How Internet Radio Should Handle the Music Industry

NEW YORK (TheStreet) -- As it battles the royalty fight on several fronts, Pandora (P) struggles with the blessing and curse of disrupting two of the world's most unimaginative industries -- music and radio.

Picture old, fat white guys wearing gold bracelets and over-sized wristwatches puffing cigars. These are the people single-handedly destroying -- or at least slowing down -- trajectories to sanity and progress as the consumption of music moves almost wholly to a digital access model. But it goes beyond consumption -- merely listening to music -- they're working overtime to kibosh a holistic approach to promoting every aspect of the process. From "record" sales to touring to branding and beyond.

There's a fundamental problem that doesn't get talked about much. The leaders of Internet radio companies -- and I'm not just talking about Pandora ( P) -- tend to be more tech-minded individuals.

They launch and run startups in the spirit of Apple ( AAPL) and Google ( GOOG), not dusty old record labels and slow-to-act-and-react bloated corporate giants such as Clear Channel ( CCMO). It's a bit like the relationship between Tesla Motors ( TSLA) and the entrenched automakers, but only more extreme. Tesla is a technology company; it doesn't "sell cars" the same way Ford ( F) and General Motors ( GM) do.

Oil and water. However, "little" startups actually operate within companies such as Ford (and, I think, GM), particularly around the issue of in-car entertainment. These guys are not afraid to let Apple or Google or Microsoft ( MSFT) or BlackBerry ( BBRY) into their worlds literally and conceptually.

The same even applies to old guard media. There's no question the big boys -- Time Warner ( TWX), News Corp ( NWSA) and such -- control the pace of change, but they're certainly not resistant to it. They just do a better job managing it, carefully and smartly implementing along the inevitable road to entirely new ways of doing things.

That's not the case with the music and radio guys. They have always kicked and screamed towards change, resisting every step of the way. They're, at best, adverse, though more often openly hostile to tech. That should bewilder you, given the fact that technology drives practically all of the success the music industrial complex -- and, ironically, the radio business -- has had over the last decade.

Yet the tech companies (Internet radio) that keep the music industry (somehow) moving forward -- and, ironically, the radio business (!) -- refuse to band together. They're either opposing one another or are not having serious talks about inciting real change. I have asked a bunch of people why Internet radio has yet to form a bloc and not one person has given me a good answer. Usually, the reasoning comes back to it's just not how this or that works.

But it doesn't work. Practically every aspect of the systems that pay the people involved in the creation, production and performance of music is broken. It's a set of structures as inefficient, poorly managed, confusing and cumbersome as the IRS. In fact, it might be worse.

A select group of people make out on the deal. Fat and happy label executives, big name performers and a relative handful of the most prolific songwriters. The royalty structure screws just about everybody else with the exception of terrestrial radio (which typically pays nothing or next to nothing) and SiriusXM ( SIRI) satellite radio (which pays a relative pittance compared to Internet radio, yet still complains).

Working musicians get screwed, yet organizations that only exist to advocate for the interests of the music industrial complex's elite recruit them as front-line soldiers in a war they absolutely should not be waging. And Internet radio gets the shaft, overpaying for the content they promote more effectively than anything that came before them. It's not just Pandora; check out how much Spotify pays for music. Just imagine if Pandora, Spotify and others could pour their revenue back into the business of promoting artists -- all artists -- not just the established few and an exclusive, seemingly random bunch of hand-picked up and comers.

It's time for Pandora, Spotify and the rest of Internet radio to band together. Forget about statutory or compulsory rates. Forget direct deal licensing. Stop the madness of too many moving parts in a publishing industry that can't seem to get on the same page as the labels. Enough of the nonsense.

These guys -- each and every one of them, on both sides of the equation -- are wasting time and resources arguing over and enabling an ultimately unworkable, outdated and broken system.

Two rates should exist. No exceptions.

One goes to the songwriter, composer and publisher of a song. The other goes to the musicians who perform the song. Sometimes they're the same people. But, in any event, set two rates and pay them. Make it the same for everybody -- Internet radio, satellite radio, cable and broadcast radio, no matter how they use the product. Give each service the ability to chose from the same features (skips, replays, on-demand, streaming, etc.).

Then deal with the issues few people from the music industrial complex want to talk about ... How does this money get divided up after it leaves Pandora, Spotify, Sirius XM, etc. and ends up in the hands of a record label or SoundExchange or ASCAP or BMI?

Where does the cash end up?

Let's talk about the piece of the pie the label keeps. Let's talk about how much the label doesn't pay the artist.

Let's talk about the crappy contracts bands sign when they're "lucky" enough to get their first record deal. Let's talk about what has become the accepted initiation for new musicians -- getting screwed by your label on your first and what it is quite often your last record deal.

Let's talk about the money, millions of dollars, SoundExchange sits on every year that does not make it into the hands of working musicians. People who don't know how the system works because it's not in the interest of anybody to tell them.

Let's talk about how many middlemen skim cash off of the top before singers and songwriters get paid.

Let's talk about the other issues that actually impact musicians. Let's talk about the sweatshop-like system called pay-for-play that crushes the chances of aspiring acts and vital local music scenes across the country.

Let's talk about what matters. Let's talk about the actual problems and driving forces.

And let's have the tech-minded folks from Pandora, Spotify, Songza, Rdio and every other upstart Internet radio service out there come together to start, lead and control the real conversation.

Whether big-time music executives like it or not, technology executives are the future of their business. And the future is now. Yesterday. We shouldn't have to wait for the old guard to literally die off so the rest of us can get on with our lives.

-- 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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