A Deep Dive Into Pandora's Payments to Publishers
Those who read through Judge Louis Stanton's decision on the court battle between performance rights organization BMI and Internet radio giant Pandora, wherein Stanton decided that Pandora will pay 2.5 percent of its annual revenue to the PRO. The decision tosses out terms like headline rate, effective rate, industrywide rate, and BMI-adjusted rates, sometimes using those terms interchangeably.
In sorting all of this out, the headline rate, or "the public rate" -- as a result of Sony/ATV, Universal Music Publishing Group and BMG withdrawing and cutting some kind of direct deals with the custom service, in conjunction with Judge Louis Stanton's ruling -- Billboard estimates that Pandora had to pay $49.6 million, or 5.39 percent of its revenue, to music publishers last year, on total revenues of $920.8 million.
Overall, Pandora's 5.39 percent rate means that U.S. publishers are no longer at a such a large disadvantage in terms of revenues, when compared against the revenues collected by labels. In 2012, Pandora's acquisition cost, i.e. royalty payments to labels and publishers, totaled 55.9 percent of revenue, of which publishing accounted for 4 percent and record labels accounted for nearly 52 percent. (This is the 13-to-1 revenue ratio, loathed and often quoted by publishing representatives.) That ratio now stands at 7.5-to-1 -- in 2014 Pandora paid 40.48 percent of its revenue to labels.
Before Judge Stanton's decision was released, Pandora said it was paying 4 percent of revenue in 2014 to publishers, according to the company's financial filings. This means the company's 2015 payout will not only need to accommodate the higher rates set by Stanton, but that it may have to play catch up with what it should have paid (some) publishers last year.
Here, Billboard's estimates of what Pandora should have paid publishers during 2014 -- in all cases, the actual revenue percentages are far lower than their headline rates.
Headline rate: 8.5 percent of revenue
Effective rate: 3.825 percent of revenue
UMPG minimum floor: $5 million
Estimated royally paid to UMG and its songwriters: $6.34 million
Actual percentage of Pandora revenue: 0.69 percent.
Headline rate of 5.56 percent
Effective rate of 2.5 percent
Estimated royalty payment from Pandora to BMI and its songwriters: $19.13 million
Actual percentage of Pandora revenue paid to BMI, after carve outs: 2.08 percent
Headline rate of 6.46 percent
Effective rate of 2.9 percent
Estimated royalty payment from BMI songs to Sony/ATV and its songwriters: $6.3 million
Actual percentage of Pandora revenue: 0.69 percent (0.24 percent for $2.25 million and (0.45 percent for ASCAP payment)
Headline rate of 6 percent.
Effective rate of 2.7 percent
Estimated royalty payment from BMI songs to BMG and its songwriters: $1.17 million
Actual percentage of Pandora revenue: 0.19 percent (0.12 percent for $1.15 million payment and 0.07 percent for BMI payment to BMG)
Headline rate of 4.11 percent.
Effective rate of 1.85 percent
Estimated royalty payment from Pandora to ASCAP and its songwriters: $17.03 million
Actual percentage of Pandora revenue: 1.85 percent
Headline rate of 4 percent
Effective rate of 0.4 percent
Estimated royalty payment from Pandora to SESAC and its songwriters: $3.68 million
Actual percentage of Pandora revenue that SESAC payment represents: 0.4 percent
Total estimated payout by Pandora: $49.6 million.
Total estimated percentage of Pandora revenue: 5.39 percent.
For readers who want to see the math behind the estimates, read on...
On the last day of 2013, UMPG and Pandora agreed to a deal that would see the music service pay the publisher a headline rate of 8.5 percent, and an effective rate (also known as a "BMI-adjusted rate") of 3.825 percent, which came with a minimum guarantee of $5 million and/or a guaranteed market-share floor of 15 percent -- whichever pays more.
In this instance, that 8.5 percent headline rate means UMPG would receive its pro-rata share of 8.5 percent of Pandora revenue. To arrive at the BMI-adjusted rate, realize that BMI has a 45 percent market share, as does ASCAP, and SESAC holds a 10 percent market share. So UMPG's "BMI-adjusted rate" means the PRO's market share of 45 percent is applied against the 8.5 percent "headline rate," (or 0.45 x 0.085), equaling an "effective rate" of 3.825 percent.
Using those numbers, multiplying UMPG's market share of 18 percent against Pandora's revenue of $920.8 million, and then further multiplying that result by UMPG's effective rate of 3.825 percent, the publisher should receive about $6.34 million for its direct license with Pandora for 2014.
Sony/ATV and BMG
Let's look at some things in Stanton's decision that aren't so obvious. For one, even though Stanton cited a direct deal between Pandora and Sony/ATV in his decision, and that company's EMI Music Publishing-administered catalog as a benchmark rate, Sony/ATV and Pandora never actually struck a direct deal with a license rate.
In December of 2013, Judge Stanton ruled that the publishers either had to be all-in or all-out of the PROs, and were not allowed to withdraw only their digital rights (the ones that concern Pandora). Consequently, Stanton said those publishers that had withdrawn digital rights -- Sony/ATV, UMPG and BMG -- were completely out of BMI. While Sony/ATV never cut a deal with a rate, it did reach a stand-still agreement that allowed Pandora to play Sony/ATV songs without fear of a copyright lawsuit. In exchange, Pandora agreed to pay Sony/ATV $2.25 million in the first and second quarters of 2014, with that payment being adjusted upward to reflect Pandora's growth in the third and fourth quarters.
