Updated November 26, 2013: Likely due to its recent third quarter loss, Pandora representatives have stated that the company will end its lobbying efforts backing the Internet Radio Freedom Act and instead focus on influencing the Copyright Royalty Board for a change in royalty fees. Pandora’s decision is viewed as a victory by musician advocacy organizations and will likely ensure that musicians and artists will not experience the eighty-five percent pay cut proposed by the Act.
For many people, the era of FM broadcasting has long past. Internet radio is the frequency of the future; however, even internet radio giant Pandora is paying homage to the broadcast tradition. KXMZ-FM in Rapid City, South Dakota is Pandora’s new small-market “terrestrial” radio station, purchased to bypass the American Society of Composers, Authors and Publishers’ (ASCAP’s) allegedly discriminatory licensing and royalty rates. ASCAP, an organization composed of 460,000 “member-owners,” like Paul McCartney, Tom Petty, and Wilco, works primarily to ensure that artists and record labels are fairly compensated for the performance of their music.
Companies like Pandora have not been willing to pay these higher rates however, especially when their competitors seemingly receive more favorable treatment.
According to Pandora’s assistant general counsel Christopher Harrison, music industry members have been allowed to withdraw from ASCAP the “right to license certain songs on what is essentially a case-by-case basis.” Pandora believes that this withdrawal violates the terms of ASCAP’s antitrust consent decree with the U.S. Department of Justice by “discriminating in license fees and terms between Pandora and similarly situated licensees.”
Pandora also claims that this violates the antitrust consent decree by “failing to provide required transparency in identifying songs ASCAP claims it can license to Pandora,” and by “creating a scheme by which member-publishers can withdraw their catalogs from ASCAP’s license for Pandora but allow them to remain for everyone else.” “Everyone else” being other internet radio competitors like iHeartRadio. ASCAP had refused to grant Pandora the same licensing terms as it granted iHeartRadio because iHeartRadio is owned by a conventional, terrestrial radio broadcaster. Pandora’s recent purchase of KXMZ-FM makes Pandora more like its competitors that have participated in this “scheme” to obtain the same licensing terms and lower fees.
These royalty rate issues stem from the fact that the amount of people listening to music online has skyrocketed in the last ten years. Radio plays used to bring in hard-copy compact disk (CD) sales, but now that music is so readily available on the internet–and practically for free if a user does not pay for the premium versions of Pandora, iHeartRadio, or Spotify–artists are getting paid less per spin. This decrease in traditional revenue translates to a need for higher royalty rates for artists, who rely on their creativity to make a living. Companies like Pandora have not been willing to pay these higher rates however, especially when their competitors seemingly receive more favorable treatment resulting from ownership of conventional radio stations across the country.
Pandora may have a valid point. According to Washington and Lee Assistant Professor of Business Administration David Touve, if conventional radio stations paid the same royalty rate as Pandora, such radio stations would be in debt nearly $2.5 billion each year. All of Touve’s calculations are hypothetical, assuming industry values and not accounting for non-music radio formats. Despite this, a potential debt exceeding $2 billion shows that Pandora might have just cause for turning internet radio royalties into a heated debate.
While this may close the loophole, it would not necessarily benefit Pandora financially.
The battle for equal royalty rates and licensing fees is not a new one. In 2012, Pandora pushed for House Bill 6480, also known as the “Internet Radio Fairness Act of 2012.” This bill aimed to provide regulations for the computation of royalty fees for internet radio services, limit antitrust exemptions, and promote a “competitive marketplace” for internet radio providers, Pandora in particular. While the bill has since died in committee, Pandora is advocating for a 2013 version of the bill, enlisting artists this time to support its legislation.
