Oct. 11 (Bloomberg) -- U.S. legislation backed by Pandora Media Inc., the biggest online radio service, would hurt musicians and record labels by reducing their royalties, according to SoundExchange President Michael Huppe.
Under the current structure, the online radio industry is growing rapidly, said Huppe, whose nonprofit group collects and distributes royalties. This year, SoundExchange is collecting digital royalties from 1,800 outlets, compared with 1,210 in 2009 and 855 in 2007, he said in an interview yesterday.
The Internet Fairness Act would cut Pandora’s content costs by as much as half, Rich Tullo, an analyst at Albert Fried & Co., said in a report last month. The bill calls for royalty parity among satellite, pay-TV and online services as a share of the revenue rather than a flat rate per track, he said. Rates are currently determined by the Copyright Royalty Board, part of the Library of Congress.
“We want Pandora to succeed,” Huppe said. “We want them to grow and have a hugely successful business but we don’t believe artists should have to subsidize that business.”
Pandora, based in Oakland, California, fell 3.5 percent to $9.49 yesterday in New York and has declined 5.2 percent this year. Tullo has an “overweight” rating on the stock
Online radio services pay 0.11 cent for each song they stream, with half going to a track’s owner, 45 percent to the performers and 5 percent to background vocalists and musicians, Huppe said. Pandora’s second-quarter royalty payments grew 79 percent, while revenue rose 51 percent.
Tim Westergren, Pandora’s co-founder and chief strategy officer, said Oct. 9 in a blog post the company expects to pay recording artists Lil Wayne and Drake $3 million each this year. Coldplay, Adele, Wiz Khalifa and Jason Aldean will receive $1 million each, he wrote.
“We’re proud to pay performance fees,” Westergren wrote. “We think artists could and should ultimately earn even more. But all of this revenue is coming from a single company.”
Lower royalty rates would draw investment into the market, creating more opportunities for artists, Westergren wrote. Pandora, which accounts for 6.5 percent of U.S. radio listening, paid $60.5 million in royalties last quarter.
``We envision a future in which Internet radio can offer more as the sector grows and innovates -- but this is only possible if Internet radio can compete on a level playing field with the other forms of digital radio,'' Mollie Starr, a Pandora spokeswoman, said in an e-mail.
Huppe says payments listed in Pandora’s blog are misleading and include funds that don’t go to top artists.
“We’re not just paying the Lady Gagas of the world, we’re also paying middle class artists who depend on this revenue stream,” Huppe said.
The current arrangement expires in 2015, and talks to establish a new royalty rate are slated to begin next year, Huppe said. That may be delayed while Pandora and SoundExchange lobby over the proposed legislation, he said.
“It’s fair to say the negotiations have already begun by another means,” Huppe said. “Clearly this bill is starting the process a little early and I expect this to continue into new term when Congress reconvenes.”
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