However, after collecting its $2.25 million stand-alone fee for the first quarter, Sony/ATV went back under the blanket license of BMI near the end of January. Beginning in Feb. 2014 and lasting through the end of Pandora's license with BMI on Dec. 31, 2016, Sony/ATV will receive a pro-rata share of the 2.5 percent revenue that Stanton ruled for BMI.
Meanwhile, BMG had a different experience than Sony/ATV and UMPG. Pandora executives decided that if they took the interpretation that it could play BMG songs with multiple songwriters and mulitple publishers through the licenses supplied by the other publishers that had a stake in those songs -- it didn't have to do a deal with BMG and could then pull down all songs fully controlled by BMG, which according to court testimony amounted to 1 percent of the music Pandora played.
For the first six months of 2014, Pandora did not play any songs fully controlled by BMG. In the end, BMG signed a direct deal with Pandora, beginning Jul. 1, 2014, with the music service agreeing to pay $1.15 million for the second half of that year to license BMG songs.
(In 2015, BMG was due to get $1.15 million in the first half of the year and $1.9 million in the second, totaling $3.05 million; and another payment of $1.9 million to be made in the first half of 2016, with the license apparently ending on June 30, 2016.)
So there you have it: Sony/ATV was out of BMI's blanket license for January of 2014 while BMG was out of BMI's blanket license for the second half of 2014. With Sony/ATV and BMI out for those periods, and UMPG out for the whole year, the formula to determine royalties for the BMI adjustable license kicks in that is built around a floor for BMI revenue and additional administrative fee to manage the adjustable license; and BMI market share carve-outs to reflect the withdrawn publisher's songs. That formula provides an alternative payment structure to the Stanton decision that BMI should be paid a royalty rate of 2.5 percent, or $23 million, out of Pandora's $920.8 million revenue for the year.
BMI Formula for adjustable rate, and the math behind it:
BMI awarded a 2.5 percent rate of $920.8 million, equaling $23.02 million.
The adjustable rate license allows for a BMG 10 percent floor (10 percent of $23 million), or $2.3 million; and an administrative fee of 3 percent (of $23 million), or $690,000.
Carve-outs for UMPG, Sony/ATV and BMG: 100 percent, minus 18 percent (UMPG); minus 3.45 percent (half of BMG's 6.9 percent in market share)minus 1.95 percent (one-twelfth of SATV 23.4 percent market share for not being in blanket license in January 2014), leaves BMI with 76.4 percent of its market share to use in the formula.
Deductions from Pandora revenue: The BMI/Pandora license allows the music service revenue deductions for costs associated with fees paid to outside third agents that sell advertising for the service. According to knowledgeable sources Pandora's outside third parties generate about 7.5 percent of Pandora advertising revenue of $743.4 million, which means $54.9 million can be deducted from Pandora revenue.
In order to not double count the BMI floor payment and administrative fee, the $23 million also needs to be deducted.
Those deductions bring Pandora's total revenue of $920.8 million down to a $842.5 million in base revenue for the BMI deal.
Applying carveout of 76.6 percent against Pandora revenue of $842.5 million after deductions, and multiplied by 2.5 percent rate means Pandora will pay BMI $16.14 million. When added to the 10 percent floor ($2.3 million) and 3 percent admin fee ($690,000), BMI's total payout in 2014 is $19.13 million.
Since Sony/ATV was in BMI's blanket license for 11 months and had a market share of 23.4 percent, that means it will get about $4.04 million from the $19.13 million BMI will collect from Pandora. ((23.4 percent x $19.13 million) x 11 / 12).
If you add that to the $2.25 million that it got for its stand-still agreement with Pandora that means Sony will get $6.3 million in total from its music plays on Pandora.
BMG gets $1.15 million for direct deal with Pandora for the second half of 2014. Judge Stanton said that payment translated into a an effective rate of 1.81 percent, which allows you to back out to market share of 6.9 percent. But Pandora didn't play those songs solely controlled by BMG (1 percent of Pandora plays), which means that BMG had 5.9 percent market share in the first half of the year. Cut that in half to 2.95 percent to represent the half year BMG was under the BMI blanket license, that means that the publisher will get $564,000 from BMI's $19.31 million payout (2.95 percent x $19.13 million). Adding the $1.15 million for the second half of 2014, BMG and its songwriters were scheduled to receive $1.71 billion for its BMI repertoire in 2014.
One knowledgable source disputes UMPG's market share, saying it was 14.8 percent, so the 15 percent floor would kick in. If that's the case, its payout would come to $$5.28 million (15 percent x $920.8 million x 3.825 percent), and that payment equals (0.57 percent) of Pandora revenue. If that's the case, BMI's market share for the would adjust to 79.6 percent of revenue and its remainder payout would be $16.77 million and a total payout of $19.77 million or 2.15 percent of Pandora revenue, while Pandora's total payout would fall slightly to 5.34 percent.
All estimated payout to publishers and songwriters are before the BMI administrative fee kicks in.