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Why Pandora Pays Much More for the Music You Hear Than Radio Stations

Rob Pegoraro
Contributing Editor
Yahoo Tech

The best-known Web-radio service in America has spent most of the last two years trying to buy one of the country’s more obscure FM radio stations, KXMZ of Rapid City, S.D. But you can’t blame this move on any new fondness at Pandora for either FM frequencies or the musical tastes of this town of 70,000 souls.

Instead, Pandora wants to buy the station to prove a point: As Pandora assistant general counsel Chris Harrison wrote in June 2013, it’s tired of getting jerked around by the music industry over what it pays for the rights to broadcast songs over the Internet. 

And with last week’s move by the Federal Communications Commission to remove one major objection to this purchase, Pandora may get the relief that this purchase will trigger: a slight reduction in the confiscatory copyright royalties it pays — which no FM or satellite broadcaster does. 

Write a Song, Get Paid. Sing it, Maybe Not.

While Pandora can seem like a cool radio station that happens to live in your laptop, tablet, phone, TV, and car, it’s not like radio in one key way: It pays more in copyright royalties, and pays them to more people, than U.S. AM and FM stations.

A radio station must cut checks to songwriters, the idea being that tunesmiths will keep writing songs if they know they’ll get paid for their broadcast exposure.

The people who sing or play an instrument, however, get nothing for their airplay. Every time you hear Bruce Springsteen do justice to Tom Waits’s “Jersey Girl” on FM, only the gravel-voiced composer gets money from the station. The Boss: zip.

That’s not the case in most of the world. Congress chose to “fix” this in 1998 by requiring newer music services — satellite radio, non-Internet subscription services and Internet radio — to pay performers too.

The Library of Congress’s Copyright Office then decided that while satellite and subscription services should pay a set percentage of their revenue, there was already a valid market between record labels and Web radio (based on a deal inked by, ahem, Yahoo during the dot-com boom times of 2000), which justified making those sites pay a fraction of a cent per song and per listener.

Sound cheap? It’s not. AM and FM can use musicians’ work for free. SiriusXM can budget a set share of its revenue — now rising from 9 to 11 percent — and pass that on to subscribers. But at Web scale, per-stream fractions of a cent quickly multiply into millions and then hundreds of millions of dollars a year. As in, 44 percent of Pandora’s revenue last year.

That yields another difference between Pandora and regular radio: It doesn’t turn a profit. Pandora lost money in each of the last three years, despite steady increases in listenership and revenue.

Pandora Derangement Syndrome

The Pandora bid to buy KXMZ, which the FCC finally waved through, won’t dent those performance-royalty rates. But by giving Pandora a chance to claim a deal reserved for broadcast-station owners, it may trim the royalty it pays songwriters from 1.85 percent of revenue to 1.7 percent and make it harder for them to yank their work out of its catalogue.

(Why the two-year hold-up? The FCC spent much of that time fretting over whether the publicly traded Pandora could prove foreigners didn’t own more than a quarter of its stock, which would violate FCC rules about who can buy stations.)

Representatives of music composers have reacted as if Pandora founder Tim Westergren proposed to drain 1.85 percent of their blood.

The American Society of Composers, Authors and Publishers accused Pandora of trying to “undercut songwriters” in a fact sheet that failed to note that the Web service’s proposed new rate would only match what FM’s been paying for years — and which doesn’t draw the same ire from ASCAP. 

National Music Publishers’ Association CEO David Israelite was angrier, tweeting: “What’s next? Pandora founder buys high heels. Demands Ladies Night discount at bar.” 

Beyond the obnoxious notion that exploiting regulatory loopholes should be a sport reserved to incumbent industries, this debate (have I really been writing about it since 2002?) also exhibits a sort of voluntary flight from fact I normally only see in comment threads about Apple.

Pandora Derangement Syndrome may not be as widespread as Apple Derangement Syndrome, but it’s just as ugly to watch. And news stories enable it all the time.

Take a music publishing exec’s complaint about Pharrell Williams’s getting $2,700 in composition-royalty income from the site for three months of playing “Happy.” That got widespread publicity in stories that never said FM stations paid him a lower rate and glossed over his much higher performance-royalty payments from Web radio — but not FM.

I don’t see how you can look at the music industry’s problems and (growing) potential and conclude that the next step should be making the company that already shares a massive chunk of its revenue shell out even more. 

But this is not just about Pandora. It’s also about the smaller webcasters who can’t afford to hire lobbyists and PR firms to speak for them in Washington, but risk getting handcuffed to the same steep rates if they get too popular.

This is about you: the listener. Every time you hear somebody declare that intellectual property like a song is the same thing as real property, you should be thinking about how this saga reveals what a deeply political construct “IP” can be. And that you, the voter, deserve a say in defining it instead of just shutting up and listening.

Email Rob at rob@robpegoraro.com; follow him on Twitter at @robpegoraro.