Pandora Gets Encouraging Sign on New Copyright Fee Structure

Pandora received a ruling from a copyright regulator that makes it more likely the Copyright Royalty Board will set a streaming fee structure for 2016-2020 to its liking.
By Leon Lazaroff ,

Pandora Media (P) has many hurdles to climb to convince investors that it's building a viable business.

There's competition with its chief rivals, Spotify and Apple (AAPL) - Get Report Music, and then there's questions about the growth of radio advertising as well as the potential for building a non-commercial subscription service.

But before Pandora can move forward on either, it has to get beyond concerns that the Copyright Royalty Board could set rules for the 2016-2020 period that would cut into revenue at the Internet streaming service's platform. 

On Friday, Pandora said it received a ruling that could help push the the copyright board, which is expected to make a final decision in mid-December, to establish a rate structure more to its liking. The Internet music platform also received a boost on Friday after announcing that pop singer Adele agreed to allow her new album 25 to be streamed on Pandora. Spotify and Apple Music had yet to secure streaming of 25, reportedEntertainment Weekly.

Adele had balked at allowing Pandora and other streaming services from playing her new album, preferring that fans buy it instead.

As for the matter of music royalties, Pandora, in a statement, said the Register of Copyrights ruled that it couldn't offer an opinion that would counter the current "non-differentiated rate structure for licensors," in other words, a fee structure that pays all artists and labels an equal amount per streamed song rather than a differentiated rate that might require hundreds of separate negotiations.

Additionally, Pandora is pushing for rates below those supported by SoundExchange, the Washington-based organization that acts as a conduit between streaming services on one side, and music labels and artists on the other.

"The copyright board seems to be, if not outright endorsing Pandora's view, basically they saying they don't think there's any basis in having a differentiated royalty structure, which is what Pandora has been arguing," said Paul Verna, a media analyst at eMarketer. "A significant increase in the rate could be the difference between profitability and non-profitability, and it's in Pandora's best interests to keep these rates as low as possible."

And for Pandora, profitability would be a welcomed change. The streaming service posted negative earnings in the first three quarters of 2015 because of legal settlements with the music industry. During the third quarter, Pandora was forced to pay the music industry $81.8 million to settle disputes. Excluding those charges, Pandora reported operating earnings of 10 cents per share for the third quarter.

Unlike Spotify and Apple, Pandora wants to pay music labels a statutory rate rather than a commercial rate that is negotiated with individual record companies. That's because Pandora views itself as competing directly with terrestrial radio stations rather than so-called on-demand streaming services such as Spotify, Apple or Alphabet's (GOOG) - Get Report YouTube which allow users to individually select songs to play. 

Pandora operates a curated listening platform whereby they play songs based on a users selection of a musician or genre.

There are exceptions to that structure. Earlier this month, Pandora signed a direct licensing contract with Sony/ATV music publishing, the largest music publisher in the world. The deal was aimed in part at improving Pandora's relationship with the music industry that has repeatedly charged the Internet streaming service with underpaying artists.

Sony/ATV, which represents stars such as Bob Dylan, Lady Gaga and Pharrell Williams, argues that streaming rates for top artists should be higher on a per song basis than those for lesser-known artists. Pandora has countered that artists that receive more streams, would naturally be paid more.

"There's an increasing tension between rights holders, who want to negotiate the best possible deals, versus the collective framework [SoundExchange] which the labels don't like too much because it doesn't allow them to have a direct commercial relationship with Pandora," Mark Mulligan, a digital media analyst with Midia Research, said in a phone interview from London.

Pandora said that the Register determined that because all participants in the proceedings had assumed a "non-differentiated rate structure," that a uniform framework was the only reasonable outcome of the proceedings.

Shares of Oakland-based Pandora were gaining 4.8% on the announcement, rising to $13.85 and trimming its 2015 decline to 24%.

A final ruling would apply to all streaming services including Spotify, Apple Music and YouTube for songs not covered by contracts with individual music labels.

Loading ...