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Pandora explains music licensing strategy in a public conference call

pandora logo crystalIn a brisk 51-minute conference call with investors yesterday, Pandora described its strategy in the Copyright Royalty Board (CRB) proceeding, explained why it thinks music licensing costs (to labels) should be lower, and fielded questions. Although Pandora executives often speak at investor conferences, and conduct quarterly earnings calls, the single-topic focus of yesterday’s call was unusual.

mike herring 02 canvas

Pandora CFO Mike Herring

Mike Herring (CFO) and Chris Harrison (VP Business Affairs and Associate General Counsel) hosted the call.

Pandora’s Rate Argument

RAIN News uncovered Pandora’s argument strategy in the CRB proceeding shortly after the company filed its argument brief, a public version of which is available here. A redux of Pandora’s 14-section written argument for lower rates could be bulleted like this:

  • The CRB royalty-rate determination for the 2016-2020 period should be based on free-market negotiations between “willing buyer and willing seller,” which reveal the true value of music recordings in an Internet radio service.
  • Until this royalty rate cycle, those real-market examples did not exist. (Licensing rates are set by the CRB every five years.)
  • Pandora now has a real-market agreement with Merlin Network, a global alliance of record labels.
  • In that deal, there is an agreement that when Pandora favors Merlin music, Merlin charges royalty rates lower than the CRB-set statutory rates. Pandora calls this extra exposure of Merlin music “steering.”
  • Based on the details of the Pandora-Merlin agreement (some of which are blacked out of the public document), Pandora proposes royalty rates for 2016-2020 that are lower than current rates, and about half of the rate proposed by SoundExchange, which argues on behalf of labels generally.

pandora crb document 300wSteering the Music Genome

Herring and Harrison did not wait for questions about “steering” Pandora playlists toward Merlin music. Pandora’s Music Genome, the music intelligence layer which dynamically programs music for listeners based on their preferences, is a key differentiating asset for the company, and Pandora doesn’t want any perception that “steering” damages the integrity of Music Genome.

“In everything we do, we consider the listener experience to be sacrosanct,” Herring said, noting that Pandora’s analytics indicate that a 15% “steering” margin can occur without any effect on the Genome’s ability to play music that matches listener taste.

Mike Herring also made the startling disclosure that 80% of Pandora’s music in not played on FM radio.

Hunger for Deal Points

In the Q&A session, most of the questions were about the Merlin partnership; investors were clearly hungry for revealing details.

Michael Graham of Canaccord Genuity, which covers P stock bullishly, noted that Merlin labels had an opt-in privilege in the Pandora partnership, and wondered how many labels did so. The answer was over 90%. “There are outstanding deals for the labels that opted in. They will make as much or more money than they would have over any CRB arrangement over time.”

Another question probed an assertion which exists in other argument briefs filed with the Copyright Royalty Board, that the distinction between non-interactive services (like Pandora) and interactive services (e.g. Spotify) is blurring. The two sides of the music-service industry are regulated differently, with the non-interactive players benefiting from blanket statutory rates. Chris Harrison would have none of it: “We think the distinction is extremely clear. It is settled case law. The functionality and user experience are clearly different.”

One investor asked whether Pandora is considering changing its CRB argument, after the discovery process in which the company receives all the other arguments (e.g. from SoundExchange, inasmuch as the Pandora vs. SoundExchange polarization represents a key debate). Pandora’s reply was tight-lipped: “We have no comment on ongoing case strategy.”

Finally, one investor asked the “what if” question — what if the Copyright Royalty Board is swayed by SoundExchange, and raises royalty rates? Pandora’s reply might be called fatalistic, but with a twist at the end: “In order to operate, we have to pay whatever rates are determined. Doing direct deals with labels is always an option.”

Brad Hill

5 Comments

  1. “Doing direct deals with labels is always an option.” hmmm
    SoundExchange may not be the best PRO (performance rights org) in the world with their pile of undistributed cash BUT you can expect the labels to be much worse at paying out if they do direct deals.

  2. I find it silly that artists are harassing Pandora about higher royalty rates. It’s free promotion. Think about what artists had to do to promote their music before sites like Youtube, Pandora, Soundcloud, etc. We spent hundreds, sometimes thousands if you had it like that, on promotional CD’s to give away. We performed live for free spending money on transportation, food, drinks, etc. A lot of us even paid to perform at venues. We paid Magazines for interviews and features, radio stations for airplay. Pandora doesn’t provide on demand streaming. It’s doesn’t compare to ownership nor does it provide the kind of access that comes anywhere near it. Pandora makes money from its stock and everyone’s losing it. So what, the same artists and writers complaining about what Pandora pays rake in millions from money they’re paid upfront by company’s, album points, uses of their work in films, radio air play, and a bunch of other areas. That income doesn’t exist without exposure which streaming platforms provide. There’s a lot of artists that would pay to have Pandora play their music.

  3. How can you possibly have a “free market” inside a federal 3 judge song tribunal? You can’t, there is nothing free market about the Pandora – Merlin Deal. It’s phony “news” articles like these that pimp for streamers to help destroy the American songwriter. How about a follow up Brad where you define the term “free market”? Thanks.

    • Thanks for the comment, George. How is Pandora/Merlin not a free-market deal? It is two companies deciding how to trade. I also don’t understand why you call the article, which mainly describes a conference call, “phony.”

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