Free Internet Radio No Longer Free: Pandora, Sirius XM Now on Equal Ground

Jul. 9.09 | About: Sirius XM (SIRI)

By Brandon Matthews

Yes, it’s true. Webcasters have reached a deal with the recording industry that offers them a temporary reprieve, much like a death row inmate that has been granted a stay of execution. In the end, however, the result will be the same in my opinion. Both the inmate and streaming radio sites will cease to exist.

My initial reaction upon reading the terms of the deal was one of immediate skepticism. The deal allows for a lower rate than the proposed .19 per song that had been established; reducing the flat rate to a staggered rate of .08 cent for songs streamed in 2006 and increasing to .14 cent in 2015. The net effect is that companies like Pandora will be able to continue to operate for the near future, although it is clear to me that long term prospects remain bleak for such webcasters. The incentives to grow are now gone. The more the company grows, the more it pays.

Apparently, Pandora agrees. The company has just announced a new plan to begin charging its users on a monthly basis. The initial fee calls for users to be charged only .99 per month for the 10% of its users that listen to Pandora for more than 40 hours per month. Limiting access will certainly harm the ability of the company to sell advertising space. To be blunt, a dollar is not nearly enough to keep the company afloat and will result in a loss of subscribers. Once the unlimited free aspect of the service is removed, users of such services will be forced to look elsewhere.

As ad revenues decrease (and you can bet your bottom dollar that they will), the costs to consumers will have to increase. Pandora (and Slacker for that matter) are now playing on an even playing field with Sirius XM Radio (NASDAQ:SIRI). Neither can match the Satellite Radio provider’s exclusive content.

Already Sirius XM’s iPhone and iPod Touch application has become the most popular music download at Apples iTunes store. Other applications will soon follow. Recently it was suggested that Sirius XM Radio could begin offering A La Carte channels as well. I see this as very likely. Such a move would further erode the listener base of free webcasters.

In the end, it has again been proven that free is never a good business model.

Position: Long SIRI