Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions
Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

What if terrestrial radio stations were treated like webcasters and had to pay a royalty similar to the one Pandora pays to SoundExchange for the performance of sound recordings? David Touve, Assistant Professor of Business Administration at Washington and Lee University, estimates in a blog post that Big Radio would owe nearly $2.5 billion per year.

Here's the math. Touve assumed a radio station plays an average of 12 songs per hour for 24 hours a day, 365 days a year. The Arbitron estimate for average listening audience (ages 12 and older) was 8.8% of the population. Pandora's royalty is the $0.0011 per stream currently paid by pure-play webcasters. The product of those figures (total songs per year x listening audience x royalty rate) is $2.47 billion.

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Remember this is a very hypothetical situation. Touve did not try to estimate how much a new performance royalty of this magnitude would reduce overall industry profitability, which in the real world would probably lead to either fewer stations playing music or fewer stations operating altogether.

This is also a thought experiment, not a political statement or judgment about the rates paid or not paid by webcasters and radio broadcasters. Pandora's support for the Internet Radio Fairness Act and hopes for a lower royalty rate has helped turn webcasting royalties into a divisive topic. This article does not take sides.

That $2.47 billion number could be high, however. Touve did not take into account the 17% of radio listening that goes toward non-music formats such as talk, sports and news (source: Arbitron "Radio Today 2011" report). Had Touve reduced his numbers to adjust for non-music listening, the estimate for Big Radio's royalty bill would be $2.05 billion rather than $2.47 billion, according to my calculations.

Assuming a $15 billion industry, and adjusting for non-music listening (I assume advertising is generated at an equal rate for music and non-music listening), Big Radio would end up paying about 20% of its revenue in statutory, pure-play webcasting rates. Of course, Big Radio currently pays nothing for the performance of sound recordings but pays performing rights organizations for the performance of the composition. In contrast, Pandora's content acquisition costs, nearly all of which goes to SoundExchange, accounted for 50.3% of revenue in its most recent fiscal quarter.

Touve, who recently wrote a white paper on licensing that can be downloaded through NARM and digitalmusic.org, also estimated Big Radio's royalty obligation if it paid the webcaster rate of $0.0021 per stream paid by radio stations that simulcast on the Internet. Given the same assumptions (8.8% listening audience, 12 songs per hour) annual royalties would be $4.71 billion. That's 37.8% of revenue -- closer but still under Pandora.

This totally hypothetical scenario shows Big Radio, which currently pays nothing for the performance of sound recordings, would have a far different and difficult cost structure if in were in Pandora's shoes. Or, flipping the situation, one could say Pandora would have a much different cost structure if it were treated more like terrestrial radio.

In the real world, though, Pandora pays for the performance of sound recordings -- and is fighting to pay less -- while Big Radio does not. This is just a thought experiment to show how two different types of broadcasters that arose in different eras and have very different histories with the record industry have ended up paying vastly different amounts of their revenue for the same content.