Should Pandora and Spotify Merge? (Maybe Even at SXSW)

NEW YORK (TheStreet) -- I'm all over Pandora's (P) pivotal Q4 earnings report and Apple's (AAPL) attempt to fix a stagnant iTunes.

Tim Cook should end the charade and take out Spotify. That's the obvious call here, as opposed to banging your head against the wall negotiating with the self-serving music industry.

With that in mind -- and with Pandora quite possibly silencing embarrassed bears once and for all -- it might seem like a strange time to bring this up, but what about the notion of a Spotify/Pandora merger?

Here's my thinking. Characterize most of it as thinking out loud.

There's no question Pandora crushed the quarter. Maybe not from a numbers standpoint, but its performance in mobile and, maybe more importantly, its continued hijacking of traditional radio advertising dollars, sends the message loud and clear -- we're for real.

But, there's still the music royalty issue to deal with. A few months ago, I felt like Pandora needed to be less aggressive in its fight to score an equitable royalty structure for Internet radio. Scratch that -- it's time to strike while the iron is hot and the doubters look like fools.

Of course, Pandora and Spotify are, by and large, completely different. Pandora is radio -- redefined, but still radio. That's it. You turn it on and receive the best personalized radio experience alongside discovery. Pandora sits side-by-side and, in most major markets, tops traditional radio stations in the ratings.

Spotify is everything iTunes should be, but isn't. Simple as that. While they're competitive, Pandora and Spotify are absolutely complementary. Both can and will endure over the long haul.

Pandora pays for most of its music through a regulated arrangement with the Copyright Royalty Board, also known as "compulsory licensing."

Spotify uses direct licensing, much like the way Netflix ( NFLX) buys its content. In other words, Spotify negotiates separate deals with music labels, etc.

Both models -- from a cost standpoint -- stink.

That's why it might be time for Pandora and Spotify to bury their subtle hatchet and talk partnership, if not merger.

Both companies -- though to a greater extent, Pandora -- have gained and continue to gain serious leverage. There's no question the content owners have control, simply because they own and control the content. They have done an excellent, even if inaccurate, job of controlling the conversation.

However, at some point the labels must come around to the argument that Internet radio rules; as such, it's obscene to think terrestrial radio, satellite radio and cable pay so little relative to Pandora and Spotify.

Different model. Same model. This scheme. That scheme. It's all one big joke!

Pandora and Spotify play music you would never find on AM/FM radio. That, in and of itself, should trigger a mutiny of indie artists, small-time names and their sympathetic big-name acts against the oppressive music labels. They are not pro-artist. Bottom line. Don't let them fool you into thinking they are with their disingenuous marketing campaigns.

A united Pandora and Spotify . . . a unified front of Internet radio companies -- setting aside whatever meaningless differences they have -- is the way to go to win both the battles in Congress and against the labels. That's how they need to view this thing.

We are Internet radio. It would help their cause as well as music listeners and musicians. Now and in the long run. There are ways to structure royalty fees outside of black-and-white arrangements. Do it in tiers so artists who would get hurt by a pay cut are grandfathered into any new deal. Make it universal across platforms.

Plus, it would be pretty freaking powerful for the massive local sales force Pandora is building out to be able to sell complementary services like Pandora and Spotify side-by-side. The national ad agencies would love it as well.

Something to consider . . . maybe even in the halls and clubs of SXSW in Austin.

At day's end, we should not make this whole thing more complicated than it needs to be. Pandora and its Internet radio peers can simplify the debate and ultimately win it.

-- 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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