Billboard Magazine Clueless On Pandora

NEW YORK (TheStreet) -- Union Square Ventures principal Fred Wilson maintains an excellent blog: AVC: musings of a VC in NYC If you invest, care about tech and enjoy learning, read Fred's blog. I do almost daily.

During a recent interview with Wilson, Bill Werde, editorial director at Billboard, gave the Internet radio royalty discussion, as it pertains to Pandora ( P), shockingly shallow treatment.

Wilson wrote about the exchange at his blog. He asks readers to skip to the 7:45 mark of a video that captured part one of the powwow.

I didn't think Billboard was a shill for the music industry, but after the way Werde not only disrespected, but blatantly mischaracterized Pandora, I have to wonder.

There's no excuse for this, particularly from a respected publication like Billboard that -- credibly and rightfully -- called Pandora co-founder Tim Westergren out for a blog post about how much his company compensates artists.

Werde compared Pandora to Live Nation ( LYV) because the two firms have similar market capitalizations. I know. I don't understand why either.

Echoing what he calls popular sentiment in the music industry, Werde refers to Live Nation as the product of "10, 15, 20 years of work" by some of the greatest minds in the business. (Giggle). He then falsely states that Pandora came "along relatively recently."

It's incredible, but Werde got everything wrong inside of roughly 15 seconds.

Pandora may have just gone public, but it has been around, as a company, since its December 1999 founding. Westergren and Will Glaser came up with the Music Genome Project -- the proprietary technology that powers personalization and discovery on Pandora -- earlier that year.

Unfortunately, Fred Wilson makes the mistake of picking up Werde's weak argument and going with it.

Wilson continued to connect Pandora and Spotify's valuations to their requests for, as Werde called it, "relief" from hefty royalty rates. So, in other words, because these companies are overvalued, the music industry looks at the royalty fight and scoffs -- you have these massive valuations, your executives are getting rich and you want to pay us less. Give us a break!

Wilson was correct on one thing: Anything having to do with market cap distracts and keeps the two sides from reaching an agreement. True. And that's because one thing has nothing to do with the other.

Wilson also accurately pointed out that the music labels are out for themselves; they do not partner with artists as much as they enter into shrewd financial transactions with them. Very true.

High valuations might annoy industry executives, but they certainly would not back down from their positions if private equity and the public market undervalued Spotify and Pandora.

But, let's not get too far ahead of ourselves like Wilson and Werde did.

In a recent article on royalty rates, I made it clear that Pandora and Spotify play by different rules. I think Wilson and Werde know this, however, they both kept comparing apples and oranges.

Pandora pays compulsory license fees set by the Copyright Royalty Board. Spotify does licensing deals directly with individual music labels. I explain that in the above-linked article.

When Pandora asks for "relief," it does so through formal channels when negotiations come in 2014 or, as it is now, via the legislative process. Spotify negotiates with content owners, just like Netflix ( NFLX) does.

On the surface, it sounds like Wilson gets the entire music royalty flap, but I'm not certain he does. He argues that it comes down to how much revenue Pandora keeps versus how much it pays the music industry and how much revenue Spotify keeps versus how much it pays the music industry.

Sounds great. And that's the headline, but, at day's end, it's not the fundamental issue. The deeper issue involves the aforementioned notion of compulsory versus direct licensing. That's where the meat of the battle, at least intellectually, gets fought. Not just how much, but how should Internet radio compensate labels and artists. Compulsory or direct.

That's the conversation to have.

Valuation should never enter the dialogue. We all know Pandora and Spotify are overvalued, but, as Wilson ends up saying himself, these valuations are not real; when the dust settles, they mean nothing. Companies will end up being worth what the highest bidder is willing to pay for them. As such, valuation should never enter the music royalty debate.

Web radio dominates music consumption and sales. Bottom line. It is the present and future of the music and radio businesses. The music industry needs a healthy Internet radio space with far more competition than there is now (again, contrary to popular meme, Pandora dominates marketshare and then there's a smallish gaggle of everybody else).

Compulsory licensing -- with equitable rates across services -- regardless of how they deliver music (streaming, on-demand, etc.) needs to become the standard. Without it companies such as Spotify are held hostage by a music industry that acts in opposition to the musician's best interest. Thousands of small labels and independent acts do not, cannot and will not receive air play (or royalty compensation) under a direct licensing scheme.

Once this gets settled -- and it will -- Pandora becomes a buy. And, guess what, like most other hyper-growth companies with massive opportunity ripe for aggressive investment, it will trade at a lofty valuation. That will not and should not change.

--Written by Rocco Pendola in S

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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