Over the last few months, Slacker Radio has made some big moves to step outside the shadow of rival smart radio service Pandora — and it’s doing so with some help from Pandora itself, according to Slacker Radio CEO Jim Cady.

“We’ve been able to monetize users with free accounts without placing limits on how many hours you can listen to radio content before getting capped,” said Cady in an interview with VentureBeat. He’s referring to the new restrictions Pandora implemented in late February, which limits users with free accounts to a 40-hour-a-month listening cap because the company’s copyright licensing costs are too high to maintain. It’s a curious move, as anyone who uses Pandora often enough to reach the listening cap is obviously a dedicated user, and normally, you’d want to keep such people happy so they wouldn’t venture to other competitors.

“There’s been record growth since February, and we’ve definitely seen an uptick in users around March,” Cady told me. “At a certain point, you just have to put two and two together and realize that Pandora users are leaving [for Slacker].”

Slacker provides free, ad-supported custom smart radio stations composed of over 13 million songs and talk radio programming. The company also offers two tiers of premium subscription services, which gives users ad-free listening, unlimited song skipping, access to ESPN and ABC News radio, and more for $4 or $10 per month. So basically, it’s a slightly altered streaming music service than Pandora.

But to be fair, Pandora’s listening cap isn’t the only thing that may have boosted Slacker’s growth. Slacker rolled out a massive overhaul back in February that completely revamped the music service’s user interface. Slacker got a new blue-and-off-white color scheme, clearer navigation, greater emphasis on album artwork, and a design that keeps both desktop and mobile versions looking similar. Since then, Slacker announced yesterday that it’s  added 6 million new listeners (3.5 million joining through mobile devices alone) and tripled the number of iOS app installs. It also added over 100,000 new paid subscribers since February.

“If you look at our growth, both in new users and iOS installs, we’re really focusing on improving the mobile experience because that’s where people are coming from,” Cady said. So clearly, the service’s recent overall made a big impact, too.

And as for overall usage, the company said its audience is listening to the service 25 percent longer since February. It didn’t, however, disclose the exact number of hours those listeners are spending per session or per week, which is important when gauging how it stacks up to rival music services. (For perspective, Pandora listeners spend about 20 hours per week on the service.)

But Slacker Radio might not even need to beat its main rival on obtaining more listeners or higher listener hours. Over the past several months, Pandora has stated that music licensing costs are cannibalizing its capability to turn a profit and grow the business long-term. If Slacker can continue monetizing its free audience without adding listening hour caps (despite those same expensive music licensing costs), it may have a big advantage.

Cady said the company is able to avoid listening hour restrictions through continued paid subscriber growth and through big partnerships with automobile makers and wireless carriers that the company plans to announce later in the year. He decline to specify who those partnerships would be because the operational details are still being fleshed out.

“That’s when we’ll really see some growth in our paid subscriptions,” he said of the partnerships. That said, there’s still plenty of competition among streaming music services, which is likely to heat up going forward. Apple, Google, and Amazon are all rumored to roll out their own smart radio music services, and startups like Beats Audio’s Daisy music service (with rock legend Trent Reznor as its creative lead) are plotting a big splash in late 2013. I’m also curious to see what Microsoft has under its sleeve later this month as it unveils a next-gen Xbox, which already has its own Xbox Music-branded streaming service.

Photo via Slacker Radio

Strapped for cash and fighting for relevance, the relaunched Myspace already has enough problems. But it looks like the company and its music-focused revamp have another, potentially bigger issue: credibility.

The site recently came under fire from digital rights management group Merlin because Myspace is allegedly using many of the songs without permission, as VentureBeat previously reported. Merlin negotiates digital music contracts with thousands of indie labels around the world, and it boasts a library of about 3 million tracks, including those by Ani Difranco, Arctic Monkeys, Arcade Fire, Wilco, and several others. (See a longer list pasted below.)

“This is not bedroom artists hoping to get their music onto the Internet. Merlin’s [song library] is real, commercially significant [music] that’s playing on other services in a way that’s equivalent to the major labels,” Merlin CEO Charles Caldas said in an interview with VentureBeat yesterday. He added that, at one point, music from Merlin’s record label clients accounted for about 10 percent of Spotify’s total business — meaning it’s definitely a crop of songs that people want to listen via a streaming music service.

So, how is Myspace able to use music it doesn’t have permissions for? Well, the music-minded social network permits its users to upload their own songs to the service, essentially allowing them to promote their work to a broader audience that otherwise would only receive attention if it signed a contract with a record label.

This is both Myspace’s most valuable and deadly feature, as many of its users have created dummy accounts to upload their favorite artists’ music. Searching the site for Arcade Fire brings up over a dozen results for artists claiming to be Arcade Fire — including one that sports “ArcadeFireOfficial” in its customized URL.

