How to get ahead in webcasting

Last year was not the ideal time to start a webcasting business. A copyright royalty board had ordered a stunning increase in royalties for webcasters in March, increasing the rates paid to labels and performers 150% over five years. The hike was so steep that even Yahoo warned that it would have to abandon the business if the increases weren't rolled back.

Nevertheless, launched in July with a preview of a social network wrapped around a personalized webcasting service. Within two months of its formal debut in November, it had attracted 1 million listeners who created 3 million customized stations. Chief Executive Dan Kaufman says he expects to reach 2.5 million unique listeners this month. An audience that size can run up big royalty bills in a hurry -- more than $50,000 per collective hour of music played.

While competitors complain that the royalty rates are "non-economic," Kaufman exudes a "What, me worry?" breeziness about his mounting bills. "We have way more page views per visit than any of the other guys," he said in a recent interview. More page views means more ads displayed, which in turn means more revenue -- that is, once Jango actually starts selling ads.

"We have, I don't know, 500%, 1,000% more opportunities to show a visual ad than Pandora or Yahoo or AOL," Kaufman said. "Even with a very low CPM [the fee charged advertisers each time their pitch is seen], we break even with a very small number of users, relative to the other guys."

Jango's approach reflects one vision for the future of the music business. It's not about selling recordings; it's about monetizing the time people spend listening to music. Over-the-air radio has done this quite capably for decades -- it generates more than $20 billion in advertising revenue, although much of that comes from talk and news stations. In essence, it's billing advertisers for the time you spend tuned in, even if your attention is focused elsewhere.

Terrestrial radio stations don't pay royalties to labels and performers, however. Their long-standing exemption reflects the belief that airplay promotes the sale of singles and albums. Fearful that digital broadcasts would have the opposite effect on sales, record companies and artists persuaded Congress in 1995 not to give an exemption for online stations. Arbitrators have set royalty rates twice since then, each time drawing howls of protest from webcasters -- first from those that weren’t large enough to attract large advertisers, and more recently from large and small webcasters alike.

In light of those rates, webcasters have a choice, Kaufman said. They can insert commercials into their playlists, which is fine as long as their competitors do the same. Or they can try to keep listeners glued to their websites, where they can be shown targeted ads that might seem less intrusive and tiresome than commercials. Neither strategy is guaranteed to succeed -- according to an often-cited study by JPMorgan analyst John Blackledge, royalty payments due are expected to grow faster than ad revenue, consuming $3 out of every $4 a webcaster is likely to collect this year. That doesn't leave a webcaster much to cover streaming costs, payroll and other expenses.

That's why Jango surrounds its webcast with social features, such as the ability to find people with similar musical tastes and listen to the stations they designed. It has many of the usual elements, such as the ability to send instant messages to friends and e-mail to other users. But it also has some nifty little touches -- for example, prompting users to send thank-you notes electronically when they stop listening to someone else's station. It also tries to keep people interacting with the site's musical content by rating songs, reading about artists, creating new stations and recommending their creations to friends.

It's impossible to tell now whether the strategy will work. The page-view counts may be high, but the company is not selling any ads yet. Kaufman said the company's small staff (11 employees) is focusing on improving the site and working with the labels before generating revenue. Its expenses so far have been covered by "the founders and friends and family," Kaufman said. One encouraging sign: Jango's usage statistics, which used to rise and fall with its marketing expenses (mainly Google and Yahoo search advertisements), have started going up on their own.

Just to cover royalties obligations, a music webcaster has to generate a little more than 2 cents per user per hour this year (assuming it plays 15 songs per hour). That number, which rises to 2.85 cents by 2010, seems minuscule, but webcasters say they raise only 1.5 cents to 2.5 cents per listener per hour on average. SoundExchange, the agency that collects royalties from webcasters and other digital broadcasters, has offered discounts to small commercial online stations, but talks with mid-size and large stations have yet to result in a deal. In the meantime, disgruntled webcasters are pinning their hopes on a grass-roots protest, a bill in Congress and an appeal to the courts.

Jango, by contrast, is counting on advertisers to view its site as a way to target their pitches to the right people. In particular, Kaufman said, there are two types that Jango plans to woo: brand advertisers (think beverage companies, carmakers and the like), which can segment Jango's audience according to the users' musical preferences, and the music industry, which can promote new releases and artists to people with matching tastes.

Still, neither Jango nor any other webcaster can rely exclusively on page views. Jon Potter, executive director of the Digital Media Assn. (a trade group for webcasters and other online media businesses), noted that online radio is also starting to extend to stereos and cars, divorcing the music from the pages that accompany it. "If they're not making any money off me because I'm not looking at the page, I'm not sure that's an effective business model for them," Potter said.

Kaufman acknowledged that Jango will probably have to insert some commercials into its audio streams, at least for users who don't interact with the site. "Audio ads will be part of online radio in the future, and I think they're going to be way less on our site and other sites that have a lot of content," he said.

One certain effect of the new royalty rates is that commercial webcasters will have to be more aggressive about raising money, however they choose to do it. And unless the coming increases are rolled back, some popular outlets simply aren't going to be able to stay in business. Such casualties are a consequence of rational efforts by major labels and artists to maximize royalty revenue. Although lesser-known acts might be happy just to have the exposure that online stations provide, the ones that dominate terrestrial radio have much less incentive to support webcasters that can't pay significant royalties. Potter also suggested that the major record companies are trying to "set a benchmark price for the performance of music to a human being."

That's because the tussle over webcasting royalties is merely the prelude to a much bigger and more important fight: the drive by labels and artists to force over-the-air stations to pay them royalties too. That's where the real money is, for now at least.

Jon Healey is a Times editorial writer; he runs the BitPlayer blog.