-By Doug Perlson

Representing one of the brightest growth areas in the technology and media field, Internet radio has managed to grow at an astonishing rate. Surveys have shown that upwards of 80 million listeners are tuning in each month, and online radio has grown at a 27 percent clip since 2000. Internet radio is also leading the charge into new and exciting mobile ventures.

Just last month, several companies introduced wildly popular radio applications for the iPhone that allow streaming music services like Pandora, AOL Radio and Last.fm to work on the mobile device.

But, like many popular innovations, several online radio networks are still searching for ways to fully monetize their booming listener base. Internet radio’s profit margins are not what they can be. However, a simple, counterintuitive method exists that could benefit the music industry, artists, the online radio networks and listeners. It has a tainted name, one with a long, unpleasant history: paid-song inclusion, sometimes known as payola.

We have seen a similar arrangement provide the financial backbone for the online advertising search field. It is the much heralded search marketing business model—the one Google has used to great success. Advertisers have learned to love the “revolutionary” ability to place bids and target their message to a highly specific audience. An Internet radio “pay to play” advertising service could accomplish a similar goal. The problem is the negative historical associations. The practice so infuriated lawmakers in the 1950s that they passed anti-payola laws with heavy monetary punishments and potential jail time for violators. But the law did provide a benefit for broadcasters. It gave the networks an exemption on paying performance royalties to artists.

This law applied to both Internet and satellite radio. These new media do not receive the performance royalty exemption, a subject of furious debates in Congress and the press. In 2007, much of the online radio industry almost went under based on questions of how much networks need to pay per song. On the other hand, the way the law is written, online networks should not be barred from accepting payment for song placement.

Paid song inclusion will also benefit the “payees,” the artists, management and rights owners. They would bid, in an organized, fully transparent system, for slots on the Web’s best radio stations, gaining exposure for new bands or promoting existing artists on tour.

The music industry and independent artists would benefit from a greater freedom of action. Thanks to the nearly instantaneous and detailed information feedback provided by Internet radio, labels can see in real time what works and correlates to sales. By the same token, independent artists will, for the first time, have real control over the promotion and distribution of their music. They also will be able to target the people who are by far the most likely purchasers of their products.

Best of all, paid inclusion would not harm the industry. With a lower royalty burden and new revenue stream, many popular commercial-free streaming audio services could blossom by introducing one or two sponsored songs per hour instead of spoken word advertising. Due to basic self-interest, networks will monitor these “sponsored songs” to ensure that they fit in the format and be reviewed for overall quality and appropriateness. They should be properly identified in the media player as “sponsored music” and allowed the same skipping functionality as other songs.  Advertiser self-interest will also serve as a gatekeeper—if the sponsored song does not achieve the desired effect, the “advertiser” will remove the song from rotation.

With the burden of performance royalty payments and the reality that savvy radio listeners will not tolerate heavy ad play, online radio networks have a number of challenges on the road to a big financial payoff. Sponsored music may be the way to allow online radio networks to pay their bills while maintaining a strong listener experience.

Payola may be a dirty word for the music and radio industry. But its use in online search advertising shows just how lucrative a field it can be. In the right hands, and with the right audience, paid inclusion could be exactly the win-win-win new revenue stream that allows online radio to keep growing and providing great content to its audience.    

Doug Perlson is CEO of TargetSpot, Inc., an online advertising network designed for Internet radio.