Money for Nothing: The Internet Radio “Value Shift” In Waiting
The easiest way for creators and rights holders to earn more money? Simply watch as listeners ditch AM/FM.
By Glenn Peoples, Insights and Analytics at Pandora
- Creators and rights holders get far more royalties when listeners choose Pandora over AM/FM radio. One share of listening is worth $60 million. Potential royalties in the radio market is $4.2 billion.
- The music industry is making financial gains as consumer behavior shifts from old formats to new, digital formats.
Would the music industry rather have people listen to AM/FM radio or Internet radio? Easy call. The shift of music listening from one platform to another is not a zero-sum game. An hour of listening at AM/FM is not worth the same as an hour of listening elsewhere because some platforms are more effective in monetizing their listening. AM/FM is relatively ineffective in this way — especially since AM/FM stations in the U.S. are required to pay just one of two performance royalties. Online radio pays both performance royalties.
The music industry is benefitting from this “value shift.” For each share of listening that moves from AM/FM to Pandora, creators and rights holders get $60 million. Pandora has already grabbed a 10.3 percent share of U.S. radio listening. If all AM/FM listening shifted to Pandora, creators and rights holders would get an additional $4.2 billion in royalties. Record labels and publishers don’t need to lift a finger to get that money. Listeners must simply continue to move from terrestrial radio to Pandora.
For each share of listening that moves from AM/FM to Pandora, creators and rights holders get $60 million.
One of 2015’s most-used terms in the music industry has been “value gap,” the difference in different types of digital music services’ effectiveness in monetizing their traffic. (It’s been used against YouTube.) A less-heard term is “value shift,” the incremental royalties received when traffic moves from one platform to a different platform. (YouTube has talked about the shift to YouTube from AM/FM radio and television.) In the case of radio, value shifts when listening move from AM/FM to a platform such as Pandora.
One way to understand radio’s value shift is to imagine a three-dimensional pie chart. The radio market is like a billion-plus-dollar pie split into pieces according to each format’s popularity. Each 360-degree pie is broken into 100 segments, or shares. The most popular format has the widest slice and the most shares. The most valuable format has the greatest combination of width and height, the royalties generated by the slice of listening. The best way to compare the value of different formats is to compare the height of the slices. Finally, the way to figure out the “value shift” is to measure the gain or loss when moving from one slice to another
A share of U.S. radio listening time is valuable in the hands of Pandora. For each 1-percent share of listening that moves from AM/FM to Pandora, the music industry receives $60 million, based on Pandora’s expected royalties and listening share for 2016. For record labels, an extra $60 million is like having 700,000 on-demand subscribers paying full price for a year. It is what rights holders get from 66 million digital tracks at $1.29 apiece.
But there’s far more potential royalties in the huge radio universe. Imagine a scenario in which all AM/FM music listening migrated to Pandora. That shift would capture the upside of the music radio market. In such an event, creators and rights holders would receive an additional $4.2 billion in performance royalties. A windfall of that magnitude would be equal to about 40 percent of the roughly $11 billion generated by U.S. record labels and publishers in 2015.
The disparity between AM/FM and Pandora exists mainly for legal reasons. AM/FM broadcasters in the U.S. are required to pay royalties for the performance of music works (music publishers and songwriters) but not of sound recordings (record labels and performing artists). Record labels have tried to put sound recordings on equal footing. The latest attempt to amend U.S. copyright law, the “Fair Play, Fair Pay Act of 2015,” has received stiff opposition from AM/FM stations and their trade group, the National Association of Broadcasters, however.
There isn’t a legislative equalizer on the horizon, either. As people say in Washington D.C., it’s tough getting Congress to pass legislation unfavorable to the radio business when there’s at least one station in every district. Instead, the music business can expect to receive more performance royalties simply from AM/FM listeners’ migration to online options. Numerous consumer and market trends suggest more shifts are forthcoming. Radio ownership is falling, smartphone ownership is near saturation, mobile and fixed broadband is becoming cheaper and more accessible, in-car online radio listening is rising and digital music options for the home are expanding rapidly. At $60 million per listening share, these shifts will have major ramifications.