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Pandora Pleads for Royalty Relief - What's Fair?

Analysis and Opinion

By

Tim Westergren, Founder of Pandora

Tim Westergren, Founder of Pandora

Photograph: David Shankbone, Creative Commons
Pandora's Boxed In

Tim Westergren, the founder of Pandora, the customized online radio portal, has been busy lobbying the media and anyone else who will listen to his thoughts on the Internet Radio Fairness Act.

Westergren writes in a recent email: " This bipartisan bill will correct the incredible inequity in how different digital radio formats are treated under the law when it comes to setting royalties. The difference is quite extraordinary. In 2011, Pandora paid over 50% of our revenues in performance royalties, while SiriusXM paid less than 10%

Westergren goes on to say that because of Internet Radio, millions of music lovers have been brought back to their music and new artists are getting great exposure. He argues that Internet Radio needs "a fair chance to succeed."

The Performance Royalty Reality

Geekwire.com has a pretty good explanation of the issue. There are actually two pieces of legislation actively being reviewed at the moment. The first is the "Internet Radio Fairness Act of 2012" which would reduce the percentage of royalties paid by streaming entities like Pandora, iHeartRadio, Spotify, etc. Then, there is the "Interim Fairness in Radio Starting Today Act of 2012". This proposed law would not necessarily lower rates for Internet streaming portals but rather, raise the percentage rates for other users of recorded music like SiriusXM.

So, what's more fair? A lower rate to give the Pandoras of the world a better shot or a higher rate to put other media that offer music content on a "level playing field," as some commentators contend.

At first glance it sounds a little like a David and Goliath scenario. The big bad satellite radio service gets a big cost break while the struggling online services have an onerous financial burden. But, analyst Richard Greenfield quoted at forbes.com makes a good point:

"...the reason why companies such as Pandora pay such high royalty rates…is because they severely limit audio advertising to protect the user experience and keep people on the platform. If Pandora ran several minutes of audio ads per hour (the way terrestrial radio does)…the percentage of revenues paid out as royalties would be dramatically lower..."

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