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Record Labels Screw Pandora, Spotify, Artists, Consumers Every Day

Stocks in this article: P NFLX SIRI

Pandora pays music royalties via a compulsory licensing scheme. That means the rate it pays is set by a regulatory agency. Spotify, like Netflix, uses direct licensing, meaning it negotiates directly with labels. Irrespective of who you think employs the better model, the labels ultimately give both companies the shaft.

As Pandora's fight plays out in Congress (it wants a more equitable royalty rate come 2015), Spotify should back its competitor. At day's end, compulsory licensing -- as structured today -- and direct licensing both stink. We need a fair rate across the board no matter how you choose to deliver your music.

The one thing few people talk about -- though Tullo brought it up with respect to Adele -- is that the streamers, particularly Pandora, have more leverage than the labels give them credit for.

Those optimistic music sales figures CNBC's Amanda Drury spoke of as she introduced Tullo? Thank Pandora, Spotify and other Internet radio entities for driving that action. And both companies provide a voice to thousands of artists (A) the music labels have no time for and (B) the traditional models of terrestrial and Sirius XM (SIRI) never touch.

With reasonable cost structures, companies such as Pandora and Spotify can cut loose and innovate. And that will be good for musicians -- large and small -- as well as music lovers.

As I explained earlier this year, expect Pandora to eventually branch out into local concert promotion.

The company, however, can't juggle too many balls in the air at once with the royalty situation going forward undecided. Congress needs to deal with it this year, pre-emptively, so we can get on with business and bust the broken model the record labels so desperately wish to hold onto.

-- Written by Rocco Pendola in Santa Monica, Calif.

Rocco Pendola is TheStreet's Director of Social Media. Pendola's daily contributions to TheStreet frequently appear on CNBC and at various top online properties, such as Forbes.
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