Collecting From Pandora: A Brief

Pandora has been in and out of the courtroom since it went public in 2011. It has had mixed results in the courtroom against SESAC, BMI, and ASCAP, always trying to lower the rates it pays songwriters and publishers. Beginning this past January, the streaming giant found itself in federal court once again, participating in a long awaited trail against ASCAP.

The lawsuit began late 2012.  Pandora filed suit against ASCAP after the two were unable to agree upon a reasonable royalty rate. Sony and several others publishers had made attempts to partially pull out from ASCAP in order to deny Pandora their catalogues. At stake was how much Pandora would pay for the use of compositions over the next two years.

Pay the Artist

Both ASCAP and BMI negotiate and collect fees from businesses that play music. ASCAP, the American Society of Composers, Authors, and Publishers, represents high profile songwriters such as Beyoncé, Jay-Z, Katy Perry, and many more. The company currently represents around 470,000 members. CEO of ASCAP, John Lofrumento, pointed out that Pandora would not have business if it weren’t for their members creating music. “Our fundamental position in this case is that songwriters deserve fair pay for their hard work,” stated Lofrumento.¹

Lofrumento is not the only one voicing concern. Burt Bacharach, six time Grammy winner and world-renowned musician, recently published an article in the Wall Street Journal stating his position on the topic. In his article, titled What the Songwriting World Needs Now, Bacharach sympathized with other artists, explaining the difficulties of trying to make a living as a musician in this day and age: “Today many songwriters are being denied fair compensation as result of antiquated regulations that were conceived over 70 years ago for a different world.”

Bacharach then continued to explain why this is: “The 1941 consent decree with ASCAP and […] BMI were written when vinyl records were the hot technology. They were deemed necessary to ensure that these leading licensers charged reasonable rates for the use of the music played on AM radio, in restaurants and bars and other public places.” Under these “consent decrees”, ASCAP and BMI are required to license a song to anyone who asks. “When the parties can’t agree upon a price, federal judges are the arbiters of the value of our work-instead of the market place-and judges set rates without knowing what deals might be struck in a free market²,” Bacharach writes, describing a situation identical to the one existing between Pandora and ASCAP now.

Although those decrees were introduced before Internet radio existed, they still apply to digital media today. Pandora has a market cap of over 6 billion dollars. Yet, a songwriter earns 8 cents 1,000 plays of a song. In fact, Linda Perry was paid roughly $350 for “Beautiful”, which was played 12.7 million times on Pandora last year. Consent decrees guarantee songwriters “reasonable fees”, but Bacharach argues that these current fees are far from reasonable. Pandora should be paying more, not less.

Recognize the Service

In contrast, Pandora contends that they are the digital equivalent of a radio station. The company believes they should be paying the same amount that regular, terrestrial radio stations pay to songwriters. Terrestrial radio stations currently only pay 1.7 percent of its revenue to songwriters and publishers, and Pandora considers these radio stations their main competitor.

ASCAP, on the other hand, argues that music is more valuable to Pandora’s revenue than it is to terrestrial radio. The streaming service lacks sports-and-talk programs and plays fewer audio ads and should therefore pay higher rates. Money made from Internet streaming is split between publishers and music companies and, currently, music companies are making the bulk of the money. Pandora pays approximately half of its revenue to record labels, while only 4.3 percent of its revenue, mostly made from advertising, goes to songwriters.

Furthermore, Pandora is a non-interactive streaming service, meaning that users cannot control the songs they listen to and cannot choose to listen to songs on repeat. Other streaming services, considered interactive, such as Spotify and iTunes, must negotiate their fees directly with ASCAP. This rate is actually much higher than what Pandora pays at the moment.

Additionally, Pandora and digital rivals, including Apple Inc.’s iTunes Radio, have recently made deals to license music directly from individual publishers at much higher rates that what ASCAP has been charging for blanket licenses. For example, Apple has agreed to pay 10 percent of its revenue generated from catalogues on iTunes Radio to certain publishers. This is more than twice the amount that Pandora spends on publishing royalties.³

Court Ruling

Up until now ASCAP has charged streaming services either 1.85 percent of their gross revenue or .006 cents each time a user listens.⁴ Pandora has been paying an interim rate based on these guidelines since 2011. However, the case came to a close on Wednesday, March 19 when a federal judge sided with Pandora over ASCAP. The judge agreed with Pandora’s position that it is more like terrestrial radio than other music services such as Spotify.

U.S. District Judge Denise Cote ruled that Pandora should continue paying a royalty rate of 1.85 percent of its annual revenues. ASCAP had sought after 3 percent, but Judge Cote determined that this rate was “unreasonable”. The ruling declared that Pandora’s rate should not be determined by what interactive streaming services pay.⁵

If Judge Cote had ruled for Pandora to pay more, it would have affected their bottom line, but probably not by much. Actually, the consequences for Pandora may be greater now that they have won. Songwriters and composers may decide to pull out of ASCAP in order to negotiate their own deals. Pandora will have to reconsider everything if this happens; they will technically be out of product.

As for ASCAP, which celebrates its 100^th birthday this year, it may have to face the wrath of many publishers who will need more justification not to pull out from under the its umbrella.

Judge Cote’s ruling, in short, will impact Pandora and ASCAP as well as the industry’s traditional modus operandi. Internet radio companies may be forced to make more individual deals with publishers, leading to higher rates than charged by ASCAP.⁶ Songwriters will be further embittered, as they feel that the ruling only undercuts their ability to make a living. Although for now the decision may put Pandora on equal footing with other radio stations, disagreements over royalty payments will likely continue to bring instability to the industry and add friction between content owners and music providers.

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