For investors, online music operators have been extremely risky. Of course, the main problem has been the lawsuits over copyright infringement. As a result, there have been no IPOs in the online music sector since 2002. That was when Napster went bust.

But over the past couple of years, the environment has been getting better. Just look at Pandora, which is an Internet-radio company. It has filed for a $100 million IPO.

When XM Radio and Sirius radio decided to merge a few years ago, it was most likely the only survival strategy left for long-term viability of both companies. Satellite radio subscriptions were not growing at a pace needed for consistent growth, and having a unified front to partner with automakers for satellite radio in new cars was becoming all-important. Fast forward to 2010, and smartphones are taking over from standard cellphones. Herein lies a huge problem for Sirius moving forward: competing with internet radio that's personalized and on-demand.

If you own an iPhone or Google-powered Android phone, the amount of customized radio-type listening services is almost limitless. For iPhone and Android, the ever-popular Pandora becomes your own radio station with only the artists you like. Download the Stitcher app for Android or iPhone and you have popular radio programs (Fox Radio, CNN, more) and podcasts available at any time. Even though Sirius has apps for its satellite radio service on popular smartphone platforms, will customers pay for it with so many other options only a download away?

Warner Music Group (NYSE: WMG) has asked CBS Corporation's (NYSE: CBS) free on-demand music streaming service Last.fm to remove the label's music from the site "in an apparent dispute over compensation rates." Billboard reports that CBS is "currently negotiating a new agreement with Warner Music Group and are working hard to built the most comprehensive music service on the Web." Music from Universal Music Group, Sony BMG Music Entertainment, EMI Group, and various independent labels remains on Last.fm, and the site's Internet radio service still offers songs from WMG artists.

CBS purchased British-based Last.fm a year ago for $280 million, and WMG was the first major label to sign with Last.fm in February 2007. According to Billboard, WMG had continued to keep music with Last.fm "on a month-to-month basis" after the original deal lapsed. Unlike paid subscription-based services, Last.fm and other free services offer consumers music without charge, and are ad-supported. News Corp.'s (NYSE: NWS) MySpace will soon be starting it's own similar service, which will tap into the social networking site's large user base.

Billboard also reports that WMG had grown "disenchanted with Last.fm's compensation rates" after comparing the rates to other services like the forthcoming MySpace Music. In addition, WMG "owns equity stakes in MySpace Music" and "has been frustrated by Last.fm's failure to proceed with its plans to launch a music subscription service." Paid subscription services have been being pushed by the music labels over other sites and stores like Apple Inc.'s (NASDAQ: AAPL) iTunes Store because they offer better profits for the labels. Mobile phone services have started to tap into this very service, offering consumers music and players on new phones developed for that very purpose.

Last Tuesday, workers who like to plug themselves into their favorite music genre while sitting at their desks stumbled upon some dead air. Many top providers of streaming Internet-radio services, from Yahoo! (NASDAQ: YHOO) Launch to Live365 and Pandora participated in a "Day of Silence" to protest the threat of impending royalty increases that would have a detrimental effect on the industry. Broadcasters that carry their tunes over the cyber airwaves only are facing a dark day on July 15th, when 17 months' of retroactive royalty payments (at staggeringly high rates) come due.

The silent airwaves, together with a petition effort at SaveNetRadio.org, may have made a modest impression. According to Forbes, SoundExchange - formerly a division of the Recording Industry Association of America - said Friday it will extend a cap on a portion of the fees owed by Internet radio operators. The $2,500 cap on an annual $500-per-channel fee currently charged to Internet radio stations may be a tiny sigh of relief to both web-based station operators and avid listeners who feared last Tuesday's silence was a grim omen of things to come.

But the industry is hardly free from worries. SoundExchange is currently willing to extend this cap through 2008; the Digital Media Association, which represents Internet radio stations including CBS Corp.'s (NYSE: CBS) Last.FM, does not want to accept anything short of an extension through 2010. Additionally, the Internet stations are facing a per-song royalty charge of 19 cents starting July 15, up from current levels of 8 cents per share. Nonprofit and small commercial Internet radio outfits are currently being given the concession of lower royalty rates.

The prospect of silent Internet airwaves is certainly not one I relish. For the past 8 or so years, I've relied on Internet radio to keep me sane at work, introduce me to new artists, and maintain a lively discourse with my co-workers (does Tom Petty belong on Slacker.com's "90s Alternative" station? Hardly). I truly hope the battling forces can work out an agreement that is fair and pleasing for all sides.

Beth Gaston Moon is an analyst at Schaeffer's Investment Research.

CBS Corp. (NYSE:CBS) took another step into the internet world yesterday with its $280 million purchase of online social networking/music site last.fm. This follows last week's acquisition of the internet stock market show WallStrip.

Last.fm acts as both a music guide and internet radio/music distribution site. Members allow the site to track their PC/iPod listening habits, and the site customizes streamed content of new music matching their tastes. Last.fm also allows artists and labels to upload new music (with accompanying permissions), so they can (hopefully) build a following.

The UK-based site began five years ago, and now claims 15 million members.
CBS still owns the largest radio network in the U.S., and I'm interested to see if and how they might integrate last.fm into this business. The two seem to be, to some extent, competing technologies, one in decline (radio), one ascendant (internet). The sale came as a surprise to some pundits who had speculated Viacom (NYSE:VIA), until recently part of the CBS empire, was prepared to offer as much as $450 million for last.fm.

Last.fm could provide CBS with a valuable platform for distributing content and a channel to retain advertising flowing to the internet. However, at present, no one site clearly dominates the music networking world. While CBS now has a seat at the table, the fight for ears and eyeballs will continue to grow more interesting.

Sirius (SIRI) seems to be planning to sell an online-only version of its satellite radio service, according to a community website: siriusbackstage.com [via Cnet news]. The service will cost $12.99 per month as a stand-alone and will be called "Sirius Internet Radio Plus." That price is comparable to the monthly price of the traditional service. It will include some, but not all, of Sirius' satellite radio content, as well as some separate programming, evidently, as the service is also priced as an add-on the a conventional subscription for $2.99 a month, but Sirius will also continue to stream its existing content selections for free to satellite subscribers. Sirius appears committed to branding this as a distinct entity; they've registered the acronym "SIR" as a trademark.

One of the serious (sorry) stumbling blocks to adding new subscribers for both Sirius and its rival XM (XMSR) is the need for special equipment: a receiver and then something to plug the receiver into, like a boombox, or converter kit for an automobile. Sirius has long offered free three-day web-only access trial accounts.

Sirius internet radio music channels stream at 128kbps and talk channels (including the Howard Stern channels) stream at a rather tinny-sounding 48kbps.