Congratulations, Webcasters. Now What?

With the recent deal between SoundExchange and pureplay webcasters, Internet music radio now appears to be "saved," at least from the bogeyman of onerous license fees (though they aren't safe from the new bogeyman, revenue sharing). I've been waiting for this day for ten years, ever since my own involvement with a pureplay webcaster from back in 1999. You might be surprised, however, to learn why I have been so eager for this settlement to be reached. I do love Internet radio, and I've been a subscriber to Pandora since the first day they were open for business. I certainly don't want it to go away, and I truly hope that this settlement is a workable solution for both parties. What pleases me most, however, is that now webcasters can focus on the real problems with their format--the fact that the product they are selling is a commodity, and making money in a commodity business is going to be tough if you aren't adding real value for consumers along the way. The royalty issue has been a serious problem--don't mistake my purpose here for calling it a straw man, because if a settlement wasn't reached we would never know if webcasting could make it as a business or not. Now that it has been reached, we have a shot at learning the answer. Simply reaching the settlement, however, doesn't guarantee that the answer will be a good one for webcasters.

With hundreds of thousands of available sources of Internet music, there is little to differentiate one jukebox from another. Sure, Pandora's interface is clean and inviting, but interface is replicable and a fleeting advantage. A music discovery algorithm is a unique selling point with a potentially high barrier to entry, but mainstream success requires at least as much familiarity as discovery in a music stream, and familiarity is also a replicable commodity. So are personalization, audio quality and virtually any other technology-based feature or benefit for a music-based webcast service.

The simple reality in 2009 is that online music is ubiquitous, and scarcity creates value. Hence, online music is, today, nearly valueless. That's not to say that the work of an artist is without value, and today, more than ever, those artists are taking the marketing of their work and their own creation of added value very seriously. But the delivery of that music is basically just trucking wheat. You can tweak the engine to get better mileage on the truck, but to the customer, wheat is wheat. If online webcasters aren't making the streams themselves more unique, with entertainment value, localism, character, curation and personality, then wheat is wheat is wheat.

The settlement merely gives webcasters an even footing from which to compete--the battle is a draw, but the war is far from won. To win as a direct-to-consumer play, webcasters have to contend with the fact that the majority of online consumers won't pay diddly for online music. You only need to look at the necessity of Pandora's new 40-hour cap, and what the fee is to exceed that cap in a given month: 99 cents. If Pandora could charge more than a buck a month to their entire user base, I bet they would. Clearly they are banking on the size of this micro-payment being small enough to retain users and not send them packing to Spotify or LaLa, in light of the lessons learned from Napster and now The Pirate Bay.

To win as an advertising-supported service, webcasters have to show results there, as well: reach and frequency matter little if listeners aren't engaged and those spots don't translate to sales. Engagement, as terrestrial broadcasters know, happens between the records. The ad-supported model is showing some cracks all over the Internet anyway, and a better mousetrap for music selection doesn't necessarily equate to better results for advertisers. Again, value has to be created in the stream beyond simply blasting one great song after another. Passive measures of time spent listening or unique connections matter little if the clicks don't follow, or tangible, measurable benefits to brands aren't recorded.

So, I say this without a trace of sarcasm or irony, congratulations, webcasters! Now you can get to work.