For Pandora Media Inc., the move helps improve relations with artists, who have complained that royalties on digital streaming services are too low, especially as CD and digital download sales decline. It's a departure from its current business model, where it relies on government rate-setting bodies like the Copyright Royalty Board to determine how much it pays artists.
"In a world where it's very difficult to get onto terrestrial radio, a deal like this gives us an incredible opportunity to get our music in front of an enormous amount of people," said Merlin CEO Charles Caldas in an interview. "The data that comes out of the back of this should also enhance our business."
Brian McAndrews, CEO of Oakland, California-based Pandora, said the deal would not have a "major impact on costs" — a concern of investors that have pushed Pandora shares down some 38 percent from their high of $40.44 in early March.
He also said he was "very excited" about the company's first deal with a record label group and said he hoped that others would follow.
"We are open to other deals if we feel we can find a win-win-win for labels, artists and Pandora," he said in an interview.
Merlin, representing more than 20,000 independent labels, commands about a 10 percent share of music consumption worldwide and revenue collected from streaming platforms doubled to $89 million in the year through April.
The deal covers royalties for performances, not songwriting rights, and it comes as the Department of Justice is re-examining Pandora's right to automatically license song rights from publishing societies like the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music Inc. (BMI).
That process was put in place in 1941 as a counter to anti-competitive behavior by publishers, who say that the market dynamics have changed and they should have the right to negotiate songwriting royalties without the floor on rates set by the publishing societies.