Pandora In Favor Of New Internet Royalty Bill, Analyst Says They Should Pay More
September 25, 2012
On Friday, new bipartisan legislation was introduced to Congress, which could lower Internet radio royalty rates for music. The Internet Radio Fairness Act would categorize Internet radio under the same standards used to set royalty rates for other digital services such as satellite radio or cable. The NAB and Clear Channel, among others, have spoken out in favor of the bill.
Pandora has also thrown its weight behind the legislation, as the popular digital music service released a statement from founder Tim Westergren. In the letter, Westergren says that Internet radio is subject to "discriminatory" standards by government regulators, but the new legislation will help end this practice.
Westergren wrote, "as a result of legislative and legal strong-arming done over a decade ago by the RIAA, internet radio is subject to its own, very discriminatory standard. The resulting bias is staggering. To give you an idea, last year Pandora paid about half of all its revenue in performance fees alone. In that same year, SiriusXM paid 7.5%. No radio service anywhere in the world pays more than 15% of its revenue in such royalties. The anti-internet bias in federal law is nothing short of absurd. The Internet Radio Fairness Act will address this discrimination by extending to internet radio the same standard used to determine virtually all copyright rate-setting processes, including satellite and cable radio, allowing us to compete on a level playing field."
Meanwhile, a new report from BTIG claims that Pandora is not paying enough in royalties. In a posting from BTIG analyst Richard Greenfield, he says that "On the surface, the rates paid by Pandora and other online radio services appear onerous and in need of congressional relief. However, the reason why companies such as Pandora pay such high royalty rates as a percentage of revenues is because they severely limit audio advertising to protect the user experience and keep people on the platform. If Pandora ran several minutes of audio ads per hour (the way terrestrial radio does) vs. just a few 15 sec. spots, the percentage of revenues paid out as royalties would be dramatically lower and would be more in line with satellite radio or cable TV."
Greenfield objects to the new proposed legislation, adding, "Just consider how crazy this Internet Radio Fairness Act really is: Pandora chooses to not generate as much advertising revenue per streamed hour as it could to enhance the user experience and is capture share from terrestrial radio (based on lesser ad load), satellite radio and music downloading/playlist sites (iTunes). So Pandora is effectively asking the government to intervene and reduce its cost structure, helping it remain a viable business because it knows its business model only works while running limited advertising. Why should the U.S. government allow musicians to be harmed simply to help Pandora and its investors generate enhanced returns?"
He concludes, "If Congress acts to reduce fees on Pandora and Internet radio sites, we suspect the end result will be an even lower desire to generate revenues per streamed hour," adding, "We continue to believe Pandora’s royalty rates should be increasing, not decreasing, which would force them to either increase the ad load and survive at that ad load (with likely fewer users) or find other ways of generating revenue to sustain their service. [Or] Pandora may simply need a new business model if it hopes to exist long-term."