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Pandora argues that royalty rates are already too high and it has tried numerous tactics to drive them down. In June, it bought a South Dakota radio station to qualify for the lower fees charged to station owners. The company also backed a now-defunct bill in Congress that would have lowered its rates.
Internet-powered music services are becoming more and more important to the industry. So-called "access models" made up 15 percent of the music industry’s $7.1 billion in revenue last year, up from just 3 percent in 2007, according to the Recording Industry Association of America.
Because Pandora’s 2009 deal with record labels and publishers now acts as a benchmark for other companies, including Apple, any fee reductions in a new deal with Pandora would have a ripple effect across the industry.
"That’s why everybody in the industry is very exercised about these rates," says RIAA President Cary Sherman.
Pandora pays record labels about $1,200 for every million song plays. The labels split the payments with performers. The rate goes up $100 each year through 2015, when the current deal expires.
Pandora pays another $200 or so per million plays to session musicians, songwriters and publishers.
In all, the payments amounted to more than $214 million last year, or roughly 50 percent of Pandora’s fiscal 2013 revenue.
Pandora has pointed out that, as a percentage of revenue, that’s more than the $300 million paid by Sirius XM, or about 9 percent of revenue, and the $500 million paid by the entire traditional radio industry, or only 3 percent.
David Oxenford, a copyright attorney who has represented Pandora, says the Copyright Royalty Board’s likely first step when hearings start in January will be to give the music industry and Pandora six months to come to a deal on their own.
Pandora is also fighting separate battles in court with the two major songwriters’ societies, Broadcast Music Inc. (BMI), and the American Society of Composers, Authors and Publishers (ASCAP), over songwriting royalties. It’s a separate challenge that McAndrews will also have to navigate.
Still, even as they attack Pandora, music industry executives acknowledge that they share a future with the company.
"We want Pandora to be a raging success," said Paul Williams, president of ASCAP. "But their success should be our success, too."
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