Less Could Mean More: Why Merlin's Deal With Pandora May Pay Off

Merlin has come under attack in the last month for making a deal that, according to its critics, lowers its member labels' per-stream royalty rate with Pandora, and thus their revenues. Though in time they may ultimately be correct, those critics don't seem to understand that the deal was actually designed to generate more money -- not less-- for Merlin's labels and artists.

According to sources, the deal is designed so that Pandora has an inducement to play more music by the labels of Merlin members.

Looking back at Pandora's history, if Merlin's member labels achieve the normal amount of play that Pandora's algorithms dictate, then the rate stays at the statutory rate. But if Merlin labels and artists are played more, then a discounted per-stream royalty rate kicks in. Meaning the overall per-stream rate may very well fall below the statutory rate ($0.0013 per stream), as its critics charge. (Sources add that there is a cap on how low the percentage can go.) But if that happens, the Pandora deal will end up delivering a bigger pie to the Merlin labels, benefitting its artists as well.

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Merlin's critics say the deal could backfire on artists and labels in another way. They point out that if incremental play produces an overall average per-stream royalty rate that is lower than the statutory rate, the Copyright Royalty Board could take the lower number as the market rate and lower the overall statutory figure in its revisions.

Why? Back in 2007-2010, when ASCAP and BMI rate court judges were involved in litigation between DMX and performance rights societies, the judges examined the direct licensing deals DMX cut with publishers. During that process, judges did not review the advances or any of the other aspects of the deal, and only looked at the reduced per-store royalty rate Consequently, in the case of BMI, this resulted in the per-store negotiated rate falling from $36.36 to a per-location fee of $18.91, much to the chagrin of the publishers, who stayed a part of the PROs' blanket licenses. The ASCAP rate court returned a similar finding.

(Did we mention that Pandora vp of business affairs and assistant general counsel Chris Harrison was DMX's vp of business affairs at the time of the rate court ruling in a lower per-location blanket fee?)

Merlin was fully aware of the rate court's history of using precedent-setting deals to establish new rates when it went into the Pandora direct licensing contract. It wouldn't have done such a deal with Pandora if they thought it would result in a DMX-like outcome, according to some label members.

Finally, to address another issue that may be of concern to artists, the Merlin deal preserves the payout structure already in place. Meaning that, instead of Pandora dealing directly with labels who then are responsible for paying the artists, the streaming service makes payments to SoundExchange.

Another aspect of the deal that critics ignore is Merlin moving to remedy the wrong it perceives when major labels negotiate deals with digital services. 

Major labels tout their market share in negotiating lucrative advances and prime real estate for their artists at the various services, but they do so by including the market share of the independent labels they represent. Consequently, Merlin says it gets short-changed on advances and in representation in digital stores and services.

By creating an inducement to play more music from Merlin's labels, it could help alleviate the major labels' dominance, as Pandora will have an incentive to structure its algorithm so it plays more indie music at the expense of major labels because it would reduce the company's overall costs for music.

But will Pandora's popularity with listeners suffer as a result of the deal? In court documents from its ASCAP rate court hearing, the service has reported that it has already experimented with playing less music from one record label with test listeners. They detected no drop in customer satisfaction.

Finally, the charge that the Merlin deal amounts to payola might be convoluted logic. Payola occurs when labels pay radio to play their music, not the other way around, as what happens in the digital realm. Even if the Merlin deal results in a slight economic benefit to Pandora, payola laws would need to be turned upside down and inside out to apply to this particular situation. Of course, stranger things have happened in the U.S. legal system.