October 8, 2013

The Pandora Problem: Royalty, Streamed or Short-Changed

By Stephanie Jones and Michael Zwiebach

Just this past week, a federal court ruled in favor of Pandora Internet Radio, an online music-streaming service, in a summary judgment declaring that the American Society of Composers, Authors, and Publishers (ASCAP) must license its full catalog to Pandora, even if individual publishers want to withdraw from the agreement in order to negotiate royalty fees separately.

That is part of a dispute over royalty payments between Pandora and artists and their representatives that has been going on since the service was founded, in 2005. The actual trial to determine the royalty rates between Pandora and ASCAP does not occur until December 2013, and that ruling may have a major influence on another question: What are artists worth these days and can they make enough off of their music to survive and continue creating?

Pandora’s Complaint

Pandora Pandora’s argument rests on the fact that Internet radio organizations pay performance royalties, whereas satellite/ terrestrial radio doesn’t. On the other hand, satellite/ terrestrial radio have limited playlists — only some songs are approved for radio play, which is why you tend to hear only a few of a band’s songs regularly. Pandora plays a much wider range of songs, licensing entire catalogs. (That also means, of course, that royalty payments are spread among more artists and songwriters — less per artist, but with more artists receiving payments.)

There are different royalty procedures and payments for recording artists and for songwriters (who often, but not always, are also a song’s performers.) Recording artists receive payments through the nonprofit Sound Exchange, while most songwriters receive their royalties through the nonprofits ASCAP or BMI.

As fast as Pandora has been growing (72.7 million listeners, and a 7.77 percent share of total U.S. radio listening) it operates in what it claims — and some business insiders agree — is a highly dysfunctional environment, where its royalty rates and its actual payments (as a percentage of revenue) are much higher than its direct competitors.

Pandora has adopted a dual-track strategy to cope with this problem: direct negotiations with the performance rights organizations (ASCAP and BMI), and promoting legislation aimed at changing statutory licensing (the process by which the government sets base royalty rates, so that a qualified party, such as a radio station, can use copyrighted works without negotiating separately with each copyright owner.) Unfortunately, these two strategies often cross paths.

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In the fall of 2012, the Internet Radio Fairness Act (IRFA), introduced by Senator Ron Wyden (D-Ore.) and Reps. Jason Chaffetz (R-Utah) and Jared Polis (D-Colo.), brought Pandora into direct conflict with artists, labels, and performer rights organizations.

The legislation would require the federal Copyright Royalty Board to lower the royalty rates that Internet radio services — Pandora being by far the largest — pay to stream music on the internet, making their rates equal to those paid by satellite radio and terrestrial radio stations. The bill was rejected by Congress last year, but was reintroduced in 2013.

IRFA is the successor to a 2007 bill, which also attempted to align online radio royalties with those of satellite radio. But in 2009, Pandora and the performer rights organizations (ASCAP and BMI) agreed on a five-year royalty plan and the situation stabilized. The rates are scheduled to rise to 14 cents per listener, per play in 2014. On the strength of the deal, Pandora raised new working capital from investors, who had been weary of Internet music streaming up until that point. (Their IPO in 2011 raised another $235 million.)

But many individual publishers decided to seek higher royalty rates by pulling out of the deal and pursuing separate licensing agreements with Pandora. Since 2011, Pandora has been up to its neck in royalty negotiations, with Sony/ATV, BMG, EMI, and Universal Music Group.

The Spark

Tim WestergrenThe Pandora situation exploded this past May when Tim Westergren, founder of Pandora, emailed a petition asking artists to support the IRFA bill. Artists and bands such as David Lowery, Pink Floyd, and Blake Morgan began to speak out against Westergren's request. Morgan then outed the company by releasing the emails exclusively to the Huffington Post and speaking out on NPR and Bloomberg News programming.

“What happened with me and the reason I got involved is because I got an email that a lot of artists got,” said singer/songwriter Morgan. “The petition looked benign and very ‘I love Pandora, Pandora is great. We need more Pandora. This is exciting for our rights. This is terrific.’ It’s like they were assuming that we, as artists, are so [unaware] and we’re so misinformed that we’re actually going to sign something that hurts our own interests. They were asking us to help them lobby Congress in order to hurt us.”

“They were asking us to help them lobby Congress in order to hurt us.” - singer/ songwriter Blake Morgan

“I think that artists and clearly labels and everybody else has felt betrayed because in 2009 we all came to an agreement with each other and with Pandora for the royalty rates that we’ve been operating under,” said Morgan. “And Mr. Westergren himself declared, ‘The royalty crisis is over. This is great. We've got our long term deal in place.’ That was in 2009 and only two years later he was lobbying Congress to change the deal. He took his company public and had different obligations and suddenly went back on the deal. So, it’s been very disappointing.”

The Money Dispute

Pandora, which declined a request for an interview, says on its blog and in official statements that it fully supports artists making money through royalties, but that it needs to level the playing field with its competitors.

The response from ASCAP and from some performers has been that Pandora already makes a tidy profit and the time for feeling sorry for a little startup company is long past. Pandora, they say, by choosing to pay on a revenue percentage basis, rather than on a per play basis (which they are legally allowed to do) can pay a songwriter as little as eight cents for 1,000 plays.