None of them are the band’s official Myspace page, and what’s more, Myspace doesn’t have rights to publish Arcade Fire’s music, Caldas said.

“The disappointing thing [about Myspace] is that you have a service that’s come in supposedly geared toward enabling and empowering music artists, and its first act is to offer a whole range of songs without the permission of those artists,” Caldas told me.

Having investigated what a standard Myspace artist page is, I find it pretty hard to tell the difference between an illegitimate account and an official page. Artist pages all look professional, and Myspace doesn’t give out a stamp that verifies official artists’ pages.

Myspace declined to comment to VentureBeat about its dealings with Merlin, but the company did previously confirm that its users were responsible for any music from Merlin’s library that appears on the site.  Likewise, Myspace’s new terms of service indicates that users are ultimately responsible for what they upload, and that the company will remove any content that it does not have permission to use in accordance with DMCA rules.

YouTube also ran into trouble years ago because of its users illegally uploading videos that contained copyrighted tracks. However, unlike YouTube, Myspace doesn’t have a ridiculously large user base that makes it difficult to filter out songs that the site doesn’t have permission to use. Each artist listed below has less than 15 “dummy” Myspace artist accounts.

“Frankly, I’m not going to spend hours trolling a site trying to find my music,” Caldas said.

Caldas said Merlin previously ran into difficulty with the first iteration of Myspace music after its contract with the site expired in 2011. Merlin has been in continuous negotiations for a new contract with Myspace, but the two parties have yet to reach any sort of agreement, he said.

The conflict over song permissions is something that could prove disastrous to the young music-focused Myspace, according to some critics.

“At this stage in Myspace’s renaissance, it is necessary the company ‘cover its bases’ to avoid negative press or legal issues, which could influence usership and revenues. Even this seemingly minor oversight could be a reputation issue for the company,” said Kenneth Wisnefski, the founder of online marketing firm WebiMax. “The buzz surrounding the network’s return to prevalence could easily be subdued by such negative press and the music-themed site should attempt to renew its license with Merlin as to not limit its extensive track offerings while still adhering to licensing regulations.”

While the attention over music permissions may work in Merlin’s advantage (meaning Myspace is forced to sign a new contract because users want Merlin’s library of music), it doesn’t discount the fact that Myspace is facing a serious problem that could hurt the service overall. The last thing the site needs is people questioning how much of its 50 million song library is actually worth listening to. This is especially true for new users, who may load up their Myspace music queue with tons of tracks from Merlin’s library, only to find out days later that those same tracks are gone thanks to DMCA requests.

At the same time, Myspace could be declining to reach a new contract with Merlin — as well as other smaller record labels — because it simply doesn’t have the money to pay for it. Back in November, it was revealed that the company was seeking a $50 million round of funding to become a true Spotify competitor.

Whatever the case may be, Myspace needs to address these licensing issues quickly, before it develops a bad reputation with the kinds of artists and users it hopes to cultivate in the future.

Artists Myspace technically can’t play on its site:

Amon Tobin
Ani Difranco
Animal Collective
Arctic Monkeys
Arcade Fire
Bad Religion
Billy Bragg
Boards of Canada
Bob Sinclair
Bon Iver
Chuck Prophet
Dan Zanes
DJ Khaled
Grizzly Bear
First Aid Kit
Hercules and Love Affair
Jim Jones
Josh Rouse
Kid Koala
Marilyn Manson
Prodigy
Sharon van Etten
She & Him
Sonny Landreth
Space Cadets
The National
The XX
Tom Waits
Vampire Weekend
Wilco

Recently revamped social network Myspace is facing accusations that it’s using music from a handful of small independent labels without permission, reports the New York Times.

Last week, new Myspace owners Specific Media launched the new version of the site to the public, with help from minority investor Justin Timberlake. Rather than competing with social giants like Facebook and Twitter, the new version of Myspace focuses on cultivating new members interested in both mainstream and underground music groups. The site boasts a music library of 50 million songs — larger than any other online music service available — that is mostly made up of artists on small record labels or without representation.

However, digital rights group Merlin, which represents over a thousand independent labels across the globe, said Myspace is using many songs without permission. Myspace initially had a contract to stream music represented by Merlin’s clients, but it opted not to renew when it ended in 2011.

Myspace also said that if any music from the labels represented by Merlin remain on the service, it’s because users uploaded them, according to NYT’s report.

We’ve reached out to Merlin for specific examples of music used without permission, and it also asked Myspace about its process of removing music content that’s been uploaded without permission. We’ll update this post with any new information we find.

