Pandora Shares Plummet on Sour Fourth-Quarter Forecast
Pandora Shares Plummet on Sour Fourth-Quarter Forecast

Pandora mounted an effective publicity campaign Tuesday by revealing the amounts of royalties some artists' songs generate on its service (as opposed to how much money those artists are actually collecting). The company is putting its political and popular weight behind bills in Washington that would lower its royalty burden and, it argues, vitalize the Internet radio market.

Unfortunately, Pandora's message was easy to misunderstand and occasionally misleading: Take what you thought artists were getting paid and chop off half. The math is below.

Pandora doesn't actually pay artists. It pays SoundExchange, which then gives artists 45% of net royalties. Half of net royalties goes to labels, and a portion may find its way back to artists through its royalty accounting system.

Pandora's first comments came from Westergren speaking at the SF Music Tech conference in San Francisco. "There are a couple artists making over $2 million on Pandora," TechCrunch quotes Westergren as saying. "Some artists making over $100,000 a year." Those are pretty straightforward comments. Artists do indeed make money from streams on Pandora.

Next came a post at the Pandora blog that offered details on specific artists. Over the next 12 months, the post claims, the music of Donnie McClurkin, French Montana and Grupo Bryndis will generate performance royalties from Pandora of $100,228, $138,567 and $114,192, respectively.

Note the wording here. The post referred to "performance fees…for the music we play for their large and fast-growing audiences on Pandora." That's different from saying, "We're paying the artists this much money." And technically the wording is correct, because Pandora does not pay artists. Pandora pays SoundExchange.

But the post was already sending mixed messages. The title of the post is "Pandora and Artist Payments." The title and the contents of the post would lead any reasonable person without - and anyone with knowledge of the compulsory webcasting license - to believe Pandora will make these payments, in these amounts, directly to artists. As I'll explain below, that's exactly how blogs covering the post interpreted the numbers.

The post went on to specify how much in royalties Pandora is already paying for artists like Coldplay and Adele ($1 million each) and Drake and Lil Wayne ($3 million annually each). Again, Pandora worded the message to say the artists' songs generated those amounts of money. The wording is correct, but a reasonable person would have come away thinking those artists are receiving the amounts stated.

Later in the day, Pandora chief technology officer Tom Conrad crossed that fine line between technically correct and inaccurate. Conrad tweeted that Pandora is paying $670,000 per year to Rascal Flatts, $173,000 a year to Iron and Wine, $135,000 to Bon Iver, $574,00 to the Zac Brown Band, $609,000 to Ellie Goulding and $523,000 to Mumford and Sons. These numbers were included at the bottom of the "Pandora and Artist Payments" post, although the original post did not make Conrad's mistake.

There's little doubt Conrad know the details of the compulsory license and SoundExchange's payments to sound-recording owners and performing artists. A Pandora spokesperson told Billboard.biz Conrad had "mistweeted." (Conrad noted how SoundExchange pays out royalties to sound recording owners and artists in follow-up tweets.)

Many of the reports on this story got it wrong. TechCrunch had a typical interpretation. It wrote that "over 2,000 artists will earn over $10,000 in the next year from Pandora" and "extremely popular artists Drake and Lil Wayne are nearing a $3 million annual rate each." The headline at Mashable read, "Pandora Reveals How Much It Pays Artists."

Pandora does not pay artists - not directly. Because Pandora takes advantage of the Section 114 compulsory license for webcasters, the company pays all royalties for the performance of sound recordings to SoundExchange, the organization that collects digital performance royalties on behalf of sound recording owners and performing artists.

Here's how SoundExchange distributes net royalties: 50% to the owner of the sound recording, 45% to the performing artist and 5% to the session musicians and backup singers. Net royalties are royalties less SoundExchange's administration fee, which was 5.3% in 2011.

Pandora also pays performing rights organizations (PROs) for the performance of the songs' underlying compositions. In the U.S., PROs represent 4% of Pandora's revenue. But a Pandora spokesperson told Billboard.biz the figures shared by the company Tuesday represent only payments to SoundExchange.

Compare Pandora's numbers to what artists are actually receiving.

If Pandora pays $100,228 (the number cited in Pandora's blog post) over the next 12 months to stream the music of Donnie McClurkin, only $42,712 will go directly to McClurkin as the performing artist. McClurkin will not receive the share given to the owner of the sound recordings, since he has released albums on Warner Alliance, Verity Records and Zomba Label Group. Those labels will split $52,204. Other musicians and backup singers will receive $4,746.

If the music of Drake, for example, generates performance royalties of almost $3 million annually, as the "Pandora and Artist Payments" post claims, Drake would get $1,278,450 as the performing artist. The label would get $1,562,550. Other musicians get $142,050.

An artist that owns the sound recordings would get both the label and the performing-artist share paid to SoundExchange. The examples Pandora gave are all affiliated with record labels.

This is a complex and often confusing topic. People who work in webcasting are familiar with the issues; people who cover the business are better than others at sifting through these finer points. But the average person in the music business may not know when something like Conrad's tweet fails to pass the sniff test.

In a conversation Wednesday about the blog post, Westergren said the issue of how artists get paid is connected to the compulsory license Pandora depends on. He said some of his opponents would be happy to get rid of the compulsory license and require Pandora to negotiate direct licenses. Without a compulsory license, artists would not be paid 45% of net royalties through SoundExchange. Instead, performance royalties would be streamed through labels' accounting systems. "Artists are much better taken care of in a compulsory-licensing situation," he told me. "Very few people understand that."

Pandora should get credit for a highly effective publicity campaign that got people talking Tuesday. And, as Westergren noted, even half of some of those multi-million dollar figures are still big amounts, which are certain to grow larger as Internet radio grows. But Pandora shouldn't be given credit for money that won't end up in artists' pockets.

Questions? Comments? Let us know: @billboardbiz

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