September 24, 2012 at 4:58 pm

Pandora Mobilizes Listeners to Change Royalty Rate… Again

The Copyright Royalty Board, pictured here circa 2007, sets royalty rates for internet and other forms of radio in the United States.

Back in 2007, webcasters really scared technology journalists with the news that they would not survive the royalty rates handed down Copyright Royalty Board.

We liked internet radio. So did seemingly everyone else. Why did three judges (pictured to the right), whom some said were beholden to one industry (the music industry) at the expense of another (music technology companies), want to ruin the party?

Where was the love, as it were? After so much back and forth that I had to create an entire category on my old blog just to keep track of it all, it looked like digital music companies had some of what they wanted, and that record labels, artists, and publishers had some of what they wanted.

In other words, it looked like a good compromise.

However, the way these royalty rates are structured means that, in admittedly over-simplistic terms, for every dollar Pandora and other streamers earn, they owe a proportional amount — marking a big difference between streaming music and just about any other kind of internet business, where the economics make more sense at greater sizes. (Actually, they owes for each listen by each user — and so if listens get harder to monetize streams at high volumes through advertisers’ non-infinite budgets, Pandora and other large-scale streamers can actually lose money by streaming more, because they have to pay for non-monetized streams.)

The last time around, Pandora and the other members of DiMA, (Digital Media Association) succeeded in convincing internet radio listeners to flood Congress with requests that they “save net radio.” It appeared to work. As Pandora itself wrote back in 2009, “the royalty crisis is over!”

Not so fast. In 2012, Pandora and other large internet broadcasters are finding the current rates too onerous. It’s true, that if they can’t make a business out of this, they will pay precisely zero to SoundExchange, which would hurt music copyright holders quite a bit. Pandora’s IPO isn’t exactly igniting a fever on Wall Street, although it’s trading a bit higher today, possibly due to news that these royalty rates will once again be configured.

It’s a tricky balancing act. Set the rates too high, and internet radio companies can’t stay in business, and nobody gets paid. Set them too low, and SoundExchange won’t disburse a fair amount of money to artists, labels, and publishers.

Today, TechCrunch reports that Pandora has, unsurprisingly, thrown its support behind the Internet Radio Fairness Act, by broadcasting ads to listeners, just like it did last time around. You can watch Pandora’s message here.

“Fourteen years ago, when online radio was in its infancy, the incumbent interests were successful at getting laws passed to discriminate against the Internet,” said  Sen. Ron Wyden (D-Oregon) in a statement. “This bill puts Internet radio on an even plane with its competitors, and allows the music marketplace to evolve and to expand — which will ultimately benefit artists and the Internet economy.”

The crux of the issue is that even with these rates, which Pandora and other webcasters saw as a victory at the time, internet radio indeed pays much higher royalties than satellite or cable radio (both of also pay artistsSoundExchange). However, satellite radio services have to put stuff into orbit, and cable radio stations have their own physical equipment-related costs, which is why internet radio has a structural advantage — which the Copyright Royalty Board saw apparently fit to try to even out, by saddling it with a higher royalty rate. As a result, Pandora pays over half its revenue to copyright holders, while satellite radio pays 7.5 percent.

Is it Pandora’s fault that it uses a more efficient medium to stream music than satellite and cable companies? If you buy Pandora’s argument that it’s not, the company offers a number of ways in which you can contact your congressional representatives and use the hashtag #fairnetradio to spread the word.

Photo courtesy of the Library of Congress (page deleted)