The Publishers Fight Back

There is general resentment in the music industry that a company with $3.2 billion market capitalization pleads poverty with the public, Congress and the CRB. Many industry executives point out Pandora's management team is now made up of millionaires.

 

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Still, some see it all as business, nothing more. One executive says that while he doesn't agree with ­Pandora's attempt to get lower rates, he also says it's unfair to paint its team as greedy millionaires.

 

"I remember a lot of years when Pandora executives were looking for hotel special rates, couldn't afford to pay for dinner with other industry executives and were flying out on the red-eye to save one night hotel payment," that executive says. "They had an idea, worked hard and managed to hold on through tight financial times, and now they are being rewarded. That is the American dream. I don't begrudge them it."

Another industry executive sees Pandora's maneuvering in rate court and the CRB as "engaging the industry in a three-dimensional chess game" and labels Pandora "a worthy adversary."

In truth, the industry's opposition to IRFA marked a rare moment of true unity. Labels and publishers don't share common interests-or a tactical approach -- when it comes to Pandora. They're competing for the same pool of money. The publishers are outraged about the split favoring labels 13-1, and have taken the strongest actions.

For its part, Pandora seems to have been surprised by the publishers, who entered the IRFA skirmish despite the fact that it didn't directly effect them. Pandora maintains that it's just protecting itself from the music industry, particularly the trend of publishers withdrawing digital rights from the U.S. performance rights societies, ASCAP and BMI.

EMI withdrew some of its catalog in April 2012 from ASCAP, while Sony/ATV withdrew all its digital rights (including the remaining EMI rights) from ASCAP and BMI on Jan. 1. Meanwhile, Universal Music Publishing Group and BMG withdrew their respective digital rights from ASCAP on July 1, while Kobalt is scheduled to do so on Oct. 1. Warner/Chappell, which originally said it would withdraw from ASCAP on July 1, has postponed until Jan. 1, 2014. As for BMI, UMPG, BMG, Kobalt and Warner/Chappell have served notice that they intend to withdraw on Jan. 1, 2014, from that society.

Publishers feel that ASCAP and BMI can't realize market rates for licensing because both operate under consent decrees signed with the U.S. government. Because of the consent decree, once a service asks for a license, it's immediately allowed to begin playing music, even before rates are negotiated.

If rate negotiations prove fruitless, each performing rights organization has a federal rate court, both in the Southern District of New York, where a rate trial can be heard. Each has a separate judge assigned to one of the respective PROs, deciding on rates.

That's why the major music publishers began considering the direct licensing route. EMI Music Publishing began exploring that option in May 2011 and actually pulled its copyrights from ASCAP in April 2012, followed by Sony/ATV beginning Jan. 1, 2013. In the case of the latter, Sony/ATV negotiated a rate equivalent to 5% of revenue from Pandora, sources say, for its songs, an almost 25% improvement from the 4.1% the service had paid out in 2011.

Since then, UMPG also has negotiated a direct deal with Pandora, and sources say it achieved an even higher rate than the one paid to Sony.

Can iTunes Put Pandora In A Box? 

Even while it engages in direct negotiations with publishers, Pandora must have had its eye on another set of negotiations: Apple conversations with labels and publishers to launch iTunes Radio in the fall. The details, now that they are known, appear to actually have been designed to put Pandora in a box.

In looking to launch a service similar to Pandora’s, Apple engaged in direct licenses rather than a pure-play license under the Webcaster Settlement Act of 2009, which calls for a per-performance rate or 25% of overall company revenue, whichever is greater. In Apple’s case, 25% of company revenue would be $39 billion. Yet, even though Apple is obtaining direct licenses, it has agreed to a rate structure that some say is higher than Pandora’s. 

On the label side, while Pandora pays a rate of $0.0012 per play per listener or 25% of revenue, the rate Apple has agreed to pay is $0.0013 per play per listener, plus 15% of advertising revenue, against a minimum of 45% of revenue or $21.25 per 1,000 listening hours. The 45% of revenue minimum is almost double the 25% that Pandora would have to pay, assuming Pandora was able to grow its advertising and subscription revenue enough so that the revenue bucket would be bigger than the per-play rate.

From any angle, it looks more expensive than the Pandora rate. And from a Machiavellian viewpoint, it looks designed to ensure that Pandora’s royalty payments will be set higher at the next CRB rate determinations. 

Meanwhile, for publishers, as part of its iTunes Radio negotiations, Apple has agreed to direct deals with publishers that will pay a rate 10% of the pub service’s revenue, or double the rate Pandora pays. And this is something the publishers plan on introducing to the ASCAP and BMI rate courts. So far, Sony/ATV, including EMI Music Publishing; Warner/Chappell; UMPG; and BMI have signed the Apple deal.

In December—when Pandora was still negotiating with Sony/ATV and aware that direct negotiations were occurring between the majors and Apple—Pandora offered up a royalty rate to ASCAP that it says was substantially higher than the one it was then paying. While Pandora and ASCAP decline to identify that rate, some say that it amounted to about 4.7% of revenue, which represented a 14.6% increase, if the equivalent increase was offered to the other PROs. 

But ASCAP turned down that rate, to the disappointment of Pandora executives. Earlier, when EMI withdrew its digital rights, Pandora perceived it as an injustice. According to documents Pandora filed with the ASCAP rate court, ASCAP rewrote its bylaws so that publishers can pick and choose which digital services they can negotiate directly with. In other words, direct negotiations would only be used by the major music publishers with large services like Pandora and iTunes Radio, while all of their other competitors would still be able to get blanket licenses that included the large music publishers.

 

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