Should Pandora Pay Less in Music Royalties?

Photograph by Scott Eells/Bloomberg

In 1994, the band Cracker released a song called Low. America was well into its grunge phase, and the slacker anthem quickly rose to the No. 3 spot on Billboard’s modern rock chart. Cracker toured with acts like Gin Blossoms, Spin Doctors, and Counting Crows. Today, Low has been played 1.12 million times on YouTube and nearly 750,000 times on Spotify. But it’s much more popular on Pandora, where it was played 1.15 million times in the last three months of 2012 alone. For their songwriting efforts, the band was paid about $42. Cracker’s lead singer, David Lowery, had the largest stake in the song. As he wrote in a scathing blog post about Pandora this week, his portion of the songwriting proceeds was just $16.89.

Yet according to Pandora, the amount of money it shells out for songwriting royalties is too high. The company is suing the American Society of Composers, Authors and Publishers (ASCAP), complaining that its last deal with the licensing organization is “ill-suited and not reasonable,” and is seeking lower rates. It’s also asking people to support the Internet Radio Fairness Act, which would significantly lower the amount Pandora pays to performers when it streams their music. While the specifics of Pandora’s beef with the music industry are full of legal technicalities (some of which I’ll get to in a moment), it’s an important example of just how difficult it is for a musician or songwriter—in some cases, even a record label—to make money from streaming music.

There are two types of rights associated with a recorded song: the copyright held by the songwriter who wrote the tune and the recording copyright (usually held by the record label) of the musician or band who performed it. Songwriter royalties have been law ever since the 1909 Copyright Act; when radio took off in the 1920s, organizations like ASCAP and later its main competitor, Broadcast Music Inc. (BMI), made deals with stations under which they collected royalties and then distributed the money to the artists after taking their own cut. (In Cracker’s case, BMI took about 13 percent of the royalty.) But performers didn’t get such a deal. “If you’re Carole King and you wrote (You Make Me Feel Like) A Natural Woman, whenever Aretha sang it on the radio you got wealthy,” explains John Simson, co-creator and former executive director of the performing rights organization SoundExchange. But if you were Aretha Franklin, radio paid you nothing.

Over the years, musicians have periodically rallied for performance rights—Frank Sinatra was a huge proponent, arguing that radio stations played his music because he sang it, not because someone else wrote it—but they had little success until 1995 when Congress passed the Digital Performance Right in Sound Recordings Act. Now, anyone who digitally broadcasts a song has to pay performance royalties. Traditional AM/FM stations still don’t have to pay because radio airplay has historically been seen as free publicity for record labels.

When Sirius launched its satellite radio service in 2002, SoundExchange cut a private licensing deal that allowed the company to pay a fixed percentage of its revenue in royalties. Sirius currently pays about 8 percent of its revenue to artists and labels for performance rights.

When Pandora was launched in 2005, says Simson, “I was running SoundExchange at the time and the problem we saw was they didn’t have very much revenue.” Sirius may pay only 8 percent of its revenue, but it also made $3.4 billion last year. Pandora made $427 million last year, or a little more than a 10th of that. And back when it was negotiating with SoundExchange, it made a lot less.

In 2009, Pandora agreed to pay SoundExchange a 12th of a cent for each song it streamed or 25 percent of its revenue, whichever number was greater. According to Simson, that 0.12-cent rate was about 40 percent less than what other services paid. But because Pandora’s revenue is so low compared with the number of people who use its service, the amount of money it pays to performers turns out to be about half of what it makes. For those 1.15 million plays of Cracker’s Low, Pandora paid out a total of $1,370. For the 14 billion hours of music played by its 175 million registered users in 2012, it paid $258.7 million in royalties. That works out to about $1.48 per user. That’s pretty cheap. (For comparison, Sirius paid $272 million in royalties and has 24 million subscribers, so that’s $11.33 in royalties per subscriber.)

Pandora may not have much in the way of revenue right now, but it’s a lot more than it used to have. The company raised $234.9 million in an initial public offering in 2011 and is expanding. It gained 18 million active users in 2012 and its revenue increased by about 55 percent over the previous year—but compared with the number of hours of music it plays and the number of people who use its service, it’s still not nearly as much as satellite radio.

“Pandora has made a conscious choice not to monetize,” says Simson, pointing out that the service could easily add more commercials or try to boost its paid subscriber rate. “They should definitely not get a discount,” he says. Jack Lerner, a law professor at University of Southern California, disagrees. “I think Pandora is paying too much,” he says. “I do have serious concerns that Pandora’s royalty structure is not sustainable for them.”

In a recent blog post, Pandora’s co-founder and chief strategy officer, Tim Westergren, noted that while one “spin” of a record on traditional radio may reach a million listeners, one play on Pandora is usually heard by only one person. “If major-market FM stations paid the same rates as Pandora, based on audience, some would be paying thousands of dollars for every song they played,” Westergren wrote. But according to current law, digital music is treated differently from broadcast radio. Does that mean Pandora should pay less? Maybe it means broadcast needs to pay more.

The real problem is that no matter what rate is set, there are so many hands in the pot—from groups like ASCAP and SoundExchange to record labels to artists to songwriters—that once a payment trickles down to the people who actually create the music, there’s not much money left. “The fundamental building block of the music business is the song,” says Cracker’s Lowery. “We’re in a weird position where the people who create the product, the musicians and the labels, don’t set the price for our own stuff. The government sets the price. Give us more control and let the market sort it out.” Then, with a laugh, he adds: “That’s right. You’re hearing an artist call for more free enterprise.”

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