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The Deal: A Royalties Pain on the Air

Lowery represents a band of industry personalities that questions the whole foundation of licensing regimes, which govern the broadcast of music. Pretty much unique to music, revenue sharing and royalties are determined by a hodge-podge of courts and administrators, including a board of judges appointed by the Librarian of Congress.

It's a system cantilevered on a copyright platform from the early 1900s. One pillar is the compulsory or statutory licensing of music recordings. Compulsory licensing allows radio stations to play recorded music whether the performer agrees or not.

Pandora opted to use this regulatory framework in return for building in certain limitations in its personalized delivery system, including the number of times per hour it can play an individual artist on a particular channel. That's why, for example, a personalized "The Monkees" radio station on Pandora also broadcasts the Four Tops, the Rascals, the Beach Boys, the Beatles and the Mamas and the Papas.

Some major competitors in Internet streaming music services, notably Spotify, can offer an entire album on demand, say, "The Best of the Monkees Volume Two." That's because they don't rely on compulsory licenses, but instead have negotiated directly with rights holders. ITunes Radio is expected to follow Pandora's model.

On June 5, Pandora bought South Dakota's KXMZ-FM. In a filing with the SEC, Pandora maintained the acquisition would enable the company to lower royalties its pays songwriters, and was made with that specifically in mind.

The two major American organizations that collect royalties on behalf of songwriters and publishing houses were not amused. The American Society of Composers, Authors and Publishers, known as ASCAP, filed objections with the FCC.

On June 13, Broadcast Music Inc., or BMI, petitioned in the U.S. District Court, Southern District of New York that Pandora should increase the royalties it pays songwriters, not decrease them. While the suit doesn't address KXMZ directly, the implication is there. "We expect Pandora to claim that it is no different than commercial broadcast radio," BMI lawyers stated in their petition. "This contention is wrong."

A BMI spokesperson said the company wouldn't comment beyond legal filings.

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