Digital royalties are back in the news after being a continuously hot topic in 2013.

An email exchange between artist and label owner Blake Morgan and Pandora founder Tim Westergren was seen in an article at the Huffington Post. Morgan told the Huffington Post in the third quarter of 2012 he received $1.62 in royalties for 27,900 spins on Pandora. He also took issue with Pandora's support of legislation that could lower the royalties it pays.
 
Morgan was reacting to an email sent by Westergren to express Pandora's support for artists. The email said the company's "goal is to make something ... that can materially impact the ability of artists to make a living." The pitch is a familiar one: Pandora has stepped up its talk of support for artists since the Internet Radio Fairness Act (IRFA) was introduced last year. The bill is likely to be introduced again this year.
 
The Huffington Post article highlights some common problems in this debate. Opponents say proposed legislation will succeed in reducing royalties by 85%. That's an unlikely scenario (and a popular talking point reiterated by Morgan) that assumes record labels and artists have no influence in Washington. Pandora is doing what every business does: try to obtain more favorable business terms. But Pandora will encounter a countervailing force as SoundExchange will try to obtain more favorable business terms for the RIAA and artists.
 
The numbers used in these debates sometimes seem a bit off. Let's look at the royalties received for 27,900 spins. Assuming Morgan is both performer (who gets 45% of royalties) and record label (who gets 50%), a payout based on the current pureplay statutory rate of 0.13 cents per stream would be $30.12 (calculated as 95% of the royalty after SoundExchange deducted its 2011 administration fee of 5.3%). If Morgan received royalties only as an artist, the amount would be $14.27. In either case, the $1.62 Morgan said he received for 27,900 streams (which works out to just 0.0058 cents per stream) is far less than the statutory rate.
 
A royalty of 0.0058 cents per stream is closer to a payout from either ASCAP or BMI, which cover sound recordings' underlying compositions, rather than SoundExchange, which distributes royalties related to the digital performance of sound recordings. Mixing up royalties from performance rights organizations (which get roughly 4% of Pandora's total royalties) and SoundExchange is not unheard of due to the complicated nature of digital royalties. Galaxie 500 made a similar mistake in its article at Pitchfork about its digital royalties.
 
It this debate it's important to distinguish between royalties paid for the sound recording and the composition. ASCAP and BMI would not be affected by the legislation Pandora has supported that could lower its royalty bills. The legislation would only impact the royalties paid to SoundExchange for the performance of sound recordings. However, it's not unimaginable those performance rights organizations and Sony/ATV Music Publishing (which deals directly with Pandora rather than go through a performance rights organization) will aim for a higher share of revenue if Pandora ends up paying less to record labels and performing artists through SoundExchange.  
 
In any case, per-stream royalty rates are low. They're low enough that Morgan won't make much at the current statutory rate at his current streaming volume. They're low enough that Morgan wouldn't make much if statutory rates were doubled or tripled. They're also low enough that Morgan wouldn't miss the royalties in the incredibly unlikely event they are lowered by 85% (although artists with more heavy activity would probably notice an 85% decline).
 
If artists dislike the current royalty scheme, they should consider venting at Congress rather than -- or in addition to -- Pandora and other Internet radio services. Congress established the compulsory license that allows digital services to offer non-interactive music streaming -- provided they pay a statutory per-stream royalty -- without negotiating directly with record labels. This system of rights and remuneration is nothing like the metaphor Morgan used to compare Pandora to a supermarket selling Del Monte green beans. If green beans were like Internet radio, the supermarket wouldn't need permission to stock Del Monte's product and it would pay a price set by a three-judge panel only for the cans actually sold.
 
Continuing the metaphor, people shouldn't blame the store for trying to obtain more favorable business terms. But the store certainly has a tough message to sell to the companies whose products keep it in business. 

Questions? Comments? Let us know: @billboardbiz

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