Yahoo has been taking a hard look at all its services as management tries to trim about $400 million in annual expenses, but the company was reassessing its commitment to Internet radio well before the cost cutting campaign began in October, said Michael Spiegelman, who heads Yahoo's music service.
The reason: a March 2007 decision by the U.S. Copyright Royalty Board that raised the royalties for music streamed over online radio. That aided the music industry, which is desperate to offset steadily declining revenue from compact disc sales, but it meant by some estimates that royalties could eat 70% of Internet radio stations' revenue.
Recently passed legislation has opened a window for Internet radio stations to negotiate lower royalties with the music industry, but Yahoo didn't want to run the risk of facing higher costs for a service that has never been a big moneymaker.
"Because of the unfavorable rates, we didn't think it made sense to invest in the product," Spiegelman said.
CBS also must pay the higher royalties for its webcasts, but the fees don't faze it as much because its radio network is more diversified than Launchcast's music-only approach. News and sports-talk stations don't have to pay the higher rates because they don't play music.
Launchcast picked up some of its technology from Broadcast.com, which Yahoo acquired in 1999 in a deal initially valued at $5.7 billion.
Yahoo's waning interest in Launchcast had already diminished its audience. It shrunk 43% to 2.9 million U.S. listeners in the year ended in October, according to Internet research firm ComScore Inc.
Some of those listeners appear to have migrated to Pandora, which boasted an audience of 5.3 million in October, a 58% gain, ComScore said.
Pandora is "cautiously optimistic" it will be able to decrease its royalty rates so its radio service can play on, Westergren said. If the higher royalty fees are passed along, Pandora would have to pay $17 million to $18 million to cover the bill this year, consuming almost all of its projected revenue, Westergren said.
