Fight Builds Over Online Royalties

The debate playing out in Washington has echoes of a presidential race. One side says businesses will suffer unless the government steps in to lower costs. The other accuses jet-set industrialists of a ploy that will cheat the middle class.

These attacks, however, are not between candidates for the White House. They are being made in a battle over the obscure but increasingly vital issue of royalty rates for streaming music online. The issue pits the survival of Pandora Media and other Internet radio services against the diminished paychecks of musicians in the digital age.

This fight has raged on and off for more than a decade, and it was renewed recently with a bill in Congress that would change the way digital royalty rates are set. But with streaming music starting to account for a significant chunk of the music industry’s revenue, and Pandora now a scrutinized public company, the issue has touched a nerve as never before.

“This is not just about our present; it is about our future, our ability to make it in the digital age,” said Cary Sherman, chief executive of the Recording Industry Association of America. “Artists and labels and the entire music community need to earn a fair return on the creative works that are the reason companies like Pandora exist.”

Tim Westergren, the founder and public face of Pandora, has denounced the current system’s “discrimination” and urged the service’s 175 million users to contact their representatives in Washington. Music industry groups and labor unions have also gone public, casting it as a fair-pay issue.

Rates are set by three judges on the federal Copyright Royalty Board, but they apply a different standard to Internet radio services like Pandora than they do to satellite and cable radio outlets like Sirius XM and Music Choice.

Sirius, for example, pays 8 percent of its revenue to record companies and artists. Pandora pays a fraction of a cent each time a song is streamed, which last year amounted to about 54 percent of its revenue, or $149 million.

“The rate being too high dramatically depresses how much music gets played,” Mr. Westergren said in a recent interview. “It has really suffocated the industry.”

The Internet Radio Fairness Act, introduced in September, would move Internet radio companies from their “willing buyer, willing seller” standard — which critics like Pandora say results in an unrealistically high rate — to the one used for satellite and cable radio. To determine a fair rate, that standard directs the judges to consider factors including whether the prices will have a “disruptive impact” on the industry.

Music industry groups also want one standard, but one that keeps rates high. For years they have also been pushing for laws that would require terrestrial stations to pay royalties to labels and artists. (In the United States — and almost nowhere else in the world — radio stations pay royalties only to music publishers.)

Representative Jason Chaffetz, a Republican of Utah who co-sponsored the bill, said in a phone interview that the bill was meant to encourage growth in the streaming business. But when Mr. Chaffetz, whose campaign committee has received $2,000 from Pandora, was asked to respond to complaints that the changes would hurt musicians, he could not resist taunting a bit.

“The old-school dinosaurs are trying to help, but they’re stuck in the tar,” he said. “They can go talk to the pterodactyls.”

Pandora has been down this road before, and in 2009 reached an agreement for a temporary discount of about 40 percent off the royalty board’s rates; that deal expires in 2015.

This time Pandora is a different beast: a company with a $1.4 billion market capitalization. Each month, 58 million people use it to stream more than 1.1 billion hours of music.

Streaming is now on every horizon in the music industry. SoundExchange, which collects royalties from Internet and satellite radio, recently announced that it had crossed the $1 billion benchmark in payments to labels and artists.

The royalties issue, Mr. Westergren said, has become a question about the wider health of the streaming business, which he believes has been stunted by royalties.

“This is not an argument about going out of business,” he said. “A fix here would be for the whole industry.”

But there is wide anger in the music industry that the bill would enrich technology companies at the expense of musicians. MusicFirst Coalition, which includes the recording industry association, SoundExchange and others, says it believes that if Pandora gets everything it wants, it could cut its royalty bill by up to 85 percent.

For Pandora, the critical question is whether streaming businesses can be successful at all in the current system. Digital music services have proliferated over the years, but just as many have died, and popular arrivals like Spotify have yet to turn a profit.

Clear Channel Communications, the radio giant, has recently moved more aggressively into streaming with its iHeartRadio app. Robert W. Pittman, its chief executive — who has been outspoken on the royalty issue — said in an interview that a change could generate more money for the music industry by allowing streaming businesses to thrive.

“It’s not so much about rates as about how much dollars you spend,” Mr. Pittman said. “The amount of dollars to artists is rate times volume. If the rate suppresses the volume, there’s less money. If it encourages volume, there’s more money.”

Mr. Westergren is revered as a self-made success with real musical bona fides; he is fond of telling stories about his years of scraping by as a touring musician. But the controversy over the Internet Radio Fairness Act threatens to tarnish that image.

The music industry says that if Pandora needs to improve its bottom line, it should sell more ads. When asked to respond, Mr. Westergren makes a gesture of banging his head on a table.

“It’s an easy thing to say,” he said. “But no one has yet explained to us why Internet radio is under a different standard. No one responds to that fundamental premise.”

Advertising sales, which make up almost 90 percent of Pandora’s revenue, doubled in the company’s last fiscal year.

For Mr. Westergren, though, the most difficult aspect of this battle has been the accusation that Pandora wants to take advantage of musicians.

“This adversarial reaction toward Internet radio is counterproductive,” he said. “It’s causing other businesses to sit on the sidelines, and that is hurting musicians. Ultimately, you want to have many boats in the harbor.”

Source: The New York Times