Why Pandora Isn’t Panicked About Its 20% Royalty Rate Hike

23 Dec 2015 | Author: | No comments yet »

Judges hike rates for music streamers; Pandora shares jump.

Coming up roses: Pandora, which lets users select stations reminiscent of traditional radio, remains the largest streaming site in the United States, even though Swedish-based Spotify leads on a global level. A panel of copyright judges on Wednesday raised the amount internet music streaming services like Pandora must pay to record labels next year and beyond.Royalties to be paid by music streaming giant Pandora will be increased by a smaller-than-expected amount next year — while iHeart Media will actually see its streaming royalty rate go down, according to a ruling on Wednesday by the government’s Copyright Royalty Board. The internet radio giant hailed the ruling as “balanced” and its shares jumped, but artist and label group SoundExchange decried the decision, saying it “will erode the value of music.” SoundExchange, which distributes payments to artists and labels, said it will closely review the decision and consider its options. The ruling by the three-judge panel, handed down after the markets closed, sent Pandora shares soaring as much as 20.5 percent in after-hours trading, to $16.20. “It’s the first time the CRB [a unit of the Library of Congress] has issued statutes that have been less than the prior term,” Tom Claps, a litigation analyst for Susquehanna Financial Group, told The Post. “In their terrestrial business they do not pay a dime for the recordings they use, and now this $17B industry will receive an additional huge subsidy on the music they use in webcasting.” The decision is bound to lead to complaints from more artists about being underpaid for their work, but streamers claim as the industry grows the revenue will become more meaningful.

Radio companies and the music industry had lobbied for sharply different schedules on payments, which are a major cost for Pandora and an important source of income for artists. Industry watchers had been closely watching the US government decision for clues on Internet radio’s future as royalties account for nearly half of Pandora’s expenses. The rate, is well under the US$0.25 (RM1.08) sought by SoundExchange, the royalty collection body established by major labels, which argued that digital music has become so mainstream that Pandora no longer needed any helping hand. Pandora had wanted the rate to be reduced to US$0.11 (47sen) but voiced confidence that the decision would still allow investment toward a “thriving and vibrant future for music.” “This is a balanced rate that we can work with and grow from,” Brian McAndrews, the California-based company’s chief executive officer, said in a statement.

SoundExchange repeated the industry’s decades-long complaints that terrestrial-based US radio stations are not required to pay artists anything at all. The board slightly lowered to US$0.22 (95sen) per 100 streams the rate on Internet broadcasters’ paid, subscription-based tiers, which accounts for a small portion of Pandora’s business. Pandora’s exposure to outside-set rates contrasts with rivals such as Spotify and Apple Music that offer on-demand music and negotiate directly with record labels. Pandora shares have taken a beating this year on fears for its long-term health, but the company has heartened markets late in the year by looking to diversify.

Rdio, which had tried aggressive promotion strategies before being bought, announced Wednesday that it would cease operations on Dec 22 as it is incorporated into Pandora. Regardless of the rate ruling, Pandora is seeking to expand its platform globally and to include more interactive features that go beyond its popular internet radio service, which doesn’t allow listeners to select specific tracks or albums. If the rates go up significantly, the company could find itself in an untenable position where it pays out more than it would like—or, after a point, more than it can afford.

The radio site this week also unveiled a new function to personalise musical selections automatically for listeners, in line with a popular function on Spotify. Pandora in October reached a settlement to pay US$90mil (RM388.30mil) for royalties of songs recorded before 1972, the date when US copyright protections took effect on the national level.

For years, Internet radio services have operated under two different rate systems: one for so-called pureplays like Pandora — businesses that operate mainly on the Internet — and another for traditional broadcasters like the radio giant iHeartMedia that also have web streams. So while Pandora’s rate for its free version — which has advertising — will increase to 17 cents from 14, for outlets like iHeartRadio, the rate will decline from 25 cents. The judges’ full decision is still confidential while it is being reviewed by the parties in the case, and is expected to be released in full in the coming days. To SoundExchange, Pandora is no longer a newcomer that needs help—it’s a music industry giant that should pay a fair price to artists. “As more and more consumers are turning to ‘access’ models as the ultimate place to acquire music, the rates must reflect this market reality,” says Michael Huppe, the president and CEO of SoundExchange. “All creators deserve fair compensation, whenever and wherever their music is used.” The overriding concern for Pandora, on the other hand, is its narrow margins.

Pandora is a public company with international expansion plans that wants to minimize costs as it acquires companies and continues to grow, even while paying a little less than half of its total revenue to labels and artists last year. In November, Pandora’s CFO Mike Herring said that if the copyright board raises rates by too much, the company’s ad-supported business will see losses. “In this scenario, having other revenue streams to focus on such as subscription businesses and live events promotion gains importance,” Herring said during the company’s earnings call. The company announced a new direct deal with Warner Music Group Tuesday, following a similar deal announced with Sony/ATV Publishing Group last month (after the company settled a $90 million lawsuit with labels over playing music that was made before 1972).

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