Internet radio involves the delivery of audio programming via digital means from one computer to other computers over the internet. It involves both simulcast of existing over-the-air radio stations and content from internet-only stations. Internet radio was made possible in 1995 by the arrival of streaming technology.

Prior to streaming, users were required to download an entire audio file before listening to it. Streaming technology allows Internet radio listeners to listen to audio as it arrived in real time so users don't have to download an entire audio file. Internet radio streaming can involve both live material and archived clips of audio content recorded earlier. In either case, the user must have special software that matches the software used by the station to encode and transmit the data.

Internet radio was a booming enterprise into the late 1990s but legal decisions and a downturn in internet advertising effectively shut down many Internet radio stations. In 2002, a dispute between Internet radio broadcasters and the music industry came to a head when a copyright appeals board required Internet radio stations to pay a per-song, per-listener fee that was prohibitively expensive for many stations.

The fee was especially tough for smaller Internet radio stations to handle requiring them to pay thousands more dollars than they made. This led to hundreds of Internet radio stations shutting down.

Unlike broadcast radio which is an audio-only medium, Internet radio stations are free to offer interactive programming and can include images, animation, and even video. Whereas broadcast radio relies on estimating the size of audiences via ratings, Internet radio can measure each time a user accesses a particular page or program an din many cases can provide detailed demographic data about the people visiting their sites.

There are three ways for Internet radio stations to make money on-line; advertising, transactions, and subscriptions. Advertising is the model broadcast stations have adopted and used for decades. The ability of Internet radio to reach a global audience means not only the potential for a greater number of listeners but also that stations may be able to attract national as well as local advertisers. Internet radio listeners represent a desirable demographic of technology-savvy young people to advertisers as well.

Beside the standard audio-only commercials so familiar on the radio, Internet radio allows stations to generate revenue through graphic advertising banners and pop-up ads as well. The "banner ad" is an easy and effective way to display advertising on a station's website. Stations charge different amounts, depending on banner size, placement, and duration on a page.

The banner ad may be placed on the same page listeners go to when they want to listen to the station on-line. A greater amount can be charged for what are called "click-throughs" which is money earned when users click on the banner ad and visit the advertiser's site.