Pandora Goes to Court on Both Offense and Defense

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Shares of Internet radio company Pandora Media Inc. (NYSE:P) are up sharply in premarket trading Thursday morning following last night’s introduction of Brian McAndrews as the company’s new CEO. Wall Street certainly is pleased, but there are some big issues facing McAndrews as he settles in.

Pandora was in federal court Wednesday arguing that record labels should not be permitted to withdraw rights to play music from the existing agreement with the American Society of Composers, Artists, and Publishers (ASCAP) in order to negotiate rights payments directly with new media companies like Pandora, Spotify, Rdio and others. Pandora currently is negotiating a license renewal with ASCAP, and the company argues that allowing the publishers to withdraw new-media rights now would reduce the number of songs covered by the ASCAP license. The suit was filed last November.

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The company also has a dog in the fight between the world’s largest record companies and Sirius XM Radio Inc. (SIRI). At issue is music recorded before 1972, which the music companies claim that Sirius is using without permission. Federal copyright protection does not apply to recordings made before 1972, but the record companies are claiming that copyright protection is still covered by state law. Sirius, Pandora and other Internet music companies play the pre-1972 recordings under the compulsory licensing provisions of the 1972 federal copyright law.

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The music industry is trying to figure out a way to recover the revenues it has lost since new media outlets like Sirius and Pandora have taken a big bite out of CD sales. Following the industry’s giveaway to Apple Inc. (AAPL) when the iPod was introduced, the music companies have taken a much harder line on rights payments.

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Pandora pays about $0.12 per hundred plays, far less than the $0.22 paid by streaming services affiliated with terrestrial broadcast stations. The highest fee is paid by Spotify, at $0.35 per hundred songs streamed. Sirius has been paying a royalty rate of 6% to 8% of revenues. Spotify, in comparison, pays about 90% of its revenues in royalties.The record companies want more -- lots more by most accounts. Sirius, Pandora and the rest have a long and costly fight in front of them and it is far from a sure thing that they will win.

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Pandora’s shares are trading up 7% in Thursday’s premarket at $22.88, a new 52-week high if it holds. The current range is $7.08 to $21.98.

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