When you listen to a song on the Internet, someone is always paying. And for Internet radio companies like Pandora, those songs could soon get more expensive.
The U.S. Copyright Royalty Board, overseen by the Library of Congress, plans to announce new royalty rates Wednesday for Internet radio companies like Pandora and iHeartRadio. While streaming services like Apple Music and Spotify negotiate royalty rates directly with labels, Internet radio companies pay the rates set by the board. Those rates are reviewed every five years by three judges. Wednesday’s decision comes after more than a year of hearings, and for Pandora it’s a big deal.
Pandora will be the largest company affected by the new rates, and any increase would likely hurt its bottom line. The Internet radio service already operates on relatively low margins—much like other streaming services. Last year, it paid out $446 million in music licensing costs on $921 million in revenue. The company says it has paid out more than $1.5 billion in royalties to music makers over the years. If the rates go up significantly, the company could find itself in an untenable position where it pays out more than it would like—or, after a point, more than it can afford.
Established by Congress in 2004, the Copyright Royalty Board has helped make Internet radio possible. “The argument was broadcasters couldn’t possibly have the ability to go negotiate with a million different rights holders,” says John Villasenor, a professor of public policy and electrical engineering at UCLA, who has researched digital music royalties.
While the regime established by the board may have helped Pandora get started, however, those fees add up. Last year, the company paid $0.0013 each time a song played on its ad-funded service and $0.0023 for songs played on its premium service. Those fees are paid to the industry group SoundExchange, which then divides up the fees to give them back to the labels and artists. (This year, per an earlier copyright board decision, the rate rose to $0.0014 per song.)
The Copyright Royalty Board is supposed to set fair rates that reflect songs’ hypothetical market value if a truly open marketplace existed. “The numbers they have chosen in the past have been wildly controversial, but in a world of zero marginal costs, it is difficult to set rates that make obvious sense,” says William Greene, a New York University professor, who researches the economics of the entertainment and media industry. “The CRB is casting about for a set of numbers that cause as little disruption as possible.”
The Copyright Royalty Board is tasked with balancing the interests of the labels and Internet radio companies. During the hearings over the past year, SoundExchange, which represents the music industry, has argued that the current fees should be raised to $0.0025 per performance. Meanwhile, Pandora has argued that the rates should be lowered to $0.0011.
To SoundExchange, Pandora is no longer a newcomer that needs help—it’s a music industry giant that should pay a fair price to artists. “As more and more consumers are turning to ‘access’ models as the ultimate place to acquire music, the rates must reflect this market reality,” says Michael Huppe, the president and CEO of SoundExchange. “All creators deserve fair compensation, whenever and wherever their music is used.”
The overriding concern for Pandora, on the other hand, is its narrow margins. Pandora is a public company with international expansion plans that wants to minimize costs as it acquires companies and continues to grow, even while paying a little less than half of its total revenue to labels and artists last year. For the company, a hike in the royalty rates would mean it would have less money to put toward other investments, like acquisitions. A constrained cash flow could well lead to jitters among shareholders.
In November, Pandora’s CFO Mike Herring said that if the copyright board raises rates by too much, the company’s ad-supported business will see losses. “In this scenario, having other revenue streams to focus on such as subscription businesses and live events promotion gains importance,” Herring said during the company’s earnings call. On the other hand, he said, if the rates end up being reasonable, Pandora will continue to invest those dollars back into the company.
The Copyright Royalty Board will likely land somewhere in between. “If hypothetically they gave SoundExchange everything they wanted, it would really imperil Pandora’s ability to stay in business,” Villasenor says. “If you were to drop the rates, it would be a slap in the face of artists. I’d be floored if they go to any of the extremes.”
Pandora, for its part, hasn’t been waiting for the Copyright Royalty Board to act. The company announced a new direct deal with Warner Music Group Tuesday, following a similar deal announced with Sony/ATV Publishing Group last month (after the company settled a $90 million lawsuit with labels over playing music that was made before 1972).
The company also bought music analytics service Next Big Sound over the summer and concert ticket service Ticketfly this fall. And after buying on-demand streaming service Rdio last month, Pandora said it would eventually offer a “full on-demand paid subscription service.” The company also has plans to expand internationally; to do so, Pandora is negotiating with record labels for rates that would likely mirror those paid by Spotify and Apple.
In other words, even if the copyright board hikes up rates, Pandora has a plan. “Regardless of what the Copyright Royalty Board decides, we will continue to invest in the music industry to support a bigger, brighter future for artists and their fans,” Dave Grimaldi, a spokesman for Pandora, tells Wired. And part of that investment, at least, appears to be moving beyond radio into all the ways listeners want to hear music today.
Also in Wired: