Pandora and other webcasters who fought for lower royalty rates a few years ago rejoiced when they achieved rates they thought would allow them to achieve profitability, back in 2009.
Yet questions still surround the ability of webcasters such as the now-public Pandora to turn a profit, given that their payments to copyright holders increase at the same rate at which they grow.
Unlike just about any other type of digital business, internet radio cannot increase (or attain, as the case might be) profitability by merely growing to a larger scale. Instead, these companies must try to increase their ad and/or subscription rates faster than they add users.
This is a tough row to hoe because it means increasing advertising prices as ad inventory increases. That runs counter to the usual rule of scarcity, where stuff gets cheaper when there's more supply. On top of that, internet radio services are competing with every other ad-supported thing on the internet - in other words, practically every commercial service you encounter on the web or the app stores.
Earbits thinks it has the answer: charging bands for the honor of having their music played on its stations, or at the very least doing so for a lower royalty rate than what Pandora and the others pay. Founded in 2011, Earbits has now streamed over 4.5 million tracks [updated] on its web, iPhone, and Android apps, which isn't a lot compared to what Pandora does (Pandora counts for somewhere around 60 percent of all internet radio in the United States). Earbits says "many of [those 4.5 million streams were] paid for play by participating bands/artists."
"The big difference in what we're doing and what [Pandora is] doing is we're trying to add value for the content providers," Earbits Co-founder and CEO Joey Flores told Evolver.fm. "We want to make the value of being on our platform so much more significant that we'll get a break on royalties that allows us to have a more sustainable model. By focusing on helping the bands get new Facebook fans, new email subscriptions, pre-sign-ups for their next release, driving traffic to their box office for their shows… and positioning ourselves as more of a marketing platform for the musicians themselves, it's both more flexible in terms of what we can do for our users… and it's cheaper for us in terms of royalties."
Not only does Earbits pay lower royalties than Pandora, but it also pays what one might call "negative royalties" by selling airtime.
"By buying more airtime, [bands] get more features and customability in terms of what they can do with that airtime," added Flores. "They can customize a visual unit above the fold to promote whatever they want at that moment. Some bands are using it to promote their free download on bandcamp. Others are using it to promote their YouTube channel. Paying bands are [also] able to do more with their profile on Earbits… it is going to be more of a pay-to-play model in terms of the revenue, but everybody that's on Earbits is giving us a royalty break. Even the non-paying bands are getting more out of it than they would by being on another platform."
Like any pay-to-play venture, Earbits faces a difficult balancing act between programming quality and revenue. To deal with that, it employs an editorial team with experts in a variety of genres (recently adding country music), like Pandora does, to decide what music to include. Only bands that are on the platform anyway have the opportunity to pay for airtime and other forms of promotion. And if users skip a band's song too much, it can be booted from a channel - even if the band is willing to pay.
A key part of the equation: When you "Like" a band within Earbits, you're really Liking it on Facebook - something that has caused over 105,000 tracks to be shared on Facebook to date. The company is also branching out into licensing bands' music (for a short film on BET) and finding bands for labels to sign (Spectra Records). So to an extent, Earbits appears to be succeeding as a way for independent bands to market their music, even if they're not getting paid, or are even paying to be heard.
If so, that's great for Earbits, which expects to be profitable by 2014.
But if the only way webcasters can make money is by charging bands, rather than paying them, we suspect internet radio royalty rates have yet to achieve their optimal configuration.