But SoundExchange, the organization that collects royalties from non-interactive digital services and distributes them to artists and rights holders, counters that the ruling is not fair to artists. “We believe the rates set by the CRB do not reflect a market price for music and will erode the value of music in our economy,” the organization said in a statement. “We will review the decision closely and consider all of our options… As music advocates, SoundExchange represents the entire recorded music industry and we remain united on the principle that recording artists and rights owners deserve a fair market rate when their music is used.”
Pandora, the biggest player in terms of payments to SoundExchange, came out pretty well in the proceedings and may have emerged as the "winner," in spite of a big jump in payouts next year. The company's ad-supported service, categorized as a commercial non-subscription service by the CRB, will pay a rate of $0.0017 per play in 2016, an increase of 21.4 percent from its current rate of $0.0014. This will be great for labels in 2016, but what happens from 2017 to 2020 may not be.
During a Wednesday evening conference call, Pandora executives expressed their pleasure with the CRB's decision. CEO Brian McAndrews called the increase "reasonable" while CFO Mike Herring said the rate hike "is manageable and we can operate effectively in 2016 and beyond."
The change between 2015 and 2016 rates works out to be a 15 percent increase in payments by Pandora to SoundExchange, according to numbers Pandora shared Wednesday. Assuming 2016 rates were paid for streaming activity in the first three quarters of 2015, total content costs would have risen 10.6 percent to $517.0 million from $467.4 million. Counting its settlement over pre-1972 recordings and other costs, Pandora's total content costs as a percent of revenue would rise to 62.4 percent, from 56.5 percent.
But the ruling becomes more favorable for Pandora in the later years. In an unprecedented move, the CRB Judges didn’t provide annual increases to royalty payments as they have done in the past. Instead, the annual rate change wll be determined by the change in the Consumer Price Index. That component of the CRB rates determination could offset any rate increases' effect on labels' bottom lines, leading one label executive to call the overall ruling “net positive by a hair.”
The likely result is no increase in the ad-supported rate, based on the low inflation environment tracked by the CPI in recent years. At the 0.5 percent rate the CPI has increased over the last 12 months, so the 2016 rate of $0.0017 would inch up to $0.0017085 in 2017 -- but because CRB had decreed that the increase has to be rounded to the nearest thousandth, there would be no rate increase at all.
That rate of change stands in stark contrast to steady, annual per-play royalty increases the industry has come to expect. SoundExchange had proposed to the CRB a $0.0001 annual increase on top of a rate of $0.0025. That's favorable for webcasters. As one label executive puts it, the potential for a static rate “sets a dangerous precedent.”
Another key change is the disappearance of a percent-of-revenue rate that's part of the rate schedule for "pureplay" webcasters like Pandora. A webcaster pays the statutory rate or 25 percent of revenue, whichever is greater. This two-tier rate was missing from the CRB's new rate schedule. Even though the pureplay license was known to be going away, the CRB was seeking a two-bucket royalty formula, one based on a per-play rate, and another bucket that they wanted to be as much as 55 percent of revenue.
iHeartRadio, the second-largest webcaster in the country, got a big win. Commercial webcasters, like web-based radio simulcasts and other ad-supported non-subscription services, will see their rates fall from $0.0024 in the current royalty scheme to $0.0017 in 2017, a drop of about 32 percent.
Pandora also gets a break, at least for songs heard by its subscribers. About 80 percent of Pandora’s revenue comes from its ad-supported model. The remaining 20 percent of its revenue comes from its subscription service that charges a fee to remove ads. Pandora CEO Brian McAndrews put the number of subscribers at 4 million in the company's conference call.
The CRB assigned a per-play rate of $0.0022 for subscription services in 2016. It's a healthy decline from the $0.0025 currently paid by Pandora and other pureplay webcasters and the $0.0024 paid by larger commercial webcasters. (Pandora had a different 2015 rate than commercial webcasters because "pureplay" webcasters reached a settlement with SoundExchange for lower rates after the CRB set rates 5 years ago. Webcasters that also have broadcast radio operations were not part of the settlement.) Either way, this is also seen as a win for Pandora and webcasters at the expense of the labels. Moreover, the commercial non-subscription service rate is also dependent on the CPI, which likely means the same rate could hold for all five years.
“We believe that the rates the CRB announced today will make it possible to spend more and drive more to build volume -- all of which will benefit the artists, the record labels, consumers and the entire music industry,” iHeartMedia said in a statement. “We look forward to working very closely with artists and our partners at the record labels to continue bringing their music to our audiences on whatever platform they want to use.”
SoundExchange believes the ruling is deeply disappointing because it gives broadcasters another unfair advantage. “In their terrestrial business they do not pay a dime for the recordings they use and now this $17 billion industry will receive an additional huge subsidy on the music they use in webcasting,” says the organization.
But not all webcasters see victory in the CRB determination. Kurt Hanson, CEO and founder of AccuRadio, says the new rates are good for the big webcasters like Pandora and iHeartRadio but not so good for smaller webcasters like AccuRadio. "My instincts are this is survivable for AccuRadio, and this is probably survivable for broadcasters that stream,” he says. “This certainly isn't going to lead to a vibrant webcasting industry, which would be good for musicians and labels."
But Hanson likes that rates will have smaller annual increases -- or sometimes no annual increase -- after a big jump in 2016. "If you can find a way to survive in 2016, you don't have a massive hurdle that increases each year,” Hansen adds.
Ultimately, though the record labels are the bigger loser in this round, they will get a second chance, at least with Pandora, when the custom radio service moves to expand beyond the U.S. market. When that happens, Pandora will have to cut direct deals for both publishing and recorded masters and the labels are expected to insist that the U.S. market be included in whatever deal is negotiated, so at that point, the rates set today by the CRB could become a moot point.
As one executive puts it, “We will all eventually be in direct deals with Pandora, so this ruling eventually will become less significant.” But that executive grouses that label expectations were undermined due to the direct deals done by Merlin with Pandora and the Warner Music Group with iHeartRadio for master recording sound performances. Whether that turns out to be a legitimate gripe will be seen when the CRB issues its full final ruling. The public won't get to see the report until the lawyers from each of the participating companies are done making redactions.