"Payola"
has been a dirty word in the music industry at least since the late
1950s, when the discovery that certain disk jockeys accepted money to
play specific records led to investigations by the Federal Trade
Commission and Federal Communications Commission. The DJs' careers were
ruined and pop radio's image was tarnished, but payola's spirit has
lived on with third-party independent promoters serving as the "
hit men." Still, today, the public airwaves are still at least nominally payola-free.
In the world of Internet radio, though, there appear to be
no such rules.
In fact, the only barrier keeping passive streaming music services from
accepting pay-for-play deals may be cultural, as this op-ed
piece
advocating Net radio payola suggests. Online stations, whether they
have human DJs or recommendation engines powering them, can accept all
the pay-for-play money they want; they're simply bound by convention,
or perhaps good taste. We're trained to think payola is wrong,
we want to believe that we're hearing curated song playlists that
labels can't overtly buy their way into, and we feel like we should be
able to tell the difference between advertising and programming. Or, in other words, between advertising and art.
Still, those cultural barriers have been tested, as with product placement in movies and TV. We're asked to show
how much
we can tolerate, or how distasteful advertising or paid placement might
be, or how much we'll pay each month to get rid of it. Internet radio
has been especially resistant to excessive audio ads, and rarely
features paid placement of the music itself. Pandora Media Inc., for example, has
notoriously
struggled
to come up with enough revenue to pay streaming royalty rates, but
studiously restricts audio ads to one 15-second spot per hour and
never includes paid placement of songs.
So when Billboard ran this
piece about
Highnote Networks Inc.,
a startup still in its infancy that expects to use paid song placement
in its business model, my immediate reaction wasn't whether it was
legal or ethical,
but how the company expects to do it without offending listeners.
The model itself is ingenious, patterned after Google Inc.'s [
GOOG]
AdWords: Content owners will pay Highnote a price set by an auction
mechanism for the right to have their songs played immediately after
other popular artists' songs.
I spoke with Highnote founder Jim Payne,
who's in the process of leaving a local-business advertising job at
Google to run Highnote full-time. I didn't mention "payola"--he did. Payne says the company drew an
important distinction by choosing a pay-per-click rather than a cost-per-impression
model, meaning that the performance of a song-ad depends on
how many people click through to the artist's Web site, ultimately
placing greater value on the most frequently clicked-on songs. Payne
says Highnote is "letting the consumer base figure it out by backing
up things that are high-quality." Indeed, the company's
FAQ
indicates that it allows unlimited skipping of unwanted tracks.
Furthermore, all the sponsored songs are clearly identified in the user
interface.
Highnote will create its own destination site with a
recommendation engine, but Payne concedes that its primary business is
in syndicating its technology to other Internet radio services. "Consumer branding will not be that important," he says. The company
will use a statutory licensing model to compensate content owners and
won't provide on-demand song streams. In addition, it will harvest data
about song preferences and report back to its label partners.
Payne
and two other co-founders have bootstrapped the company to date, but
are seeking a $2.5 million first round of venture funding in order to
license music. Despite an
audacious projection
of $920 million in annual revenue within five years, Payne admits that the
fundraising climate is frosty. Still, he believes an initial round
could be all Highnote needs to reach profitability once it gains a critical
mass of music, advertisers and users. I'll believe that when I see it,
as always -- and that goes double when the company has to overcome a
psychological barrier to enter the marketplace.
-- Paul BonanosSee Nov. 17 story from Billboard about Highnote
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