Online radio: the UK business model

Music 4.5: Smart Radio 26 September 2012

Grant Goddard

• • • • •

Production: Award‐winning, innovative radio production of mainstream  and specialist music, drama, documentary and comedy Consultancy: radio industry expertise in strategic, commercial, regulatory  and operational issues, from business plans to pioneering formats Technology: creation and execution of collaborative strategies and  applications that enhance the listener's ability to engage with radio totallyradio.com launched in 2000 as the UK’s first multi‐channel online  radio content aggregator, with support from Microsoft Lead partner in three Technology Strategy Board‐funded partnership  projects: Radio Connected and RadioDeck, enhancing online radio  connectivity; totallyradiocentral.com, a music licensing wizard for radio

How is online radio performing in the UK? Audiences?

RAJAR: UK radio audience metrics
Share of adult (15+) radio listening by platform (% of total)
80%

70% 61.1% 60%

50%

40%

30% 20.1% 20%

4.6% of all radio listening is via internet

10%

4.7%

4.6%

0% 2007 Q2 2010 Q2
[source: RAJAR]

all analogue 2007 Q3 2007 Q4 2010 Q3 2010 Q4

2008 Q1 2011 Q1

DAB 2008 Q2 2011 Q2

2008 Q3 2011 Q3

digital TV 2008 Q4 2009 Q1 2011 Q4 2012 Q1

2009 Q2 2012 Q2

internet 2009 Q3 2009 Q4

2010 Q1

RAJAR: UK radio audience metrics
80%

What does RAJAR include in ‘internet’ listening? • live online ‘simulcasts’ of BBC & commercial radio stations
61.1%

70%

60%

50%

What does RAJAR exclude from ‘internet’ listening? • ‘listen again’, ‘catch up’ & on‐demand content of BBC &  commercial radio stations • download & podcast content of BBC & commercial radio stations • all online‐only radio content (internet radio stations, podcasts,  Mixcloud, Last.fm, Soundcloud, Spotify, The Guardian audio, etc.)
4.7% 4.6% 20.1%

40%

30%

20%

10%

0% 2007 Q2 2010 Q2 all analogue 2007 Q3 2007 Q4 2010 Q3 2010 Q4 2008 Q1 2011 Q1 DAB 2008 Q2 2011 Q2 2008 Q3 2011 Q3 digital TV 2008 Q4 2009 Q1 2011 Q4 2012 Q1 2009 Q2 2012 Q2 internet 2009 Q3 2009 Q4 2010 Q1

BBC: ‘share of ear’ market research
Share of listening by age and by source (% share of all audio sources)
100 6 5 4 20 75 38 34 2 16 4 14 3 12 7 11

Almost half of 15-18 year olds’ consumption of audio is not live radio
82 85 82

50 76 25 55 60 81

0 15-18 live radio
Source: BBC, 2009

15-24 non-radio

25-34 35-44 catch-up radio

45-54 podcasts

55-64 65+ unclassified radio

How is online radio performing in the UK? Revenues?

RAB: UK radio revenue metrics
Annual UK commercial radio revenues (£m at 2011 prices)

900 800 700 600 500 400 300 200 100 0

UK radio revenues were £532.5m in 2011

Source: Radio Advertising Bureau, RPI

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

RAB: UK radio revenue metrics
900 800 700 600 500 400 300 200 100 0 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

What do radio revenues data include? • commercial radio broadcast stations

What do radio revenues data exclude? • all online‐only radio businesses (internet radio stations, podcasts,  Mixcloud, Last.fm, Soundcloud, Spotify, The Guardian audio, etc.)

Online radio needs metrics

UK online radio audiences? • RAJAR does not measure • Comscore does not measure

UK online radio revenues? • Radio Advertising Bureau does not measure • Internet Advertising Bureau does not measure

Business models: Broadcast radio Online radio

Broadcast radio
Dominated by fixed costs (70%): non‐programming staff programming staff premises transmission marketing administration
Once fixed costs are covered, incremental revenues go mostly to bottom line

Variable costs (30%): music copyright commissions on advertising sales
Source: Ofcom. The Future Of Radio: Discussion Document, 16 November 2006, p.19, Figure 18.

