NEW YORK (TheStreet) -- Pandora Media (P) slid lower Friday after a federal judge ruled against the Internet radio service in its battle with music rights agency Broadcast Music over royalty payments.
Pandora shares were down 43 cents, or 2.3%, at $18.38 shortly after noon EDT Friday.
On Thursday, United States District Court Judge Louis Stanton ruled that Pandora must pay 2.5% of revenue for playing songs in BMI's vast catalog. The previous rate was 1.75%, but BMI had sued Pandora in 2013 to raise it.The ruling, which Pandora says it will appeal, is just the latest development in the music streamer's struggle over royalties, which threaten to undermine the company's profitability prospects.
Royalties are a big expense for Pandora. Analysts say Pandora's total content acquisition costs amounted to 49% of its adjusted revenue in 2014, of which 42% went for the performance rights fees, and the balance was for other rights, such as publishing.
But musicians, record labels, music publishers and songwriters want more, and their demands are at the heart of several government proceedings and various lawsuits.
The Department of Justice is soon expected to propose changes to decades-old music industry regulations known as consent decrees that govern the way royalties are paid to BMI and the American Society of Composers and Publishers, which collect royalties on behalf of songwriters and publishers such as Sony's (SNE) ATV, and Vivendi's (VIVHY) Universal Music Publishing and EMI Music Publishing.
Those changes could saddle Pandora and other streaming companies such as Netflix (NFLX) with higher royalty costs to the tune of millions of dollars annually.
The DOJ declined to comment on the review, which began in June 2014, but industry observers expect the agency to offer proposals to two federal court judges in New York who are attempting to resolve a series of disputes between recording companies and streaming services.
"We want to change government regulations that enable music streaming services to shortchange writers and publishers," said Paul Williams, who penned hits like We've Only Just Begun and is the president of ASCAP.
"If streaming is the future of music, and it is, how can songwriters sustain careers, feed our families? That's why we've asked DOJ to review and change the system to meet the realities of the changing marketplace," said Williams.
ASCAP has said 1 million streams of a song on Pandora pay only $99 dollars in songwriting royalties divided up between writers and publishers of a song. BMI has also said its members are underpaid.
Pandora, with more than 80 million users, has opposed changes to the consent decrees, saying they would give music publishers too much clout.