Music photo via olly/Shutterstock

Yesterday, Pandora CEO Joseph Kennedy asked congressional leaders to pass new legislation — the Internet Radio Fairness Act — that lowers music licensing fees for Internet radio services.

Currently, services that stream music over the Internet pay higher licensing fees than traditional broadcast radio, satellite radio, and cable TV radio stations. That means the old  business models are inherently more profitable by default — something that Kennedy believes is an unfair advantage.

“The current rate-setting structure is a clear case of discrimination against the Internet and innovative services,” Kennedy said during House Judiciary subcommittee hearing, adding that its “fundamentally unfair and indefensible.” (It’s worth noting that this isn’t his first time to speak out about unfair digital music licensing.)

Right now, more than half of Pandora’s annual revenue goes toward music licensing fees.  The company generated a record $$101.3 million in revenue during FY13 second quarter by aggressively growing its advertising operations. And much like traditional radio stations, Pandora is now targeting regional ads and marketing sales. It’s also boosted the number of devices (including automobile dashboards), and experienced a drastic increase in the number of hours its users listen (3.3 billion listener hours last quarter).

Yet, Pandora is still firmly in the red — and has been for the last several quarters.

Others who testified at the hearing said Pandora’s inability to turn a profit is due to missteps in its business strategy.

President of SoundExchange, a non-profit organization that collects digital music royalties for copyright holders, Michael Huppe said Pandora chose to focus on increasing its audience with fewer advertisements and low subscription fees. (Essentially, he’s saying Pandora could have made sure its ad sales kept pace with audience growth.) During the hearing, he argued that artists shouldn’t have to sacrifice what they’re getting paid because Pandora isn’t a profitable company.

Others during the hearing argued that all radio businesses should pay the same music royalty rate as Pandora and other Internet radio companies. This opinion is supported by major music companies, SoundExchange, popular musicians, and other music performance organizations.

SoundExchange and trade group musicFirst even rallied 125 high-earning music performers to sign a letter speaking out against Pandora and the legislation that would lower digital music royalties.

As for lawmakers, the members of the judiciary committee didn’t seem overly swayed by either side’s argument.

What the future holds for Internet radio

If Pandora’s plea to congress fails, then one thing will become abundantly clear about the publicly traded company: it needs a new business model. That said, the company’s options are pretty limited.

It could start gobbling up traditional radio stations that spend less on music royalties, thus diversifying its revenue model. But that means Pandora would become an old school media company, with DJs, syndicated talk-radio programs, local promotional events (e.g.  Concert ticket giveaway at a local gas station that just opened), and maintain physical FM radio station facilities. This option is a giant step backwards, and clearly the opposite of innovative.

Another option Pandora has is to begin making its Internet radio service more palatable to independent artist that own the rights to their songs, as well as unsigned music groups looking for another clear path to profit off of their work. This will be more difficult, because any musician deemed successful on Pandora will be easily swayed to sign with one of the large music companies that can offer more exposure and higher profits.

Pandora can’t launch its own music publishing division, either — or at least not without consequence. If Pandora becomes a competing music company, its library of popular song licenses could quickly disappear, causing Pandora users to seek alternative listening options.

What does seem inevitable, is that lawmakers and regulators will eventually need to come up with a standard royalty rate across all platforms.

Although Halloween isn’t for another week, Pandora shareholders are experiencing quite a scare after rumors of last month’s Apple-branded Internet radio service resurfaced yesterday.

Apple could close important licensing agreements with major music labels by mid November and launch its own streaming music service by early 2013, according to a Bloomberg report that cites unnamed sources familiar with the matter. Apple’s alleged music service would likely mimic Pandora’s smart radio model rather than the much more costly on-demand model used by Spotify. It will also be ad-supported, but there is still an ongoing negotiation between Apple and the labels on how to split ad revenue, according to Bloomberg’s sources.

If the Apple radio rumors are true, Pandora has every reason to be scared — terrified, even.

The rumors alone sent Pandora’s stock crashing 21 percent, closings the day with a 11.7 percent decline. This is the second time we’ve seen Pandora take a nose dive over Apple rumors. I’d imagine the stock will perform even worse heading into the first quarter of 2013, when Apple’s Internet Radio service will allegedly launch. Other digital radio companies are also fearful of Apple’s entrance into the streaming music space. Sirius XM’s stock saw a decline yesterday as the Apple rumors took hold.

Apple is seeing a slow down in overall digital music sales and likely wants to keep its products competitive with a growing number of rival devices that offer their own streaming music service. And since Apple already has an advertising infrastructure in place via its iAds platform, the company has a perfect opportunity to jump into Internet Radio.

