Pandora, Spotify and Royalties

Pandora LogoMusician David Lowery, author of the excellent blog The Trichordist, recently caused a stir by posting images from his songwriter royalty statement that shows, while Pandora played his best-known song over 1.1 million times in the past quarter, it only paid him $16.89 in royalties.

The song involved is “Low”, which Lowery helped write and perform as part of the band “Cracker”. Lowery notes that this only deals with this songwriter royalties, he says his performance royalties are higher, and that he only owns 40% of the song. That means Pandora paid $42.25 in songwriter royalties for all of the plays of the song.

Lowery’s move comes as Pink Floyd’s musicians united to pen an oped piece for USA Today blasting Pandora calling it a “royalty ripoff”, noting that the music streaming service is already laying ground work to petition the government to mandate lower royalty rates for itself.

For songwriters, the royalty rates are compulsory, meaning that they are written into the law and set by judges. Songwriters can not opt out of these licenses though, theoretically at least, those who wish to use music can negotiate for a lower rate.

However, songwriters fear that Pandora’s proposed legislation would cut their royalty rates by up to 85%. Pandora says that these cuts are necessary but songwriters feel that they are already being paid a mere pittance and that Pandora is not doing its part to grow its business and bring in more revenue.

So who is right? The problem is a tough one but the answer is important as it could define the future of music online.

Streaming Killed the Radio Star

The basics of the argument are fairly simple. Pandora claims that they pay so much in royalties that they don’t have enough left over to pay their expenses, causing them to lose millions per year. Musicians and songwriters, on the other hand, say that the royalties they are getting from Pandora are so small that they are already earning next to nothing from it.

For songwriters, when it comes to Internet streaming services, the royalties a service pays them is largely based on the revenue that the service receives. The more revenue a company brings in, the more it pays out in royalties.

Like any business, a music streaming service can bring in less in revenues than it has in expenses and lose money, which Pandora has been doing recently. Pandora argues that if less of its revenue was being taken out to pay royalties, it could more easily turn a profit and become self-sustaining.

Artists, however, wonder if Pandora is doing everything that it can to generate revenue and, instead, feel that Pandora is asking them to subsidize their service while they attempt to gain marketshare. For example, Lowery notes that Pandora only plays one minute of commercials per hour, compared to 13 minutes on Sirius XM.

Others, including commenters on Reddit and on Lowery’s post, note that Pandora’s listenership is different than Sirius XM’s, with each play on Sirius likely reaching a much larger audience.

However, this doesn’t explain Spotify, which has a very similar usage pattern, but paid close to the same royalties ($12.05 vs. $16.89) on about 10% of the plays (116,280 vs. 1,159,000).

In short, for each play of the song, Spotify paid about .01 of a cent versus Pandora, which paid about .0015 of a cent, less than 15% of the amount. Clearly, Spotify is doing a better job getting more value from each play than Pandora, though songwriters like Lowery are left to the whims of both due to compulsory licensing.

However, in the past year, Pandora has been pushing to pay even less. They’ve not only pushed the Internet Radio Fairness Act, which died last year, but also purchased a terrestrial radio station in hopes that they could take advantage of royalty agreements songwriters had reached with terrestrial radio stations and their Internet streaming offerings.

Pandora has shown signs that it plans to reintroduce a bill similar to the IRFA soon, including circulating a petition to musicians hoping to get artists to support it.

One thing is clear, Pandora is at war with musicians and songwriters and that puts it in a precarious position, being at odds with the very people who create its product. However, this isn’t a fight that’s likely to cool off any time soon. Both sides simply have too much at stake.

Why This Fight is So Hot

Internet streaming is the big battleground for the music industry right now and the reasons are clear simple: It’s likely the future of the music industry.

Recorded music sales started a precipitous decline starting in 2000 and had already gone down about 63% by 2009. Digital sales, as welcome as they have been, haven’t done much to offset the decline in CD sales. Piracy and a heavier emphasis on the purchase of singles have combined with other factors, including the economy, to devastate the industry.

This has caused many in the industry to take a long view on things and turn to streaming services, like Spotify and Pandora, not just as important ways for users to listen to music in the future, but as key components of their business model and revenue stream down the road.

This also explains why there’s been a pitted battle against Grooveshark and other streaming websites. Services like Grooveshark, which don’t pay a licensing fee to stream music, are a threat not just to the current business model, but to the future ones as well.

But if the legitimate services can’t or don’t provide enough in royalties, the transition to streaming services is only going to further the downward slide of the industry.

But perhaps worst of all is that these relationships can feel particularly exploitative. Where pirates will download and swap music files illegally for free, streaming services, have the potential to earn millions off the work of artists completely legally while only paying a pittance.

Because of this, artists are holding Pandora’s feet to the fire over royalties and pushing back against Pandora’s attempts to pay less. Even though it won’t make much of a difference to Lowery if he gets $2.25 instead of $15.00, it could mean a great deal if Pandora, and Internet streaming in general, becomes a larger and more important means of listening to music.

Bottom Line

In the end, there is no easy answer to this. Pandora is losing money and no company can stay open forever when it’s bleeding cash. Though the royalties Pandora pays are small from the artists’ perspective, they are still better than the royalties they would pay if closed, which would be none.

Still, now that the royalty war has been started, it’s heading to court and to the halls of Congress. For musicians and the music industry, this could easily be their most important fight ever. However, its crucial to find a way to set royalties that are sustainable for both sides. Either party could easily kill the goose the laid the golden egg.

But what are those royalties, I don’t have the answer. The industry is still budding and though the music industry is turning to streaming music as a business, streaming services have struggled to find what their model is going to be. That makes it difficult to set royalty rates because you’re trying to figure out what something will become down the road.

My only hope is that out of this tension comes a solution that everyone is happy with and paves the way for a new future for the music industry. While it’s a relationship that’s off to a rocky start, that doesn’t mean it still can’t build something great.

1 comments
Adam
Adam

Here's what I don't get...if Pandora is paying royalties to artists, why are they also paying royalties to record labels? Or do the record labels not represent the artists that get the small royalties?

I also don't get what the government has to do with it. Why are they setting prices for anything?

(By the way, I don't mean these as smartassed rhetorical questions...I really don't understand this one at all.)

formal