Net Radio Feels Pinch of Ad Slump

Each new version of radio that’s come into the home--shortwave, FM, cable and satellite--has been delivered for free, either on its own or as a throw-in to a package of video services.

So far, Internet radio has largely been free too. And it probably will stay that way. But the collapse of the Net advertising market, combined with the record companies’ demand for new fees, raises the troubling possibility that free music Webcasts could end.

The Web breed of radio offers listeners unmatched variety, with programming provided by more than 5,000 online stations. For example, there are stations that play nothing but ska, Caribbean-influenced dance music. Some even offer multiple kinds of ska.

Nevertheless, it’s been a crummy year for radio on the Net, and things could get worse before they get better.

Advertising has been in a deep slump on the Web since last fall, and Web radio has been no exception. Unable to raise the money needed to stay in operation, Webcasters and their suppliers started to go belly up this year, including Soundbreak and OnAir.

The Net downturn also affected hardware suppliers, which spilled over onto Web radio when 3Com Corp. terminated production of the groundbreaking Kerbango Internet radio and tuning service.

Kerbango was one of the first devices designed to move Web radio away from the computer and into the rest of the home. The devices were going to be manufactured by 3Com and RCA, but 3Com pulled the plug before the first products hit the store shelves.

That’s a setback for Web radio enthusiasts but not a catastrophe.

Other devices and tuning services survive--most notably iM Networks--and more products are in the pipeline.

Kerbango was far from a perfect product--the initial versions worked only when hooked to an Ethernet line, something most homeowners haven’t installed.

The next reversal came when over-the-air stations started pulling their Webcasts off the virtual air.

The withdrawals came after advertisers balked at paying the new, higher fees to actors whose over-the-air commercials were rebroadcast over the Net.

Those fees, by the way, had been agreed to by advertisers in contract negotiations with unionized actors.

There’s a technological solution to the problem: Radio stations can substitute new, Internet-only commercials for the ones that advertisers want to delete from their Webcasts. It’s not clear, however, what advertisers will be willing to pay for audio commercials on the Net.

Radio advertising has mainly been an outlet for local companies trying to reach local markets. Technology is emerging to target ads to specific geographic areas, demographic types and user preferences, which could eventually make Net radio a more attractive arena for advertisers.

But those technologies also slice up a station’s audience, so stations might not be able to use them effectively unless they attract far more listeners.

Clear Channel is a radio powerhouse that owns and operates almost 1,200 U.S. stations, including more than 300 that broadcast on the Web. The advertisers’ pullback prompted Clear Channel to shut down almost all of its Webcasts, but Kevin Mayer, chairman and chief executive of the Clear Channel Internet Group, said the economic problems go deeper than that.

In particular, Mayer is concerned about the Recording Industry Assn. of America’s demand for fees from Webcasters for every song played. Although radio stations don’t pay the record labels for the music they play over the air, Congress decreed in 1998 that the labels can collect royalties from Webcasters.

An arbitration panel at the federal Copyright Office is now determining how much those royalties should be.

Clear Channel and other broadcasters have asked the federal courts to exempt them from royalties on over-the-air signals broadcast simultaneously over the Web. Internet-only stations acknowledge that they’ll have to pay something to the labels, but they argue that the amount should be minimal--less than two-tenths of a cent per listener per hour.

RIAA, on the other hand, has asked for four-tenths of a cent per listener per song, which translates to 5 cents or 6 cents per hour. Alternatively, RIAA has proposed collecting 15% of a Webcaster’s gross revenue.

“Our rates are based entirely on the market deals that we’ve done,” said Steven Marks, senior vice president of business affairs for RIAA. Those deals--25 in all--include several with Webcasters that went out of business months ago.

Marks said the labels don’t want to drive Webcasters out of business.

On the other hand, the record companies have never gotten over the fact that radio and MTV built huge businesses around the labels’ products without paying royalties.

Another sore point for the labels is that the law forces them to give 50% of the royalties they collect from Webcasters to the artists who made the recordings. That’s an unusually large cut--artists’ royalties on CDs are typically well under 15%.

Webcasters say they’d be dead if the Copyright Office grants RIAA’s request.

“It would be by far the highest single payment we’d have to make, other than perhaps bandwidth,” Mayer said. “Even if you came down to 15% . . . [that’s] enough to destroy most businesses. That’s a massive amount of money.”

Clear Channel plans to keep its over-the-air stations off the Web until more of the uncertainties are resolved.

Voicing the concerns of many Web broadcasters, Mayer said, “We are looking for an indication that there’s money to be made.”

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Times staff writer Jon Healey writes about the digital living room.