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CRB rates and Pandora

pandora button $ canvasAs the webcasting universe turns its expectant and apprehensive gaze toward the U.S. Copyright Royalty Board (CRB), which will issue new webcasting royalty rates for 2016-2020, Pandora Media has more skin in the game than any other webcasting distributor of music — in a sense.

Much of the media is portraying today as a make-or-break milestone for Pandora: if the rates go up significantly Pandora is doomed; if the rates go down a lot Pandora stock explodes to the upside and the company has a renewed optimism in its business plan. (Pandora executives, in their many public appearances at investor meetings, always exude optimism.)

Pandora pays more into the statutory royalty system, for the use of music recordings, than any other entity. Pandora accounts for more than 50% of royalty collections by SoundExchange, the government-appointed organization which collects and distributes webcasting royalties to labels and artists. (That according to calculations provided by Angus MacDonald, an intellectual property attorney at the University of California.) So a slight shift in royalty rates compounds into major changes to Pandora’s balance sheet.

But in another sense, Pandora is less vulnerable than some other webcasters, especially small ones. Small webcasters, as defined by the Webcaster Settlement Act of 2009, are seeing today as a threatening doorstep to a business environment in which the protective clauses of the 2009 law are expired, and not renewed. (See the RAIN prep sheet for more detail.) One independent webcaster told RAIN News, “We’re expecting to get screwed.”

One more thing, often overlooked in the media swirl around Pandora’s vulnerability to today’s announcement. The company is possibly moving away from statutory licensing entirely. This year Pandora has negotiated private licensing deals with Merlin, the largest association of non-major record labels, and the three major music publishers. (Music publishers do not factor in today’s CRB rates, but Pandora’s assertive business development is indicative of the company potentially moving away from relying on government-set blanket licenses.)

For certain, Pandora is planning to develop an on-demand service next year. Those services (classified as interactive, as opposed to non-interactive online radio) do not pay CRB rates. They are not considered “webcasters” in the same legal sense. Rates are set through negotiation with labels. So, if Pandora plans to start its on-demand offering in mid-2006, it will presumably be negotiating those licenses starting in the new year. Typically, the on-demand licensing also covers non-interactive service tiers — as is the case with Spotify Premium and Spotify Free.

In this scenario, today’s impact on Pandora, if rates go up, might be briefly endured until Pandora makes its private label agreements. And it’s easy to imagine that preliminary versions of those conversations have already started.

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Brad Hill

One Comment

  1. It would be very interesting (and a large blow to SX) if Pandora said, screw it we’re moving to direct deals.

    What bugs me about the whole CRB proceedings is why should SoundExchange – the organization that has the government monopoly to collect and distribute royalties – be a participant in the rate setting?

    This appears to indicate that the RIAA still dominates SoundExchange, even tho they are now separate entities.

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