Apple could decide the fate of Internet radio rivals

My guess is that regardless of any dispute the music labels have with Apple’s ad-revenue split, the deal will likely move forward. Apple has shown that it can be a powerful player that can push the music industry around to get its way. And in this situation, the last thing music labels want is for Apple to align itself with Pandora and others that are currently trying to get a new piece of  legislation — the Internet Radio Fairness Act of 2012 –  passed that would lower the licensing fee rates from Internet radio companies.

Pandora is already struggling to stay profitable, despite reporting record high revenue over the last few quarters. Pandora is rapidly building its own advertising business, but as the company’s fiscal Q2 2013 earnings report shows, it’s not growing fast enough to compensate for the extremely high licensing fees.

Earlier this month Pandora founder Tim Westergen even spoke out against the current music licensing legislation’s unfair bias toward digital music companies. One very significant point he raised was that most companies simply cannot justify running an Internet radio business because of the licensing costs — specifically citing the fact that AOL and Yahoo abandoned their streaming music services. It’s easier for a giant corporation to eliminate a portion of its business that isn’t performing, such as streaming music services. Companies built entirely around streaming music will either succeed with meager results or die off.

The revenue music companies will pull in from the alleged Apple Internet radio would more than compensate for any money lost from the closure of Pandora. And something tells me that if Pandora does die off, neither the RIAA or the major music companies will shed a tear.

Sept. 9 - 10, 2013
San Francisco, CA

Early Bird Tickets on Sale

Since the advent of broadband, the barriers to selling music on the Web have quickly evaporated. But the area of music licensing, an annoying splinter in the music industry’s foot, is still sluggish and inefficient.

Enter SourceAudio, a stealth startup in Los Angeles that is using the power of the cloud and web technologies to make music licensing a quick and nearly painless process. Using a Software-as-a-Service (SaaS) setup where all music and documents are hosted and delivered via the cloud, the company eliminates the time-consuming process of finding the right person to license a song or sound effect, talking to lawyers and faxing documents.

“There isn’t a lot of technology centered around music licensing, but we think that should change,” Andrew Harding, SourceAudio’s VP of product, told VentureBeat. “With our system you can buy and use music quickly instead of the old methods that can take days. With our system licenses get done in real time, the purchase is made, the documents are delivered automatically and the music is cleared for use.”

SourceAudio has thus far partnered with more than 70 music and effects companies and hosts a collection of nearly 1.6 million tracks that can be accessed from individual company pages. (See the example below for a custom company page.) The company claims this collection is the largest database of music on the Internet available for licensing, and Harding expects more than 2 million tracks to be hosted on the network by year’s end. The network supports tracks in .mp3, .aiff, and .wav formats.

Some of SourceAudio’s bigger partners include Premiere Networks, which syndicates most of the top radio shows in the country like Glenn Beck, Jim Rome, Sean Hannity, and Leo Laporte; and Cutting Edge Film Scores, which created the score for the Oscar-winning film The King’s Speech.

“Ideally, we’d like to partner with all music buyers and all music sellers to make this process easy,” Harding said. “We’re in talks with several major broadcast networks and music labels, but we can’t mention any specific names right now.”

The company generates revenues with a combination of hosting music tracks and taking a small cut of each licensing deal. Pricing to be part of the SourceAudio network increases as your company hosts more tracks. For example, hosting between 1 and 499 tracks costs $99 a month, while hosting between 250,000 and 499,999 tracks costs $999 a month. Ideally, if you were a record company with an extensive catalog, you could steadily add tracks to be licensed and move up the scale of pricing. SourceAudio additionally takes a 7 to 10 percent cut of each transaction, a rate that Harding says is fair for making the process work.

SourceAudio was founded in 2007, but it’s making waves now thanks to the team more seriously focusing on selling the product and strong word of mouth. “We spent a lot of time signing up the first 10 to 15 clients, but most of the rest came from word of mouth,” Harding said. “They heard about our way to make this process work and were excited to do business with us.”

Harding thinks one reason the company is finally picking up traction is because music and media companies are finally embracing digital solutions — streaming services like Spotify and MOG and cloud services like iTunes Match show that the labels are finally willing to give the web a real chance. Sites like YouTube and Vimeo have also recently shown an interest in licensing as well with music store partnerships. At BillBoard’s insistence, SourceAudio will be making its first big push this month at the BillBoard FutureSound conference in San Francisco.

SourceAudio currently has just five employees, but it’s a tightly knit and experienced team. The company is led by CEO and co-founder Geoff Grotz, who created GameTrailers.com, which was sold to MTV Networks in 2005. SourceAudio VP of Technology Ryan Cramer also comes from the GameTrailers.com family and was a lead programmer. And on top of being SourceAudio’s VP of product, Harding is also VP of product development at MTV Networks. The company is self-funded at present, with the majority of funding provided by Grotz.

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