Pandora CEO Brian McAndrews
Music publishers are still struggling to make money from digital music, so now Internet radio service Pandora is squaring off against the American Society of Composers, Authors and Publishers (ASCAP), one of the largest licensing organizations.
We first saw the news in The New York Times.
Last year, Pandora paid 49% of its revenue, or about $313 million, to record companies. But it only paid 4% of its revenue, so roughly $26 million, to publishers.
Pandora is persistently unprofitable in large part due to the royalty payments it must make for each song it plays. Every time Pandora plays a song, it must pay a licensing fee. Therefore, Pandora needs to make more money on the ads it plays its users than it pays in song royalty fees. But the problem is that every time someone plays a song, it generates more and more fees.
Now licensing organization ASCAP wants Pandora to pay more than its current rate of 1.85% of revenue as part of the 4% it pays for all publishing rights. Publishers feel hard done by because, as the Times puts it, "Five writers of hits by stars like Beyoncé and Christina Aguilera showed that 33 million plays on their songs on Pandora yielded just $587.39 in royalties for them."
But any increase in royalties threatens Pandora's financial existence. In theory, increased royalties could drive the company into bankruptcy because its expenses are pegged directly to its revenues.
Pandora argues that it shouldn't have to pay ASCAP any more than traditional radio broadcasters do, which is about 1.7% of their revenue. Pandora, which makes most of its money from advertising, considers local radio stations to be its closest competitors.
Now it's up to U.S. District Judge Denise Cote to determine the rate Pandora would hypothetically pay ASCAP in a free market. It's an important decision, given that Pandora's model depends on low royalty rates.
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