Business Matters: SOPA Delayed, Not Dead, After House Judiciary Committee Session Ends
Business Matters: SOPA Delayed, Not Dead, After House Judiciary Committee Session Ends

Weighing in on the debate over webcasting royalties, Washington D.C. think tank Brookings Institution has called for a different standard for setting digital performance royalties that would result in big cost savings for companies like Pandora.

"Digital Music Broadcast Royalties: The Case for a Level Playing Field," written by Brookings nonresident senior fellow John Villasenor, calls for the use of a different standard - the 801(b) standard used for satellite radio - when setting webcasting royalties. Under the existing "willing buyer, willing seller" standard, he writes, webcasters "face a particularly challenging royalty environment" and argues the low end of the webcaster settlement rates result in "extremely high royalty burdens."

The gist of the Villasenor paper - which happens to be Pandora's argument lately (more on that below) - is that more equal webcasting royalties will help profitability in Internet radio while encouraging new market entrants, stimulate innovation and grow the segment. These outcomes are possible because equal webcasting royalties will put Internet radio companies on a more equal footing, on a percent-of-revenue basis, with satellite radio and other digital services.

How royalties are set make a big difference. SiriusXM is paying 8% this year. Music Choice pays SoundExchange 2.5% of revenue to SoundExchange. Pandora pays out in excess of 50% of revenue to SoundExchange.

Changes in standards would have major implications. Internet radio companies like Pandora would spend far less on the performances of sound recordings. Lower spending by the likes of Pandora means less revenue for owners of sound recordings and artists (remember that artists are paid directly by SoundExchange even if they are unrecouped with their record labels) although part of the argument here is that lower royalties will actually help the Internet radio market grow.

The Brookings Institution is not alone in calling for the 801(b) standard to be applied when determining Internet radio royalties. Rep. Jason Chaffetz is reportedly working on a bill, Internet Radio Fairness Act 2012, that would call for the use of the 801(b) standard and thus lower Internet radio royalties paid to record labels and artists.

Pandora has been speaking up on this issue, too. "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 in July. Westergren said the same thing in Congressional testimony in June. But he's not talking about webcasters vs. satellite radio. Pandora believes Internet radio is being penalized relative to broadcast radio, too (broadcast radio is outside the scope of the Brookings paper, however).

This 28-page, technical paper will probably be cited more times that it's actually read. But the fact that a well-known think tank put out this paper speaks to the unique mix of popularity and gravity of this topic. Expect quite a fight as Pandora and 801(b) supporters to dig in their heels on this issue.