Pandora’s latest attempt to lower its royalty obligations is its most unconventional. The Internet radio giant has purchased adult top 40 KXMZ-FM Rapid City, S.D. Terms of the deal weren’t disclosed.
KXMZ is in the country’s 255th-largest radio market as of the spring ratings period, according to Arbitron, with a population of 108,000. Nearly 71 million people listen to Pandora’s Internet radio service every month.
But the purchase is a strategic move that Pandora hopes will help lower the price of the royalties that it pays to ASCAP, one of the major performing rights organizations in the United States. The company’s goal is to take advantage of a potential loophole in ASCAP performance royalty rules that offers lower fees to broadcast radio stations and the Internet radio services operated by owners of such stations. At the heart of the acquisition is Pandora’s desire for licensing terms that are available to many of its competitors. In November, Pandora filed a lawsuit in federal district court seeking an adjustable-fee blanket license with terms available to Internet radio services under the settlement between the Radio Music Licensing Committee and ASCAP in 2012. That settlement covers 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 United States.
A terrestrial broadcaster covered by the RMLC can also offer a stand-alone, non-interactive Internet radio service that enjoys RMLC rates and deductions. The November complaint notes that Clear Channel is able to pay RMLC rates for its iHeartRadio service, Pandora’s biggest Web radio competitor, and claims “there is no basis for discriminating” among similar types of music services or the way they distribute music to listeners.
ASCAP believes Internet and terrestrial radio “are very different businesses” that use music in different ways. “Pandora is trying every trick in the book to brazenly and unconscionably underpay and take advantage of the creative labor that produces the core offering of their business–music written by individual songwriters and composers,” ASCAP president Paul Williams says.
Pandora is also asking the court for rates that reflect any direct licenses with publishers that have withdrawn new-media rights from ASCAP. EMI Music Publishing and Pandora have already reached a deal. BMG/Chrysalis, Universal Music Publishing Group and Warner/Chappell have notified they intend to withdraw new-media rights on July 1. Kobalt Music Publishing plans to withdraw on Oct. 1, and Nashville-based Sea Gayle Music Publishing will follow on Jan. 1, 2014.
Lower rates would result in modest but important savings. Performance royalties for BMI, SESAC, ASCAP, EMI and Sony/ATV repertoire accounted for 4.3% of revenue in the fiscal year ended Jan. 31. In the Securities and Exchange Commission filing related to the KXMZ acquisition, Pandora said it believes that paying RMLC rates would result in savings of “less than 1% of revenue,” or less than $4.3 million in the last fiscal year. That level of savings would have reduced Pandora’s net loss in fiscal 2013 by roughly 9%.
National Music Publishers’ Assn. president/CEO David Israelite calls the acquisition “another sad step in Pandora’s escalating war on songwriters. While other digital partners are making voluntary deals, Pandora chooses to sue the very creators who make its business possible.”
Pandora has also pursued lower royalty rates for sound recordings. Last year it supported the Internet Radio Fairness Act, 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.