Pandora recently announced that it will be raising its monthly subscription prices for the first time since its 2009 launch – once again bemoaning the rising costs of music royalty payouts.
This whole matter is just two titans fighting about price; actually three titans, but the third one has been handcuffed.
Pandora wants market share and thus has priced their famous music streaming product ridiculously low. Social media posts abound where songwriters who write for the likes of Christina Aguilera complain about earning under $100 for over 6 million plays. But to Pandora stockholders (NYSE: P), this is just noise from pesky Occupy Wall Street drummers. In fact, the first place the Wall Street types think Pandora should go to cut costs is royalty payments. Why must music evolve beyond Michael Bolton?
On the artists’ side, the primary line of defense is being held by SoundExchange, who got an early win by analyzing the low prices Pandora was charging and deciding to charge them 50% of their revenue.
“We like what Pandora does; it’s a very exciting company.” Explained Michael Huppe, president of SoundExchange, “But if you remove the sound recordings from the mix, I would say the value proposition of Pandora drops off substantially.”
Pandora Founder Tim Westergren thinks this is unfair. “Satellite radio only pays 7.5% or 8% of their gross revenue, and broadcast radio is completely exempt.”
. “I like Tim–he’s a nice guy” says Huppe, “But it’s a bit disingenuous to simply look at percentage of revenue as a marker that you judge everything by…it’s not unusual for companies in the early stages to focus on things other than cash flow.”
Westergren can at least take solace that his royalty rate due to to ASCAP and BMI publishers is a meager 1.85% of his revenue. Of course those publishers are suing to receive more, but a Justice Department consent decree dating back to the anti-trust laws from 1941 has proved that to be difficult.
Adding salt to the wound, a New York district judge recently upheld the 1941 consent decree and reiterated that yes – ASCAP still has to grant licenses to businesses even when a rate cannot be negotiated. No – major publishers like EMI cannot pick up their toys and leave the party. And no – when the courts have to step in and arbitrate rate negotiations between Pandora and ASCAP the officials can’t reference rates that have been negotiated elsewhere. They must wear big, unflattering blinders.
My father once ventured that a wise company will never try to be the first to do something. It will instead copy a formula pioneered by a company that made all the mistakes and then “either do what they do…but better…..or do it somewhere else.”
I have to think that companies like Apple and Spotify, as they prepare and improve their own music streaming products, are busily sitting on the sidelines of this mess and taking copious notes; as Pandora’s box literally opens before their eyes.
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Mike Bielenberg is a professional musician and co-founder of http://www.musicrevolution.com, a production music marketplace with over 30,000 tracks online where media producers, video producers, filmmakers, game developers, businesses and other music buyers can license high-quality, affordable royalty-free music from an online community of musicians mbielenberg@musicrevolution.com. 
