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Lessons from Early Radio

By: Philip Leigh
January 5, 2010

Much like today's Internet, during its early years radio enjoyed high intrinsic growth. For example, while most industries were shrinking during the Great Depression radio advertising alone grew from $27 million in 1929 to $185 million in 1939 translating to a compound annual growth rate of 21%. Radio entertainment during the era included mix of music, drama, comedy, and variety shows. However, music was considered essential.

After a brief honeymoon when musicians and composers welcomed free access to the enlarged audience that radio provided, they soon began complaining about inadequate royalties. Since there were millions of listeners, musicians wanted to be paid millions of times for a single performance. Nearly all were represented by ASCAP (American Society of Composers, Artists, and Publishers) which served as their royalty negotiator and collection agency to radio broadcasters. ASCAP increased fees by 400% over the 1930s to a point where radio stations were paying four percent of all their ad revenues to the organization. Regrettably, neither side was satisfied.

When ASCAP proposed to double fees yet again in 1940, radio decided to boycott. ASCAP's "content is king" hubris led them to reason that they represented all of the quality musicians and composers. They assumed that without ASCAP radio would have to turn to second-rate talent that the public would never accept.

Originally radio responded with royalty-free compositions such as old Stephen Foster songs. Soon, however, some stations started playing Hillbilly music composed and performed by individuals represented by a new organization named Broadcast Music, Incorporated (BMI). ASCAP could almost be heard to laugh out loud.

In time, ASCAP would learn the proverbial wisdom, "Pride goeth before the fall". Gradually, Hillbilly music evolved into Country & Western which itself later morphed into Rock-'n-Roll. In the end ASCAP had to negotiate terms that resulted in royalty rates that were much lower than prior to the boycott. In short they had created a new competitor thereby unleashing market forces into a previously monopolistic situation that they had controlled. In response, royalty rates dropped and ASCAP irrevocably lost market share.

ASCAP was so incensed at the loss of monopoly power that it initiated a series of lawsuits in the 1950s and 60s in an effort to restore the exclusivity enjoyed prior to 1941. They failed.

Most radio music during the 1930s was in the form of a live broadcast. As record discs began to move into the marketplace in the 1940s the established music industry once again reacted as though the new technology were a creation of Satan. Following ASCAP's lead, the American Federation of Musicians (AFM) prohibited its members from making recordings. They did not want records and disc jockeys replacing live performers on radio. Nonetheless, within a couple of years they accepted a record label agreement setting-aside a modest royalty stream from the sale of records for AFM members. Thereafter, disc jockeys generally replaced live performances on radio.

The analogies to today's Internet situation should be as obvious as cow-patties on a snow bank. The "content is king" response to the Internet from traditional media companies is in danger of leading them down the path where ASCAP mugged itself seventy years ago. Ultimately the advantages of moving content off of physical media, as well as Cable & Satellite systems, and onto the Web are simply too compelling.

Consumers gain immediate on-demand access without having to wait for shows to be broadcast.Sponsors achieve infinitely superior ad targeting and accountability on the Net. Ultimately Google AdWords will have conditioned them to pay only for video ads that get watched. Even ad agencies will eventually increase revenues. Once they learn how to create ads that induce consumers to make online purchases, they'll not only be paid for ads viewed, but will also win a bounty for each online merchandise sale. Lastly, ever-more entertaining and informative content is being created for, and distributed by, the Internet.