Pandora Fights Fees with Terrestrial Acquisition
Pandora may have most of its business operations in the cloud, but now that it's bought a land-based radio station, it gets to play by different royalty rules, which could significantly lower its costs. ASCAP is crying foul over the maneuver, but Pandora maintains the trade group discriminates against Internet services. That battle has yet to play out in the courts.
In an effort to manage acquisition fees, Pandora Radio has acquired a terrestrial radio station based in Rapid City, S.D. The move enables Pandora to be subject to licensing fees and royalties for broadcast radio stations rather than streaming stations.
Internet radio companies such as Pandora, Spotify, Rhapsody, Last.fm and others have struggled for several years to balance acquisition costs with revenues. Acquisition costs include royalties to performers or bands in addition to revenue shares to composers and songwriters, among other fees incurred as costs of doing business.
Subject to regulatory approval, Pandora will acquire KXMZ-FM. The deal lets Pandora take advantage of a loophole that puts it in a class with radio stations that stream music. Acquisition fees, particularly the songwriter and composer fees set by the American Society of Composers, Authors and Publishers, are higher for music streamed by Internet services than for terrestrial radio stations -- even when the music is streamed over the Internet by that station.
Pandora also has filed a motion in federal district court alleging that ASCAP has shown discriminatory treatment of Pandora and other Internet radio companies, largely by charging them higher rates than it requires of terrestrial radio stations.
Pieces of the Puzzle
"This is a purely economic issue," Parks Associates analyst Harry Wang told the E-Commerce Times. "You have this top-line growth in terms of service. Pandora monetizes by advertising, and a small portion that comes from subscription. The business has been growing over the past few years."
Competition has been building in the streaming music space. Just this week, Apple announced its new iTunes Radio service.
"Pandora is trying to lower the cost very cunningly by acquiring a terrestrial radio station, and can enjoy a different set of rules," said Wang.
Royalty rates differ based on the way music is delivered.
"The terrestrial radio industry worked out an arrangement with the composers' organization for all their activities, whether they are streaming or over the air, and that percentage is different from the composers' arrangement with Internet broadcasters," Mark Fratrik, VP and chief economist at BIA/Kelsey Group, told the E-Commerce Times. "So now Pandora is a broadcaster."
Even among streaming Internet services, different rates may apply.
"Everyone pays a different rate, and everyone tries to lower the rate," said Parks' Wang, noting that Google pays an even higher rate than Pandora for its on-demand music service.
Although the KXMZ-FM acquisition helps lower costs for Pandora, it affects just one rate component.
"The sound recordings royalties -- which are paid to SoundExchange -- remain the same," said Pandora spokesperson Mollie Starr.
"The public performance royalties -- paid to PROs like ASCAP and BMI -- will change to the Radio Marketing Licensing Committee rates for new media transmissions, which is 1.7 percent of revenue, less a deduction of 25 percent to account for the expenses of selling advertising, resulting in an effective rate of 1.275 percent," she explained.
"The RMLC rate for terrestrial transmission is effectively higher because the ad sales deduction is only 12 percent," Starr told the E-Commerce Times.
"The important thing -- and it shouldn't be overlooked -- is the issue that Pandora is solving is only in the licensing fee that gets paid to composers and songwriters," said BIA/Kelsey's Fratrik. "It isn't the performers."
As Pandora maneuvers to improve its position, ASCAP is drawing its own line in the sand.
"Songwriters and composers are struggling in the digital economy to be paid fairly for their creative work," said ASCAP President Paul Williams.
"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," he said. "Internet and traditional AM/FM radio services are very different businesses with different formats, using music in very different ways."
If Pandora's acquisition of KXMZ-FM is approved by the FTC, it will open the door for all kinds of questions going forward, suggested Parks' Wang.
"It definitely muddies the water a lot if Pandora prevails in this case," he said.
Still, "I don't think it's a game-changer," said BIA/Kelsey's Fratrik. "I do think it's a strategic move by Pandora to lower their costs."