Those in opposition, including Roger Walters, David Gilmour, and Nick Mason from Pink Floyd, argue that such a bill would cause an eighty-five percent pay cut for the “music community.” Pink Floyd also posit that Pandora is trying to trick people into signing a petition backing the bill by directly emailing some artists and asking them if they were interested in being a “part of a conversation” about the music business and internet radio. Despite this, the group also believes that “[a]rtists would gladly work with Pandora to end AM/FM’s radio exemption from paying any musician royalties – a loophole that hurts artists and digital radio alike.” While this may close the loophole, it would not necessarily benefit Pandora financially–its main purpose in purchasing the terrestrial radio station–because of quarterly losses and fierce competition from iHeartRadio, Spotify, Rdio, and the new iTunes Radio.
ASCAP is also trying to fight back against Pandora and its unfair trade practices lawsuit filed in 2012 by “setting the record straight.” ASCAP states that it intends to “keep defending [artists’] right[s] to be paid and treated fairly as streaming continues to evolve” and that Pandora is “deliberately trying to conflate performance royalties with sound recording royalties,” which apparently is “dismissive and insulting” to songwriters. ASCAP launched a Twitter campaign to stop the Internet Radio Fairness Act and bring awareness to Pandora’s quest to lower royalty fees. Calling the campaign #PandoraExploitsCreators, ASCAP argued that Pandora is punishing songwriters by “refusing to pay fair value” for their music.
“Pandora’s future relies more on laws and courts than on its ability to successfully run KXMZ, Hits 102.7.”
In addition to Pandora’s suit against ASCAP over discriminatory practices, Broadcast Music Inc. (“BMI”) has recently filed an unprecedented lawsuit, its first legal action since its founding eighteen years ago, against Pandora in the U.S. District Court for the Southern District of New York after royalty rate negotiations between the two fell through. Some are calling BMI’s petition (pdf) for determination of reasonable licensing fees the ‘Napster of the 2010s.’
BMI consists of over 600,000 songwriters, composers, and music publishers, including The Black Keys, Britney Spears, and country group Alabama. In its petition, BMI proposed an increase in Pandora’s fees consistent with market rates “to reflect the explosive growth of the internet music streaming marketplace” and in light of withdrawal of publishing rights from ASCAP. BMI states that Pandora is different from commercial broadcast radio and should be treated accordingly, calling Pandora’s Congressional lobbying and purchase of KXMZ-FM an “open and brazen effort to artificially drive down its license fees.” David Israelite, the chairman of the National Music Publishers Association, stated that “[a]ny shred of credibility that Pandora had as the songwriters’ partner is now gone,” and that Pandora was conducting its business through “lawsuits and gimmicks,” trying to “fraudulently sneak in the back door for a rate that wasn’t meant for them.”
Even Congress has taken note of the problem, potentially making KXMZ meaningless to Pandora’s royalty rate battle. Congressman Mel Watt (D-N.C.) is planning to introduce a bill before the August recess that would require broadcasters to pay artists and record labels for their music. According to Congressman Watt, the bill would “recognize a performance right” so broadcasters “would have to sit down with artists and either work out a regime on their own or be subject to litigation about the value of what they’re playing.” Watt hopes the legislation will incentivize radio stations to “avoid legal action” by entering into agreements with artists and their labels. While this may be detrimental to local radio stations that cannot afford to “sit down” with artists, the legislation would be groundbreaking for the music industry.
As ASCAP put it: “actions speak louder than words.” If Pandora is merely trying to gain equal licensing and therefore equal royalty rates, then the purchase of its conventional radio station was likely a well-placed business move, depending of course on the success of the royalty rate bill. However, Pandora’s other actions, including its various lawsuits and lobbying, may be cutting corners on compensating artists who depend on royalty fees. In fact, the company admitted that buying KXMZ was nothing more than a “publicity stunt” and that the purchase would not significantly affect Pandora financially. Recognizing this fact, Businessweek writer Joshua Brustein has likely summed it up best, saying that “Pandora’s future relies more on laws and courts than on its ability to successfully run KXMZ, Hits 102.7.”