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Giant of Internet Radio Nears Its 'Last Stand'

"We're approaching a pull-the-plug kind of decision," says Tim Westergren, founder of Pandora, which builds virtual radio stations for online users. (By Thor Swift For The Washington Post)
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Even more galling to webcasters is the fact that they pay more for playing a song than traditional or satellite radio, a result of patchwork regulation created as each technology emerged.

Traditional radio pays nothing in performance royalties, though SoundExchange is pressing to change that. Satellite radio pays 6 or 7 percent of revenue. And then there are webcasters, which pay per song, per listener.

Using listener figures from Arbitron for XM Satellite Radio, it is possible to estimate that the company will pay about 1.6 cents per hour per listener when the new rates are fully adapted in 2010. By contrast, Web radio outlets will pay 2.91 cents per hour per listener.

SoundExchange officials argue that because different media have different profit margins, it is appropriate to set different royalty rates.

Moreover, they complain, Internet radio stations have done too little to make money from playing their songs.

Pandora makes advertising money only from spots placed on its Web page, not on audio ads that run between songs. Other stations are similarly struggling to persuade companies to pay for advertising in the new medium.

"We're taking this challenge very seriously," Westergren said. "When we have our board meetings, the central topic is the revenue trajectory, not how happy our users are."

He said Pandora has a 30-person ad sales operation, or about 25 percent of its workforce. The company will soon start running subtler ads similar to those on National Public Radio, too, he said.

"Something like 'The next half hour is brought to you by . . .' " he said.

Westergren and other webcasters argue that Web radio, which generally plays a far wider range of music than is offered by traditional radio, provides invaluable promotion for many independent musicians.

Matt Nathanson, a singer-songwriter who has recorded for both major and independent record labels, said he is worried that the demands placed on Internet radio could "choke" the industry before it gets its footing.

"Net radio is good for musicians like me, and I think most musicians are like me," he said. "The promotion it provides is far more important than the revenue."

Westergren, seemingly wearied by the constant haggling over the issue, signaled that Pandora's investors may also be impatient for an end.

"We're funded by venture capital," he said. "They're not going to chase a company whose business model has been broken. So if it doesn't feel like its headed towards a solution, we're done."

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