The Real Reason iHeartRadio and Spotify are Going Out of Business

by Gene Turnbow | Dec 6, 2017 | Business

I was on a forum for internet radio broadcasters the other day, and the topic came up of why the music industry is in such trouble. iHeartRadio and Spotify are both facing bankruptcy, with iHeartRadio $20B in debt (mostly due to debt carried from a leveraged buyout), and Spotify in the soup for $1.5B. How did they get there? In part, it’s because about 70% of their income goes to pay truly exhorbitant music licensing costs.

The reason why is strange indeed, and it has to do with the way music streaming is licensed. Where a terrestrial radio station broadcasts a (usually digital) signal for anyone to detect and decode back into music in the room where they’re sitting, internet radio sends out an individual signal for each person. It’s as though there was an individual radio tower just for that listener, on a special frequency that only they could hear. Because each signal is legally considered a “duplicate copy”, a whole new set of licensing kicks in.

Now, I’m going to launch into a discussion of digital copying, which is at the heart of internet radio licensing law, but when I’m finished I think you’ll agree that it makes no damn sense.

Making a copy of music from the radio is legal. Before the internet, you used tape recorders to do this. And lots of people did. The recording industry tried to kill cassette tape, because they claimed it allowed people to make illegal copies of music. However, making copies of music for personal use is specifically allowed under most countries’ copyright laws. It falls under Fair Use.

Enter the digital age, and now internet radio uses a different technology. Instead of putting a single signal out into the aether for anyone to detect and decode back into music at their receivers, each individual listener needs to be feed their own copy of that signal. Every listener needs their own separate stream.

Because the signal is now duplicated at the server end when a listener requests a connection, instead of converting the signal into an audible sound stream at the listeners’ receiver itself, the licensing organizations want to call that a “mechanical copy”, and they want it to be treated the same way as a tape cassette or a CD copy of that music. And in fact, the United States, Canada and the U.K. all refer to streaming music over the internet in these terms. This is despite the fact that nearly everyone captures the stream and immediately converts it into sound, discarding the music moment by moment as it plays.

Recording the audio is certainly possible, by a variety of means, but in the purest sense this is no different than sticking a microphone in your stereo speakers and hitting the record button. The stream from your radio station isn’t a copy. It’s data, like what flies through the airwaves from a radio station, every moment of every day. It’s not a copy until you store it.

This Sounds Fishy To Me …

Me too. But as internet radio operators, we have to pay two licenses, one the original artists’ licensing that all terrestrial broadcast pays, and the other this “duplication fee”, because the PRO’s have managed to convince the lawmakers (in most countries) that broadcasting a digital stream through the internet is somehow fundamentally different from digitally encoding and broadcasting that same stream over the airwaves.

How did the music industry function before internet radio was a thing? It was obviously possible – yet somehow we have this redefinition of what a broadcast is because we’re using different technology to accomplish exactly the same thing.

All this lunacy aside, ripping a stream means making an illegal unlicensed copy of that music, even though doing the same exact thing with a terrestrial radio is perfectly legal.

Are we, as internet radio providers, liable for this? No, we’re not. The crime does occur, but it occurs on the far end, where we can have no control whatsoever over the people doing it. It’s literally out of our hands, and we have no legal responsibility one way or the other to stop them from doing it, even if we could tell for certain what they were doing.

So How Does This Hurt the Industry?

It’s murdering it, but not because of stream ripping.  What’s happening is that the licensing fees charged to the big internet radio stations – and that’s what most people listen to now, not terrestrial radio – are roughly double what a terrestrial station plays. I don’t know the actual ratio, but it’s a lot.

This basic misunderstanding of the true nature of internet radio is part of why internet radio companies are going out of business right and left. At this point in time, independent internet radio in the United States is down, by my personal estimate, by about 85% from the number of stations present in 2015. 

Terrestrial radio stations don’t count here. Most of them have internet feeds too, and they have to pay the extra fees like everybody else. The tiny stations that run on shoestrings, though, they’re the casualties here.

The loss of an individual station doesn’t have much of an effect. Pushing music licensing out of reach of all but the most dedicated business operators, though, has had a massive, very evident chilling effect on an entire communications medium in the United States, and forced many of them to move their operations outside the boundaries of the United States into other countries where U.S. internet broadcast licensing does not have jurisdiction. Almost no country but the U.S. has such restrictive and expensive laws regarding this industry, and the greed of the performance rights organizations are strangling the industry.

This Sounds Bad. What Happens Now?

What happens when iHeartRadio and Spotify (two of the big four, the other two being iTunes and Pandora) collapse under the strain of these fees? The music industry is in for a massive shakeup, and the performance rights organizations like BMI, ASCAP and SESEC are going to be the losers in this.

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