Thursday, October 11, 2012

Mr. Westergren and Pandora Go to Washington

Mr. Westergren and Pandora Go to Washington 
-- Legislation drafted by a U.S. Representative suggests that fights over Internet royalties, and the lobbying and publicity efforts by Internet radio giant Pandora, are starting to heat up. 

According to a report at The Hill, the Internet Radio Fairness Act 2012 by Rep. Jason Chaffetz (R-Utah) aims to put Internet radio under the 801(b) standard of the Copyright Act, a move that would change how the Copyright Royalty Board determines royalties. The 801(b) standard takes into account factors such as the economic value of sound recordings and the impact of the royalty on the service. 

Royalty rates differ across platforms. Internet radio royalties have been set using a "willing buyer, willing seller" standard. Satellite radio royalties - set at 6% to 8% of royalties - were set using 801(b) standards. "The current royalty rate structure clearly favors some providers over others, and the discrimination against Internet radio must come to an end," Pandora founder and chief strategy officer Tim Westergren told The Hill. 

Labels also want parity - they are actively pushing for terrestrial radio royalties - but don't believe a major webcaster such as Pandora should pay less for its content. "Three years ago, labels and artists negotiated discounted rates to help Pandora continue to grow," one music industry source tells "Now they are a Wall Street company with hundreds of millions of dollars in revenues and they are apparently trying to use the political process to gut what they pay artists and labels -- at a time when that revenue stream is more important than ever to the music community." 

But parity can also be interpreted as fairness across all platforms, not just Internet and terrestrial. What a pure-play webcaster like Pandora pays, for example, is far higher, as a percent of revenue, than what SiriusXM Radio pays. "When you're listening to music in your house or in your car, you may be listening to it on your iPhone, you may be listening on the satellite radio or the FM radio," Chaffetz told the Hill. "Does that mean the royalties should be so vastly different? It doesn't seem to make sense to me." 

In negotiating the Performance Rights Act of 2009, Pandora and other webcasters had agreed on a definition of "fair market value" based on a modification to the 801(b) standard. The judiciary committees of both houses of Congress have passed the act, but it has not yet received a vote in either the House of Senate. Now it appears Pandora is abandoning the modified 801(b) standard. 

Pandora has been busy in the nation's capital. Westergren testified on Capital Hill in June and blasted the "disparity in royalties" while urging Congress to "level the playing field." And the company has hired public relations firm Story Partners, according to a July 9 article at the National Journal

The reason for Pandora's Washington D.C. maneuvering is quite simple: big money. The company paid $137 million - half its revenue - to record labels and performers in its last fiscal year. It stands to pay a similar, if not greater, share of revenue in the future. A decrease in the royalty rate could easily mean many tens of millions of additional dollars in a single quarter and hundreds of millions of dollars over multiple years. A lower royalty rate would also help Pandora's ability to withstand growth in mobile listening. Mobile usage is helping fuel listener hour growth and its ability to monetize mobile listening is slow to catch up. 

"Pandora is looking forward to the introduction of the Internet Radio Fairness Act, and we applaud Congressman Chaffetz for his leadership on this issue," said Westergren in a statement sent to" This is an important piece of legislation that will level the playing field, and end the current discrimination against internet radio.  Establishing fair rates will drive more innovation in legal digital music distribution and ensure artists are fairly compensated - two issues that are essential to Pandora's mission." 
The Hill

In The Mood For 
-- Songza isn't the only Internet radio service trying to match listeners' moods with hand-picked music., out since December in the U.S., aims to simplify digital music by matching moods to music. But one is free while the other is paid. What's the better approach? 

"While services like Spotify focus on those who always know what they want to listen to, caters for the consumer who feels like listening to music, but doesn't necessarily know exactly what they want to listen to," CEO Nick Massey tells paidContent. Massey is a former Coca-Cola executive who was more recently at marketing firm Octagon and television rental business Boxclever. "We provide a very easy to use, hand-curated service, with channels and playlists providing music to suit every mood." 
The truth is's competitors also help the listener who doesn't know exactly what he or she wants to listen to. Pandora has genre channels. iHeartRadio has a wealth of terrestrial stations as well as genre stations. TuneIn guides the listener to all types of radio stations - talk, news, sports and thousands of music stations broken down by region and genre. 

But can take that strategy when it's a paid service? For whatever reason, digital music business models are built on the assumption that people willing to part with money to stream digital music pretty much know what they want to hear. Whether it's Rdio's lengthy list of new releases or the apps on the Spotify desktop app, paid on-demand services take a bit of effort from the listener. In contrast, the free, ad-supported services - the radio services - target people who need help finding something to play. 

It seems that is betting it can get people better suited to radio to pay for an on-demand service. Interesting bet. The radio market is clearly bigger than the on-demand market - in terms of both dollars and listeners. It will be fun to see how this value proposition takes hold in the marketplace in the coming years. 

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