Since Pandora pays royalties both to the songwriters and for use of the particular performance (recording), and since the publisher takes a cut and the performing rights organization also pays overhead expenses from royalties, it’s difficult to rationalize the numbers being thrown around in this debate. And because one play on Pandora reaches about one listener, while one play on a satellite radio program might reach millions, it’s even harder to make apples-to-apples comparisons. But here’s a useful one from Claire Suddath’s article “Should Pandora Pay Less in Music Royalties?” from Bloomberg Businessweek: Pandora paid out $258 million in royalties in 2012, streaming to 175 million users. Writes Suddath:

That works out to about $1.48 per user. That’s pretty cheap. (For comparison, Sirius paid $272 million in royalties and has 24 million subscribers, so that’s $11.33 in royalties per subscriber.)

The Musicians’ Complaint

In the end, artists, especially songwriters, get squeezed by the system.

“If I’m a young artist/songwriter trying to get into the music industry and I look at somebody with Allen Shamblin’s track record,” said Michael Aczon, an entertainment lawyer and educator:

This is not some guy who just started writing. This is a guy who’s got years and years of recognition and certainly a significant amount of success in the music business. So, if a guy like Allen Shamblin is earning less than $900 from his hit song being played 22,000,000 times on Pandora — if I’m an unknown songwriter, what am I thinking? Am I actually going to be able to make a living at this? That’s what I’m thinking! That’s the only way I can think.”

To add insult to injury, while Pandora was lobbying for the IRCA bill it bought a terrestrial radio station in the hopes of leveling the playing field. But artists are not amused. Says Aczon:

Their main competitor is Clear Channel, the radio conglomerate, which has been paying a significant amount of money to performing rights organizations. But Pandora came along, they did not have that preexisting relationship and they didn’t pay the tens of millions of dollars into the pot to distribute among the songwriters and publishers. And that was why everybody was up in arms, because they didn’t have an ongoing radio station or chain of radio stations and [hadn’t been] paying artist royalties over this long period of time.”

The issue of fair compensation is part of the teething troubles of Internet radio. All parties know that whatever basic structure evolves over the next couple of years may define the way the industry is treated, and how it treats artists, for a long time.

“The major issue is how much creators are going to get paid and how they’re going to get paid,” said Aczon. “[Suppose] I own a pie company. And the person, who actually makes the pies that everybody is going to the store to buy, makes the least amount of money. Well, that’s exactly what Pandora is. It’s not like people are coming to Pandora to buy something else and they happen to be listening to the music. They’re going to Pandora for the music. So if the people who are providing that product, the only product being sold … if [their compensation is] what’s being cut to make the company profitable, of course it’s an emotional issue.”

It sounds grim but that’s where artists are these day. And tougher decisions for artists lie ahead.

The Next Phase for Internet Radio

The good news is that Pandora, which has shown no interest in expanding its core product, does actually need people to create the music. It probably won’t settle on a model that discourages musicians over the long haul. The service still thinks of itself as a gateway for musicians who will have a better future because of the Internet. There is some research beginning to emerge that supports the idea that active Internet music users actually also are the music industry’s best customers.

Internet streaming is a way to broaden the base: More songs being played, means more musicians being paid. Musicians don’t need to be suspicious of streaming. (And that goes for classical musicians as well — Naxos’ streaming site is going gangbusters.)At the same time, radio may never become a main financial support for songwriters or artists. According to industry insider Jay Frank, “In 2011, Soundexchange (whose revenue is primarily Pandora and SiriusXM) paid out nearly 90% of their artists with checks less than $5000.” “The future clearly is moving in a streaming direction and there’s going to have to be a way for that to be [monetized] in a sensible way.” - Blake Morgan

“In the tech industry if the audience doesn’t stick around, the company doesn't stick around,” said Aczon. “Somehow the tech industry, the finance industry, and the music industry have to work cooperatively. In a perfect world, that’s what’s going to happen and there’s going to be a business model that will reward [creators]. And people who are emerging artists are going to look at that model and go, ‘Okay, it’s worthwhile to go into that business model and think that I could actually make a living at it,’ as opposed to thinking, ‘I’m going to create some new app, make a killing on the stock options, [because] only those people are going to be able to create music.’ I don't think that's the point.”

“I haven’t withdrawn my music from Pandora,” said Morgan.

“I believe that I would be able to but I don’t want to and I’ll tell you why. I think the music community, whether it’s music lovers or music makers, and Pandora, right now we’re having a debate. And an argument doesn’t have to be a fight. It can be a high level debate. And I think, at least for the moment, I think the way to win that debate is not to walk out. So right now, personally, I don’t want to boycott and I don’t want to walk out, if you understand what I’m saying.”

Whether it’s politics or music, no one can afford to walk away when so many things are unresolved. Everyone will have to keep there eyes and minds open to ways both sides can function in a streaming world.

“The future clearly is moving in a streaming direction and there’s going to have to be a way for that to be [monetized] in a sensible way,” said Morgan. “We’re not there yet but, hopefully, we’re moving into a time in music history that’s better than the last 10 years, where essentially music just became free because everyone was stealing everything.”

Stephanie Jones received her Bachelor of Science in Music Industry from the USC Thornton School of Music in 2008. She recently completed her Master of Arts in Specialized Journalism (arts journalism) in 2010 at USC and is currently a freelance journalist as well as a playwright, creative writer, and amateur poet.

Michael Zwiebach is the senior editor/ content manager for SFCV. He assigns all articles and content, manages the writing staff and does editing. A member of SFCV from the beginning, Michael holds a Ph.D. in music history from the University of California, Berkeley.