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Pandora-ASCAP Royalties Battle Far From Over

Stocks in this article: P AAPL

NEW YORK (TheStreet) -- The ruling in the case of Pandora  (P) vs. ASCAP Friday will likely not satisfy either side in the controversy regarding money paid to songwriters by streaming music services except to acknowledge the authority of a flawed system that has been in place for the last 73 years.

Since 1941, the Department of Justice has issued consent decrees governing the rate at which royalties are paid to publishers. The consent decree effectively formalizes a mutual agreement between the payers, including traditional radio and venues playing music, and collectors, usually rights organizations like ASCAP and BMI. A separate consent decree governs each medium -- thus, radio and streaming music pay separate rates.

In the current court case, Pandora, which currently pays 1.85% of revenue to ASCAP, sought a lower royalty payment of 1.7% to match that paid by radio, which it sees as its direct competitor. ASCAP on the other hand sought to have Pandora's rate raised over time to 3%, viewing its streaming services as distinct from radio. A victory for ASCAP would expand Pandora's outlays by millions of dollars each year and have powerful implications for other streaming players, including Spotify, Rdio and Songza.

While the decision Friday has remained sealed pending review by the parties, the overall ruling maintains the status quo, with Pandora continuing to pay 1.85% of revenue. In response, ASCAP CEO John LoFrumento Monday issued a statement that reads, in part:

"We are pleased the court recognized the need for Pandora to pay a higher rate than traditional radio stations. But recent agreements negotiated without the artificial constraints of a consent decree make clear that the market rate for Internet radio is substantially higher than 1.85%. And today's decision further demonstrates the need to review the entire regulatory structure, including the decades-old consent decrees that govern PRO licensing, to ensure they reflect the realities of today's music landscape."

Apple (AAPL) has made deals with labels and with publishing rights organizations that exceed the payment established by the consent decree for its iTunes Radio service to pay as much as 10% of revenue for publishing royalties, in return for a number of caveats. This is possible because the consent decree merely establishes a floor for fee structure. Apple, as a latecomer to the streaming sector and with plenty of money to invest, could afford to up the ante to secure its role as a key player. No doubt as part of that calculation, Apple's payment of higher royalties puts further pressure on younger, smaller companies like Pandora who have no revenue outside the streaming music space.

In an emailed response to TheStreet, Pandora declined to comment on the ruling until the details are publicly released. Asked to comment about the royalties structure in general, the company also declined. However, founder and then-CEO Tim Westergren wrote a blog post last summer outlining the company's views on the royalties landscape.

A similar case between Pandora and performing rights organization BMI is scheduled for trial later this year.

In a phone interview, Paula Savastano, a royalties expert in the music industry prior to launching her own music publishing company, the Philadelphia-based SSA Music, underscored the need for a complete overhaul of the system of royalties compensation.

"It's overly complex, definitely," Savastano said. "It's unfair to writers, publishers, artists and master owners simply because it's inconsistent in payment. If you look at royalty statements, somebody with radio play gets way more money than from Pandora, even if they get five times the plays on Pandora."

Part of the problem lies in the different delivery systems and the different formulas needed for calculating payments for each. Radio can reach millions of listeners each time song is played; the exact number of listeners is impossible to determine. By contrast, a spin on Pandora targets basically one listener. Payments to songwriters from Pandora will seem pathetically small when stacked up against radio, without taking those differences between listening audiences into consideration. A song played a million times on Pandora might be equivalent in terms of listeners to 10 plays on terrestrial radio. 

Ad-driven traditional radio still generates much greater revenue than ad-driven streaming media -- in the range of $17 billion per year, compared to less than a billion for streaming services. So numbers calculated as a percentage of revenue are going to be bigger on the radio side. Further complicating matters, in addition to publishing royalties, streaming services pay out performance royalties, while radio does not.

In both radio and streaming services, the percentage of royalties going to publishers and songwriters is relatively small. According to a New York Times article last month, Pandora paid an estimated $313 million in royalties in 2013, but only about $26 million went to publishers.

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