partnered with digital audio equipment manufacturers such as Philips and D-Link to sell new stand-alone, wireless Internet radios and other equipment through the Live365 Web site.

“Our edge is user-created content and community built around that, and you’ll never find that on satellite,” Ray observed. “We’ve been a user-created community since the beginning. We’ve always been proud of our ability to facilitate the promotion and discovery of new and seldom heard music, as well as more popular forms.”

Part 1: The Times They Are A-Changin’