Online radio
Dominated by variable costs: music copyright bandwidth server capacity commissions on advertising sales
Dominance of variable costs makes profitability challenging, particularly when usage grows

Fixed costs: IT equipment & software IT development

Example: Pandora in US

“Pandora spent $136m on music royalties payments in the last year. In the  same period, Pandora had revenues of $274m. That means royalty payments  are eating up about half of Pandora's cash flow.

Pandora has proven that it can attract a huge audience, but it has not figured  out how to keep the money that it makes. This reveals a deeply flawed  business model that the company seems to have no way to fix.”

Source: ‘Pandora; Gaining Audience, Losing Value?’, Seeking Alpha, 6 August 2012.

Comparison of business models
BROADCAST RADIO Dominated by fixed costs Market limited to service area Agreed audience metrics ONLINE RADIO Dominated by variable costs Market global No agreed audience metrics

Music copyright: Statutory right to UK licence Percentage of revenues No minimum payments per song Low royalties Long‐term agreed rates Approx. 10% of revenues

Music copyright: No statutory right to UK licence Percentage of revenues plus Minimum payments (£ per song) High royalties Short‐term ‘experimental’ rates Variable % of revenues

Comparison of music copyright costs (£ per 1000 hours listened in 2011)
BROADCAST RADIO ONLINE RADIO

Over‐the‐air: £ 2.25 sector average

Small webcaster: £ 23.34 (15 songs/hr) £ 15.56 (10 songs/hr) Standard webcaster: £ 17.51 (15 songs/hr) £ 11.67 (10 songs/hr)

Internet simulcast: £ 2.25 sector average

Broadcasters stream online at this ‘broadcast’ royalty rate (simulcasting)

Broadcast radio’s average revenues were £22.46 per 1000 hours listened in 2011

2007 Copyright Tribunal set the online PRS rates
“the per play rates in [online] agreements for  pure webcasting are approximately six times those … under the [commercial radio]  agreement.” “the Tribunal was of the view that independent commercial radio offered quite  a different service to a ‘music, music, music’ service and that different terms were  necessary to reflect the increased use of music.” “Those disputing the terms of the Alliance’s  licences are most of the powerful protagonists of the online music industry.”

2007 Copyright Tribunal interviews a witness
THE CHAIRMAN: When you say radio station […] it does not actually mean a  radio as such? YAHOO!: Mm‐hm. Yes, it does. THE CHAIRMAN: It does? YAHOO!: […] It does not have DJs. It does not have weather or news. […] Well,  we are trying to compete with off‐line radio. You know, we want a piece of that  £600 million that they generate in advertising revenue in the UK. […] They do  not need to have the DJ or the local news in the morning, because they get that  from other areas online when they are online. So we do have a lot of the  relevant content that DJs talk about, like the charts and reviews of the latest  albums in the text content on the site. THE CHAIRMAN: But not audio? YAHOO!: But not in audio, that is right. THE CHAIRMAN: Audio is music, music, music? YAHOO!: Correct.
Copyright Tribunal assumed that all online radio is “music, music, music”

Online radio companies in UK market
2007 COPYRIGHT TRIBUNAL Yahoo! AOL Real Networks Napster Sony iTunes NOW IN 2012 Spotify Last.fm We7 UK Radioplayer Mixcloud Soundcloud Amazing

‘Music music music’ Mixture of ‘music music music’, programmes & curated music content

Online radio requires a more level playing field  around music copyright
Current issues: • No statutory right to a ‘broadcast’ music copyright licence • Discretionary issue of blanket licences (board approval) • Minimum per song usage payments (even when revenues = 0) • High royalty on revenues (i.e. PRS 6.5%, up from Tribunal’s 5.75%)  • Licences are ‘experimental’ and subject to change • Separate licences for webcasting, on‐demand and podcasts • Micro‐interest in business plans of potential licensee • Licensees giving music away free considered a ‘new’ business model • Online usage not resulting in payments to relevant copyright owners

Action points for online radio sector
Metrics: • Standardised, objective audience metrics • Sector revenue tracking and analysis

Copyright: • Statutory right to licence for online ‘broadcast’ purposes • Economically realistic music copyright schema for online radio • Default should be ‘to license’ rather than ‘not to license’ • Automate the licensing process as much as possible • Ensure funds flow back to copyright owners

Contact

Grant Goddard
http://kontactr.com/user/grantgoddard

www.totallyradiocentral.com

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