Music royalties and Pandora’s box

May 10, 2013

It is one of the oldest and thorniest questions of the digital music era: How much should artists and musicians be compensated for the Internet broadcast of their songs? And who gets to decide that rate?

You might think in the nearly two decades since music first began streaming over the Internet that some kind of consensus about paying artists would have emerged. But about the only thing most Internet radio stakeholders can agree on is that the current system makes no sense: Internet radio providers pay vastly different rates than their terrestrial, cable and satellite brethren, and even sometimes each other. Also, even a single company may pay a per-song fee in some cases, and a percentage of its revenues in others. Beyond that, there is vast disagreement, with the political fault lines forming an unusual pattern.

The business stakes of this battle flared up again this week, when the New York-based indie musician Blake Morgan picked a public fight with Internet radio giant Pandora. Morgan had received a feel-good form letter from Pandora founder Tim Westergren that exhorted musicians “to change the course of the industry in a direction that will be far more inclusive and empowering for independent musicians.” In response, Morgan said the “idea that Pandora is intimately interested in the success of independent artists rings quite hollow.” Specifically, Morgan noted that his songs were played nearly 28,000 times on Pandora in the third quarter of 2012, and that he received $1.62 from the company. (As Billboard notes, that is far less than the statutory rate to which Morgan is theoretically entitled.)

In an interview, Morgan said that it was “very dishonest for Pandora” to claim to empower musicians when its royalty payments are so low, and indeed seek to lower them further. Certainly Pandora’s royalty rates are critical to the health of its business. As my Reuters colleague Daniel Indiviglio has pointed out, in 2011 Pandora’s royalties-to-revenue ratio was 54 percent; Sirius XM’s was 8 percent. In an otherwise bullish stock environment, Pandora’s stock tumbled conspicuously on Tuesday when Morgan’s correspondence with Westergren was widely aired, though it has since recovered.

A Pandora spokeswoman declined to comment specifically on Morgan’s charges, but said that the company is constantly in touch with more than a thousand musicians and seeks their active collaboration in setting rates.

The spat over royalties is crying out for rationalization. Currently, the Copyright Royalty Board (CRB) – a panel of judges that is part of the Library of Congress – sets the rules for royalty rates. Unlike many issues under CRB jurisdiction, however, there are next to no market inputs, as there is no functioning market for Internet radio licenses. Instead, the CRB relies on data extrapolations from other media deals that can vary from case to case. Thus, CRB rulings seem out of whack with other industry practices and are constantly changing; the dizzying cascade of contradictory and superseding regulatory rulings is summarized here.

A legislative effort to streamline the law, called the Internet Radio Fairness Act, came and fizzled last fall. The bill was heavily supported by Pandora, since it would lower their rates, and opposed by musicians and songwriters. Curiously, though, the AFL-CIO and the American Conservative Union – two groups which rarely agree on anything – also opposed the bill, supporting instead some kind of market mechanism to determine royalty rates.

Morgan’s argument is that the discrepancy between Pandora’s rates and everyone else’s should be resolved by raising the floor instead of lowering the ceiling. And during last year’s debate, Congressman Jerrold Nadler from Manhattan introduced a draft discussion bill seeking to impose a single royalty rate for all radio platforms. Nadler’s office told Reuters that it continues to support this idea, but is also waiting for the House Judiciary Committee to undertake a broader review of copyright issues – a process that will clearly take months – before introducing any formal bill.

In the meantime, artists will continue to use whatever leverage they can find to wring a higher rate out of companies like Pandora. Morgan, for his part, points to Spotify – which has only been available to U.S. listeners since 2011 – as the “oncoming good guys” who choose to give artists a bigger chunk; he claims that he makes $1 in royalties for every 200 plays on Spotify. Perhaps there is room in the Internet radio world for market competition after all.

PHOTO: Joe Kennedy (2nd L), president and CEO, and Tim Westergren (2nd R), founder and Chief Strategy Officer of Pandora internet radio, ring the opening bell at the New York Stock Exchange June 15, 2011. REUTERS/Brendan McDermid
2 comments

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How did we get from “PAYOLA” to “PAY US”? If the 28,000 spins did not help the artist, any artist, with sales, then the entire system is broken. As a former Assistant Manager at a non-profit radio station, and seeing first hand the efforts made by the Labels to get spins (remember “for promotional use only”), I feel from the bottom of my heart, that the artists are being duped into thinking this is how to make money. How did we get to having to pay for spins. I’ve wanted to start an internet radio station for about the last 11 yrs and this “pay”, who to “pay”, how much to “pay” thing has always been my greatest fear. What ever happened to that symbiotic relationship between radio and record labels. Last thing, where are the checks and balances? Who is watching the watchers. This is the real problem; If I pay an entity to listen to music, that entity should pay the artist(royalty), If I listen for free I shouldn’t have to pay. That is the real problem. Royalty should never be paid to a record label.

Posted by ReallyPuzzled | Report as abusive

In defense of Pandora expecting lower royalty rates, please bear in mind that Pandora is more like broadcast radio in that one cannot simply hear whatever they wish. Instead, if I hope to hear any of Mr. Morgan’s music, I would have to listen to a Pandora radio station that includes the works of Mr. Morgan in its playlist. I have never heard of Mr. Morgan. The only way I would encounter his music is if I happened to listen to a Pandora radio station that includes his work. To this end, perhaps Mr. Morgan and his lesser-known ilk should be paying Pandora for advertising.

Posted by gjbloom | Report as abusive