Pandora's efforts to lower its royalty rates  have inspired conversation and controversy in recent weeks. This editorial by Justin Kalifowitz  -- president of Downtown Music Publishing  and co-founder / CEO of Songtrust , a royalty collection platform for music professionals -- presents a perspective from the publishing and songwriting communities. Billboard.biz welcomes responsible commentary - contact firstname.lastname@example.org for more information.
Last month, Internet radio service Pandora ramped up their campaign encouraging listeners to lobby Congress to reduce their royalty rates . Utilizing a dual strategy that has continued into October, Pandora has showcased the significant revenue they are apparently delivering to artists and record labels while claiming that their growing royalty obligations, which are government mandated, are unsustainable and may ultimately put them out of business.
Yet, one constituent -- the songwriter -- is largely left absent from the dialogue. And with good reason: the ratio of artist to songwriter royalties that Pandora pays is the lowest of any income type in the music business. According to figures provided to me by the National Music Publishers Association, for every dollar that Pandora pays to artists and labels, they pay just 8 cents to songwriters and their music publishers.
Compare this to other popular digital services such as iTunes downloads or Spotify streams, where songwriters and publishers receive 15 cents and 17.6 cents to the dollar respectively. With YouTube, the ratio is at 42 cents and satellite radio comes in at 50 cents on the dollar. These numbers (also provided by the NMPA) clearly illustrate why songwriters aren't singing along to Pandora's new tune.
Why aren't songwriters getting a better deal? Quite simply: leverage.
Pandora has two content costs: a license fee for the sound recordings (paid to artists and record labels) and a license fee for the underlying compositions of those sound recordings (paid to songwriters and music publishers).
The first license, relating to artists and record labels, requires Pandora to pay a 'per track' rate to SoundExchange, a non-profit organization that represents artists and record labels. These rates are determined by the Copyright Royalty Board.
The second license, relating to songwriters and music publishers, requires Pandora to actually negotiate a royalty rate with three U.S. performing rights organizations: ASCAP, BMI, and SESAC. However, ASCAP and BMI, the two largest, are bound by a consent decree entered into with the U.S. Department of Justice that prohibits them from withholding rights to their song catalogs -- irrespective of how happy they are with the rate Pandora wants to pay.
Though the benefits of negotiating on a collective basis would seem clear, this lack of leverage for ASCAP and BMI leaves over 1 million songwriters in the U.S. -- and their music publishers -- at a huge disadvantage. As David Israelite, President of the National Music Publishers Association, said , "Radio operators can walk in and get a license and then fight for years over what to pay. That can't continue."
Many analysts and reporters have commented on Pandora's recent initiatives to lobby Congress by calling their business model into question. It's true that, relative to satellite and terrestrial radio, Pandora pays substantially more in overall content costs, but as BTIG analyst Richard Greenfield noted : "The reason why companies such as Pandora pay such high royalty rates as a percentage of revenues is because they severely limit audio advertising to protect the user experience and keep people on the platform. If Pandora ran several minutes of audio ads per hour [as terrestrial radio does] versus just a few 15-second spots, the percentage of revenues paid out as royalties would be dramatically lower and would be more in line with satellite radio or cable TV."
Irrespective of how the business model pans out, one thing is clear: Songwriters and music publishers should demand a more equitable split of Pandora's content costs. One potential path that has been explored is for music publishers to pull their digital rights from ASCAP and BMI and negotiate with Pandora directly. EMI Music Publishing was the first major company to pursue this option and Sony/ATV, which represents the song catalogs of The Beatles, Michael Jackson and Lady Gaga, has signaled their intention to follow.
Without being subject to an overly burdensome consent decree, these rights holders could negotiate with Pandora on a free-market basis. Yet if tens of thousands of music publishers and songwriters each looked to license direct, Pandora would end up with a substantially more complicated (and perhaps more costly) licensing process, and also risk having a portion of their catalog withheld.
For Pandora to avoid this fate, and for songwriters and music publishers to continue to benefit from the efficiencies of collective licensing, all parties should be lobbying lawmakers to reconsider current regulation and foster an environment that delivers fair compensation to all parties in the value chain.