Why does anybody get into the online radio business
? Pandora is the king of all online music services, with 77 million active listeners at the end of last month. But even Pandora has struggled to turn a profit off its streams because the vast majority of its users don't pay to listen to the personalized radio stations. Instead, they stick with the advertiser-supported version of the service, which generates considerably fewer dollars per listener.
Tom McAlevey thinks there's a better way than either subscriptions or advertising. He's putting out a tip jar and hoping listeners will donate enough to pay the bills.
McAlevey is chief executive of Radical.FM, a personalized radio service that's available as an app either for Android or iOS phones (so far). He cut his teeth in Sweden in the dial-up Internet era, launching an advertiser-supported service called Tomsradio in 2000 that combined user-customized radio and on-demand listening years before Pandora and Spotify (or even Rhapsody).
Tomsradio lasted only a couple of years before it ran out of capital, a problem that McAlevey blames on bad timing. "It was an excellent little service," he said in a recent interview. "You just couldn't get [investors] to touch it."
This time around, McAlevey isn't wasting any time trying to sell banner ads or interstitials. "I've always believed that we could actually make more money based on a donation model than on a commercial model," he said. "If people really care about something, they're willing to do the right thing."
For Radical.FM, the trick will be to average $3 to $4 per user each month. It helps that the service doesn't let people play music on demand, because that cuts the royalties they pay to artists and songwriters considerably. "For an on-demand service to be profitable, in the long run a break-even would probably be around $8 to $9 a month" per user, McAlevey said.
Public radio's 2.7 million donors in 2011 gave the equivalent of about $11 per month. From McAlevey's perspective, that's good news ... until you consider that these donors represented only 7% of public radio station listeners that year. The average donation per listener works out to less than $10 per year. Ouch.
Besides, even the best-known successes with the tip-jar approach to music haven't demonstrated a way to generate sustained revenue. For instance, Radiohead's pay-what-you-want pricing for its album "In Rainbows" contributed to its strong sales, which topped 3 million copies in various formats its first year. But that was also the last time Radiohead let fans set their own price for its material. (continued...)
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