Here’s one to add to the head-scratching acquisitions in the technology industry: Pandora (P) has purchased a radio station serving the fine people of Rapid City, S.D. All 70,000 of them.
It’s telling that the deal was announced in an editorial written by Christopher Harrison, Pandora’s assistant general counsel, in the Hill, a Washington newspaper covering legislative minutiae. Pandora’s future relies more on laws and courts than on its ability to successfully run KXMZ, Hits 102.7. (Today’s Hits Without Rap!) In its announcement, Pandora argues that owning an over-the-airwaves radio station should legally entitle it to better royalty rates. But the move is better understood as a thumb of the nose toward the American Society of Composers, Authors and Publishers, which negotiates royalties paid to publishers that hold the rights to songs.
Royalties are the major point of contention in the digital music world. Publishers and artists say they can’t survive because rates are so low, while digital music businesses argue that those very same rates are high enough to have them hemorrhaging money. Pandora is in a particularly tight spot because it pays for each additional song streamed by its users, whether it can make money on those rates or not. Currently the company’s revenue is rising only slightly faster than what it pays in royalties. Last quarter it made $125.5 million from advertising and subscription costs, while paying $82.8 million in royalties. After Pandora’s other costs, the company lost $28.6 million; it believes that it can break even soon.
Pandora says that the portion of these royalties that it pays to ASCAP are being illegally inflated by the organization. The conflict is currently playing out in federal court, and Pandora’s editorial also detailed a filing in which it accuses ASCAP of violating an antitrust decree issued by the Department of Justice. According to the company, ASCAP has created a scheme in which it can withhold songs from Pandora while making them available to other companies, and refuses to give Pandora the same rates it gives other companies in similar positions. Pandora complains that ASCAP grants specific privileges to the Internet properties of so-called terrestrial broadcasters, which include almost all of Pandora’s main competitors. Hence the purchase of KXMZ, which was presumably desirable because it was priced to sell. (Pandora has not responded to a request for comment.)
ASCAP, of course, sees this as an attempt to undercut its members. “Pandora is trying every trick in the book to brazenly and unconscionably underpay and take advantage of the creative labor that produces the core offering of their business—music written by individual songwriters and composers,” said Paul Williams, the organization’s president, in a statement. ASCAP has not responded to a request to discuss further details.
In the grand scheme of things, the acquisition won’t much change Pandora’s business model. The company pays royalties to two separate groups of rights holders, with ASCAP representing the smaller of the two. In a recent U.S. Securities and Exchange Commission filing, Pandora called the potential financial impact “modest” and said that the deal would reduce its content acquisition costs by less than 1 percent of its overall revenue.
Pandora contends that ASCAP is acting in bad faith. It claims that the organization has refused to tell it which songs it is not allowed to play, meaning that Pandora is liable for up to $150,000 per work. “As with any innovative technology, we have encountered many attempts by the incumbent industry players to undermine Pandora’s mission to connect millions of fans with the music and artists they love,” wrote Harrison.
Pandora has been looking for other ways to lower its costs. Earlier this year it capped the amount of free streaming its customers could do on mobile devices, requiring heavy users to pay $36 annually. That fee helps offset royalty payments and has also created a significant new revenue stream for Pandora. Its subscription revenue more than doubled last quarter, as compared to a year ago, and now makes up about 16 percent of its overall revenue. If customers can be convinced to pay for music, then Pandora’s prospects could improve. But the company recently warned investors that its revenue won’t outpace its costs for the foreseeable future. With or without rap, KXMZ won’t change that.