In closing arguments Monday in the ASCAP vs. Pandora rate-setting trial, presiding federal judge Denise Cote seemed to agree with Pandora’s argument that it be treated as “radio,” according to first-hand document provided by a RAIN source. “During Pandora’s closing argument, after its counsel argued that Pandora should be classified as radio and therefore pay [a lower rate], Judge Cote stated that she also thought Pandora was ‘radio’.”
The classification of Pandora is important part of how the government decides its royalty obligation to publishers. ASCAP is one of the largest performing rights organizations (PROs) that collect and distribute royalties on behalf of composers, songwriters, and publishers. Radio pays a lower rate to publisher agencies than interactive online services do. Pandora argues its “radio” status on the basis of its non-interactive streaming which resembles terrestrial radio more than on-demand services like Spotify. Spotify, and others like it, allow users to select and listen to individual songs. Pandora, in contrast, plays dynamically generated “stations” based on performers entered by the user.
Pandora pays 1.85% of its revenue to ASCAP, set in an interim agreement. That rate is a bit higher than the 1.7% paid to ASCAP by AM/FM radio stations — which Pandora argued should be its new rate. ASCAP argued up to 3.0% of revenue. Spotify pays that 3.0%, because it is an interactive service that cannot be likened to radio in any statutory rate-setting.
In a note to investors, Susquehanna Financial Group, which had representatives at the trial, predicted this: “Based on our observations throughout the trial, we believe that Judge Cote will issue a rate somewhere in the low end of the 1.7% to 2.3% of revenue range. Additionally, after signals from Judge Cote today, the odds of a rate at/below 2% have increased significantly.”
While avoiding a royalty rate hike to publishers, and perhaps receiving a reduction in that expense, it is worth noting that Pandora pays nearly half its revenue to record labels and performing artists in a different regulatory framework. If judge Denise Cote changes Pandora’s rate to ASCAP by a tenth of a point in either direction, it might not affect the Internet service’s balance sheet as much as ASCAP’s.