Battling Rihanna Puts Pandora in Box on Lower Music Royalties

Pandora Media Inc., the money-losing Internet music service, has almost 60 million listeners to enlist for support while lobbying Congress for help to lower the royalties it pays to musicians.

Rihanna’s Facebook page can top that, with 63 million fans. And the 24-year-old singing superstar, whose “Diamonds” is No. 1 on Billboard magazine’s Hot 100, is just one of 125 artists who this month went public to oppose Pandora’s bid to cut fees for performers.

Heading into a fight Pandora says is crucial to its prospects for profitability, the most popular U.S. music streaming site faces the challenge of overcoming, or at least accommodating, resistance from stars its fans turn to Pandora to hear.

“When the very artists they are streaming -- the artists they are featuring, the artists that are even cooler than Pandora -- start to push back, that’s a real bind for them,” said Rogan Kersh, a political science professor at Wake Forest University in Winston-Salem, North Carolina, who does research on lobbying. “It’s a major lobbying setback.”

Pandora hit an all-time low of $7.08 on Nov. 16, two days after dozens of performers -- including Maroon 5, Katy Perry and Ne-Yo -- said in a statement they’ve given Pandora “a discount on rates for the past decade” and reject further reductions.

Pandora and allies, including CC Media Holdings Inc.’s Clear Channel Media and Entertainment, are pressing lawmakers to pass the Internet Radio Fairness Act, scheduled for a Nov. 28 hearing before the U.S. House Judiciary Committee. The measure would change standards the federal Copyright Royalty Board uses to set performer fees.

Performer Royalties

The bill would bring Internet radio services, which now pay a fraction of a penny in performer fees for every song they play, under the same standard applied to satellite and cable radio services like Sirius XM Radio Inc., which now pay a percentage of revenue.

Such a change could cut Pandora’s content costs by as much as half and be a “major catalyst” for the company’s earnings, Rich Tullo, an analyst at Albert Fried & Co., said in a Sept. 24 report.

For the quarter ended July 31, Oakland, California-based Pandora lost $5.4 million, or 3 cents a share. It paid $60.5 million for content acquisition, or 60 percent of its $101 million revenue. Growth of advertising, which accounts for 88 percent of revenue, hasn’t kept up with royalties that rise with the time listeners spend on its service, Pandora said in a filing with the Securities and Exchange Commission.

Digital Music

At Sirius XM, which got 87 percent of its sales from subscriptions, U.S. royalties were 8 percent of revenue during the three months ended Sept. 30, according to an SEC filing.

Pandora’s legislative effort is stirring up the fight over paying for music in the digital age, as people embrace new ways to play and discover songs. Pandora’s streaming service, available online and through mobile applications, creates music stations based on each user’s tastes.

The music community is just gaining its footing in the digital market, Rihanna and the other artists wrote in their letter, which was published as an advertisement in Billboard magazine. They asked why Pandora is pushing Congress to “gut the royalties that thousands of musicians rely upon,” adding, “That’s not fair.”

“A sustainable Internet radio industry will benefit all artists, big and small,” Tim Westergren, Pandora’s founder and chief strategy officer, said in a Nov. 14 e-mail. The proposed law “will mean more jobs in a sustainable industry, more choices for listeners, and more opportunities and revenue for working artists and their record labels.”

Rallying Users

The ad was sponsored by Sound Exchange, which collects royalties for artists, and musicFIRST, which represents the Recording Industry Association of America and musician groups.

Pandora went public in June 2011 at $16 a share and has since fallen more than 50 percent, to $7.84 on Nov. 23.

The Pandora-backed proposal was introduced Sept. 21 in the House by Jason Chaffetz, a Utah Republican, and Jared Polis, a Colorado Democrat. Ron Wyden, an Oregon Democrat, introduced the bill in the Senate.

Around that time, Pandora asked users through e-mails, advertisements and a website to contact members of Congress in support of the legislation. Westergren has compared the effort to the Internet protest led by Google Inc. and Wikipedia that unraveled support for Hollywood-backed anti-piracy bills in January.

‘Bluff Called’

Pandora is under increasing pressure from competitors in the digital-music market, including a potential streaming-radio service from Apple Inc.

MusicFIRST opposes the bill in Congress because it reduces Pandora’s royalty rate from fair-market to below-market levels and doesn’t address traditional terrestrial radio, which pays no performer royalties, Ted Kalo, the group’s executive director, said in an interview. The NAACP and AFL-CIO also oppose the legislation.

MusicFIRST supports a draft measure by Representative Jerrold Nadler, a New York Democrat, that would bring digital radio from terrestrial, satellite, cable and Internet under the market-based standard now applied to Pandora, Kalo said.

The collection of artists opposing the Pandora-backed bill has broad appeal because it spans eras and genres, Wake Forest’s Kersh said in an interview. Pandora had its “lobbying bluff called,” he said.

“The danger of a public campaign is you live by the favor of the fickle public and you may die by the favor of the fickle public,” Kersh said. “They’ve now found themselves on the wrong side.”

The Internet Radio Fairness Act is H.R. 6480 in the House and S. 3609 in the Senate.

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