Pandora proposes lowering music royalty rates based on “steering” in Merlin agreement

In a revealing document submitted to the U.S. Copyright Royalty Board (CRB), Pandora argues for lowered music licensing rates in the 2016-2020 statutory royalty period. The proposed rate range is about half the amount suggested by SoundExchange in its submission to the CRB. (See David Oxenford’s coverage here.) In its argument Pandora discloses aspects of its privately negotiated licensing agreement with indie-label coalition Merlin Network (RAIN coverage here).

Proposed Rates

Music royalty rates for streaming music are measured in fractions of a penny. This year, Pandora’s statutory rate (the government-set rate) per song stream is $0.00130 — that is 1.3-tenths of a penny. Micropayments add up: Pandora paid out $259-million for music costs in 2013, amounting to 61% of its revenue. (A minority portion of that amount went to publishers and songwriters, the rest to labels and artists.)

In its submission to the CRB, Pandora argues for new rates within a range of $0.00110 to $0.00129. Note that the high end of that range, which would apply to 2020, is a micro-penny less than Pandora’s current (2014) rate.

The CRB submission from SoundExchange (the organization which collects and distributes streaming royalties for labels and artists) proposes higher rates in a range of $0.0025 to $0.0029.

Favoring Private Deals

Pandora’s rationale for lowering the cost of music is extremely interesting for what it reveals about its private licensing deal with the Merlin Network, a coalition of 20,000 record labels around the world. In aggregate, Merlin could be considered a “major” — it claims that music on its member labels was streamed 1.4-billion times across all online music services in April. Pandora’s bespoke licensing agreement with Merlin is its first private licensing arrangement.

Pandora disclosed some aspects of the Merlin agreement as a central part of its CRB argument. The logic chain is this:

1. The CRB should be guided by free-market agreements between willing buyers and willing sellers.
2. Such agreements are hard to find, since nearly all Internet radio acquires music rights via the statutory rate.
3. Therefore, Pandora is supplying a freshly minted, free-market deal case as a template that should guide the Copyright Royalty Board toward lowering the statutory rates.

“Steering” to Partner Music

The most remarkable aspect of Pandora’s CRB submission is its detail of the Merlin agreement, regarding a way in which Pandora will favor Merlin labels and artists.

Pandora describes “steering” as a central point in the Merlin deal: “Most notably, the Merlin agreement provides that as Pandora increases its performances of covered recordings — i.e., as Pandora ‘steers’ toward Merlin-label recordings and away from competing recordings — its effective rate drops […] Pandora has precisely that ability to “steer” towards or away from the music of particular record companies.”

“Steering” is more than an option in the Pandora/Merlin agreement. Additional detail in the CRB submission shows that Pandora is obligated to push Merlin music to Pandora listeners, and receive discounted royalty costs in exchange:

“[The agreement] obligates Pandora to engage in a minimum amount of ‘steering’ toward music licensed by the Merlin Labels.” [redacted sentence] “In exchange for these increased performances, Pandora receives a discount off the ‘headline’ per-play rate as Pandora relies more heavily on Merlin recordings, i.e., as it steers towards Merlin recordings. [redacted content] “This reduced per-play rate in exchange for increased plays is the central piece of the Merlin Agreement. This feature plainly demonstrates that the Merlin Agreement is embracing the workings of a competitive market.”

Redacted portions of the CRB submission are blacked out in the public version of the document. It is clear from context that Pandora divulges royalty rates to the CRB.

Later in the document, Pandora states that it has experimented with “steering” in the pre-Merlin past, and has been steering playlists toward Merlin music during the short life of the agreement (since August). The number of Merlin streams during that period, as a percentage of major-label streams, is indicated in the CRB document, but redacted from the public version.