Why don’t radio stations produce their own songs?
Because licensing and royalties cost less than producing original content.
Question: Why don’t radio stations produce their own songs? Services like Netflix produce original content but why don’t radio stations?
Answer: Because the radio’s licensing and royalties cost structure provide no incentive to.
Welcome to Costs Matter, a series that asks different questions all of which have the same answer: to better manage costs. The costs are frequently economic though not always. The series focuses narrowly on the impact of costs. It does not claim these costs are the only reason things are as they are. To read more in the series, visit https://medium.com/galileo-onwards/costs/home.
Licensing agreements and royalty payments are similar for radio stations and online streaming services like Netflix and Hulu. The radio station procures licenses to broadcast songs from PROs (Performing Rights Organizations). Then the radio station keeps careful logs of all the songs it played during a period of time. Finally, it settles royalty payments for the songs it played.
The difference between radio and streaming services is in the license agreement. For radio, the radio station purchase a blanket license from the local performance rights organization(s). The license agreement, for most commercial stations works out to a cut of the radio station’s revenues. This cut is in the order of 2–5% according to soundcharts.com. [ref]
Since the cost is a constant cut and the licensing fees are also one-time, there is no financial incentive for radio stations to produce original content. They can leave those to music production companies thereby controlling their own costs.
This is the converse of what we saw in our previous post, netflix-93562edd0bc9. The simple corollary is when it in one entity’s financial interests to produce content, they will and, conversely, they won’t when it isn’t. Thus both cases prove costs matter.
