David Versus Goliath: Internet Radio Takes On the Music Industry

We all know the story. Underdog David takes down the giant Goliath with his tiny slingshot, giving little guys throughout the centuries a glimmer of hope.  This time, it’s Internet radio providers versus the three major record labels, but in an interesting twist, it could be time for Goliath to take a stand.

A recent study by NPD, an Internet research company, suggests that while on-demand streaming music (read Spotify and Rhapsody) revenues have only increased by 18%, that generated by Internet radio services such as Pandora and Slacker has increased 27%. A big part of the jump in Pandora’s numbers is due to its use in cars.  According to the NPD study, 34% of Pandora users listen to it in the car. And let’s just say Pandora is letting that success go to their heads.

In the past few weeks, they’ve headed to Washington with the Internet Radio Fairness Act. The Act wants the government to lower the rate that companies such as Pandora pay to play music and make them more comparable to the fees paid by Sirius/XM and cable radio services. In contrast, the music industry, with the support of musicians unions and artists would like to see the fees paid by the satellite and cable providers raised to equal that of Pandora.

Before anyone starts jumping on the music labels for being evil conglomerates, remember that while Pandora is asking for a rate cut of 85%, the royalties they pay are split evenly between the record labels and the artists. Any cut in royalties will directly affect the take-home pay of your favorite artist. To say nothing of those further down the food chain – studio employees, including the guy sweeping the floors at night.

The problem is that while consumers like services such as Pandora, artists claim that it steers potential consumers away from purchasing songs.  Similarly, artists have even more to complain about with a system such as Spotify —an on-demand service that lets users hear exactly what they want, when they want it. Why would any of those listeners ever purchase a song? Why buy the cow when you can listen all you want for free? The number of new releases is diminishing yearly, with many bands unable to afford to spend months and months in the studio to create new recordings. In that case, the quality of the recordings will suffer too if they’re being rushed through the recording process to minimize budgets. We all suffer when the music industry struggles.

Other interesting results from the survey showed that Americans still listen to AM/FM radio, although the Internet has replaced the CD as the second most-preferred listening option. However, the number of Pandora customers who also listen to terrestrial radio has dropped by 10%. And, with so many people connected continually to the Internet, users listening to music files on a portable player have dropped by 21%. When was the last time you bought/used a stand-alone music player?

It’s been cool and hip to dis the big music labels for years – that’s how people justified Napster and other free downloads, but do you think that maybe it’s time to defend the music industry for a change?