Pandora Buys Terrestrial Radio Station in South Dakota, Aims for Lower ASCAP Royalties

Pandora has purchased radio station KXMZ-FM, 102.7 in Rapid City, South Dakota (Screen shot)

Internet radio giant Pandora is taking an innovative route to lower ASCAP fees: The purchase of a small-market terrestrial radio station. The company announced Tuesday it has purchased KXMZ-FM in Rapid City, South Dakota. Terms of the deal, which closed last Wednesday, were not disclosed.
KXMZ gives Pandora few listeners. The station is in the country's 255th largest radio market in the spring, according to Arbitron. Its radio market had a population of 108,000 in the spring. Rapid City itself has a population of roughly 70,000. Over 70 million people listen to Pandora's Internet radio service every month.
But the purchase is a strategic move for the leading Internet radio service in the United States. Pandora acquired the station in an attempt to take advantage of the performance royalty fees available to broadcast radio stations and Internet radio services operated by owners of broadcast radio stations.
In an op-ed published Tuesday and shared with Billboard in advance, Christopher Harrison, assistant general counsel at Pandora, says a motion filed Tuesday provides examples of how ASCAP has violated the terms of its antitrust consent decree. He says the performing rights organization has allowed publishers to withdraw their catalogs from ASCAP's license for Pandora while making them available to other Internet radio services.
Harrison mentions one episode related to EMI Music Publishing's withdrawal of new media rights last year. He claims ASCAP and EMI "increased pressure" during Pandora's direct negotiations with EMI "by refusing to provide Pandora with the list of tracks that were being withdrawn," which exposed Pandora to a huge copyright infringement liability.
In November, Pandora filed a complaint in federal district court that sought an adjustable-fee blanket license with terms available to Internet radio services under the settlement between the Radio Music Licensing Committee (RMLC) and ASCAP in 2012. That settlement covers both broadcast and Internet performance royalties and sets a blanket license fee of 1.7% of a licensee's gross revenue less standard deductions (12% of revenue for broadcast stations, 25% for Internet services). The RMLC represents the majority of radio stations in the U.S.
A broadcaster covered by the RMLC is able to also offer a standalone, non-interactive Internet radio service that is covered by the RMLC rates and deductions. The motion notes that Clear Channel is able to pay the RMLC rates for iHeartRadio, Pandora's biggest Internet radio competitor.
A shift to RMLC rates would represent big savings. Performance royalties for BMI, SESAC, ASCAP, EMI and Sony/ATV repertoire accounted for 4.3% of revenue in the fiscal year ended January 31.
But November's petition states that ASCAP has not given Pandora either the RMLC's percent-of-revenue royalty rate or the 25% standard deduction available to Internet radio services. Instead, according to the motion, ASCAP believes Pandora should receive a 15% deduction applicable to agency sales commissions. Pandora generates advertising primarily through an in-house sales team.
Pandora also seeks rates that take into account any direct licenses with publishers who have withdrawn new media rights from ASCAP. BMG/Chrysalis, Universal Music Publishing and Warner/Chappell Music Publishing have notified ASCAP they intend to withdraw new media rights on July 1. Kobalt Music Publishing and Ruminating Music plan to withdraw on October 1. Sea Gayle Music Publishing will follow on January 1, 2014.
Through 2010, Pandora had operated under ASCAP's Experimental License Agreement for Internet Sites and Services from 2005. November’s complaint calls the Experimental License a "non-negotiable" license that became "ill-suited" as the company grew. It terminated that license in December 2010 and applied for an ASCAP license in January 2011.
ASCAP's refusal to offer RMLC terms "flies in the face of recent ASCAP Rate Court jurisprudence," the petition reads. "This Court and the Second Circuit have made clear there is no basis for discriminating among licensees offering the same or substantially similar programming based on the manner by which licensees distribute their product to end users."
Industry reaction to Pandora's November lawsuit was harsh. David Israelite, president and CEO of the National Music Publishers' Association, said it was "outrageous" for Pandora to attempt to "reduce the already nominal amount they pay songwriters and music publishers" for the performance of their works. 
Pandora has also pursued lower royalty rates for sound recordings. Last year it supported the Internet Radio Fairness Act (IRFA), legislation that would change the standard by which the Copyright Royalty Board sets statutory royalty rates. IRFA expired in January at the end of the last Congress. A similar bill is expected to be introduced this year.
The acquisition of KXMZ was rooted in royalties, but the deal effectively begins an experiment in radio programming. Pandora already has 42,000 listeners amongst Rapid City's population of roughly 70,000. Harrison writes that KXMZ "will apply Pandora's insights and listening habits to program music that accurately reflects local listeners' evolving tastes." KXMZ has an adult hits format. Pandora tells Billboard the station's format will not be changed as a result of the acquisition.