Internet radio involves streaming media, presenting listeners with a continuous stream of audio that cannot be paused or replayed, much like traditional broadcast media; in this respect, it is distinct from on-demand file serving. Internet radio is also distinct from podcasting, which involves downloading rather than streaming. Many Internet radio services are associated with a corresponding traditional (terrestrial) radio station or radio network. Internet-only radio stations are independent of such associations.

Internet radio services are usually accessible from anywhere in the world—for example, one could listen to an Australian station from Europe or America. Some major networks like Clear Channel and CBS Radio in the US, and Chrysalis in the UK restrict listening to in country because of music licensing and advertising concerns.[citation needed] Internet radio remains popular among expatriates and listeners with interests that are often not adequately served by local radio stations (such as eurodance, progressive rock, ambient music, folk music, classical music, and stand-up comedy). Internet radio services offer news, sports, talk, and various genres of music—every format that is available on traditional radio stations.

Streaming technology is used to distribute Internet radio, typically using a lossy audio codec. Streaming audio formats include "MP3, Ogg Vorbis, Windows Media Audio, RealAudio, and HE-AAC (or aacPlus)". Audio data is continuously transmitted serially ("streamed") over the local network or internet in TCP or UDP packets, then reassembled at the receiver and played a second or two later. The delay is called lag, and is introduced at several stages of digital audio broadcasting.

A local turner simulation program includes all the online radios that can also be heard in the air in the city.

A November 1994 Rolling Stones concert was the "first major cyberspace multicast concert." Mick Jagger opened the concert by saying, "I wanna say a special welcome to everyone that's, uh, climbed into the Internet tonight and, uh, has got into the M-bone. And I hope it doesn't all collapse."

On November 7, 1994, WXYC (89.3 FM Chapel Hill, NC USA) became the first traditional radio station to announce broadcasting on the Internet. WXYC used an FM radio connected to a system at SunSite, later known as Ibiblio, running Cornell's CU-SeeMe software. WXYC had begun test broadcasts and bandwidth testing as early as August, 1994. WREK (91.1 FM, Atlanta, GA USA) started streaming on the same day using their own custom software called CyberRadio1. However, unlike WXYC, this was WREK's beta launch and the stream was not advertised until a later date.

In 1995, Progressive Networks released RealAudio as a free download. Time magazine said that RealAudio took "advantage of the latest advances in digital compression" and delivered "AM radio-quality sound in so-called real time." Eventually, companies such as Nullsoft and Microsoft released streaming audio players as free downloads. As the software audio players became available, "many Web-based radio stations began springing up."

In March 1996, Virgin Radio - London, became the first European radio station to broadcast its full program live on the internet. It broadcast its FM signal, live from the source, simultaneously on the Internet 24 hours a day.

Internet radio attracted significant media and investor attention in the late 1990s. In 1998, the initial public stock offering for Broadcast.com set a record at the time for the largest jump in price in stock offerings in the United States. The offering price was US$18 and the company's shares opened at US$68 on the first day of trading. The company was losing money at the time and indicated in a prospectus filed with the Securities Exchange Commission that they expected the losses to continue indefinitely. Yahoo! purchased Broadcast.com on July 20, 1999 for US$5.7 billion.

In October 1998, the US Congress passed the Digital Millennium Copyright Act (DMCA). One result of the DMCA is that performance royalties are to be paid for satellite radio and Internet radio broadcasts in addition to publishing royalties. In contrast, traditional radio broadcasters pay only publishing royalties and no performance royalties.