The Downfall Of Pandora, Consumer Choice And Emerging Music

No Comments 8 November 2012

The Downfall Of Pandora, Consumer Choice And Emerging Music

If you listen to Pandora, you may have started hearing commercials asking you to support the Internet Radio Fairness Act. It’s legislation proposed to reduce Internet radio royalties to the level of other digital formats, like satellite radio. Over the coming months you’ll hear others “advocating for artists” by keeping the rates high. As a strong advocate for artists, let me tell you why maintaining the current rates is the worst thing that could happen to artists, consumers, and the future of music.

The beauty of Internet radio over broadcast is its personalized nature. With each user having an individual stream, Pandora can play totally obscure music for one person while playing Top 40 for someone else. With broadcast radio, audience sizes are static and large. This creates airtime scarcity and opens up programming to the influence of money. That’s why commercial radio has long been dictated by the major labels and their massive budgets. With unlimited stations and single-person audience sizes, Internet broadcasters are empowered and driven to play what each user wants. If they don’t, users will find someone who will, and finally they can.

Simply put, the Internet is democratizing music, and this is a good for artists.

Internet Radio Royalties are Creating a Music Middle Class

In addition to providing greater variety, Internet radio is putting millions of dollars in the pockets of musicians. Under their compulsory licenses provided by Congress and the Copyright Royalty Board, Pandora and Sirius can play whatever music they want if they agree to pay a performance royalty to sound recording owners. This is the first time that broadcasters have been required to pay a royalty that makes its way into the pockets of the performers themselves and it’s a huge win for artists.

Unfortunately, this revenue is in jeopardy. While Sirius pays a percentage of revenue — a manageable structure that accounts for swings in internal performance and market conditions — Pandora pays a per-stream fee every time they play a song. This structure opens them up to significant risk, along with all other Internet broadcasters who rely on these licenses. Despite over $180 million dollars in revenue for the first half of this year, Pandora has lost over $25 million, and no major company has yet to be profitable under this structure. Without a change, Pandora will go out of business or be forced to negotiate terms directly with rights holders, i.e. the major labels. Forcing Internet broadcasters to pay unsustainably high rates to the majors will reduce consumer choice, kill payments to artists, and cut many independent labels out of the future of Internet radio.

Historically, the major labels have worked day and night to figure out contract structures and licensing arrangements that avoid paying money to artists. The labels either designate most fees as a type of fee artists aren’t entitled to share in, or they withhold the majority of them because artists aren’t entitled to payments until the label has made back the bloated costs of their recordings.

Pandora, on the other hand, pays their royalties to a government-appointed organization called SoundExchange, which then distributes half to the labels, and half to the performers on the record. The fact that Pandora’s payments circumvent label accounting departments is a multi-million dollar-sized thorn in the side of the majors. While major rights holders lobby against lowering the compulsory rates, behind closed doors, they would gladly accept a reduced rate of 80%, as long as it flows through their accounting departments, instead of getting only 50% from SoundExchange.

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