Internet radio revenues, however, were estimated at a mere $92,000,000 — not so impressive. A quick bit of math is revealing: $92m/4.85bn = $0.0190 per hour. That is to say, revenue/hour was just shy of 2 cents. Unfortunately, the rate for digital sound recording performance royalties (the thing I wrote about a lot last year) is $0.0011 per performance (per track, per listener). Based on an average of 14 tracks/hour, this equates to an hourly cost of $0.0154. In other words, the sound recording royalty by itself consumes 78% of advertising revenues.
Assuming these figures are accurate, the internet radio sector is paying the labels a 78% share of their revenues. By contrast, traditional (aka terrestrial) radio pays 0% of their revenues — nothing — to the labels. And satellite radio pays 6-8% of its revenues to the labels.
For internet radio services, the remaining 22% of their revenues must be divvied up between the musical composition royalty (probably 4-5%), bandwidth, employees (which is typically the most expensive component of cost), overhead, and, well, profit. Or not. The math doesn’t work.
David's data is flawed, but the overall picture is about right. The internet radio business is pretty sucky. It's not miles underwater like the on-demand business, but it's still not very sensible.
OTOH, consider David Porter's comment on the Silicon Alley Insider piece:
The $10 eCPM argument is one I've made a lot over the last couple of years. The tough thing with ad-supported on-demand is that with ubiquitous broadband wireless (not quite there yet but getting closer), such access is increasingly substitutional for music acquisition (purchased or not). While I see your volume angle, it seems unlikely that the labels (the majors, at least) would consider an on-demand rate in an range supportable by advertising.
While it just got a lot more expensive, the radio rate under the US compulsory license is the only type of delivery that's at least close to being sustainable for a free/ad-based model. And, arguably, this style of delivery (passive, programmed) lends itself to advertising more so than the hunt-and-peck required for on-demand access.
That is, as bad as the webcasting business is, it's still better than the on-demand business.
Now consider that internet music businesses have to compete for investment capital with internet businesses that don't pay royalties. Craigslist, Google search, and Twitter do nothing but move bits around!
Lastly, returning to the conversation about netlabels the other day, I want to point out that netlabel and other net-native music doesn't have a lot of listeners, but as long as it stays clear of copyright infringement it can have economics just like Craiglist, Twitter etc. Maybe not at that scale, but definitely at that level of profitability.
And I know that people on the business side of internet music see net-native music as a joke. That's right big shots, I'm talking to you specifically. Make free and legal music popular enough for your traffic to scale and you can have the grail -- an internet music product that makes sense as a business. Which is exactly what Phlow-Magazine is working on by slicking up the presentation of those sources.