Pandora Media, the rapidly expanding Internet radio service, has a problem: The faster it grows, the bigger the financial hit it takes on royalty payments. In the first 10 months of 2012, Pandora paid $182.1 million in music royalties, or 60 percent of revenue. With the music streaming company forecasting a fourth-quarter loss, and competition intensifying from SiriusXM, Spotify, and Apple, Pandora’s stock was off about 6 percent for the year while the tech-laden Nasdaq Composite Index advanced 17 percent.
Pandora Chief Executive Officer Joe Kennedy says his company is getting a raw deal on the fees it pays for song-playing rights because of what he calls an arbitrary and piecemeal music copyright and royalty-setting system that treats various digital radio formats differently. Pandora will pay more than half its sales in royalties this year, yet satellite radio services will shell out on average 7.5 percent of their revenue, and cable only 15 percent, Kennedy said when he testified on Nov. 28 before a House committee in support of the Internet Radio Fairness Act. “Pandora pays more in absolute dollars than any other company, including SiriusXM—a company with eight times our revenue,” Kennedy said. The bill would close the gap in song royalties.