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Why Pandora Isn’t Panicked About Its 20% Royalty Rate Hike

A 20% increase in artist royalties means even thinner margins for the Internet radio station. Luckily, the company has a plan B.

Why Pandora Isn’t Panicked About Its 20% Royalty Rate Hike
[Photo: © Richard Levine/Demotix/Corbis]

Pandora is not thrilled. In a much-anticipated ruling, the three-judge Copyright Royalty Board (CRB) ruled today that Internet radio broadcasters will have to pay 20% more in royalties to copyright holders and artists. The new rates are another hurdle in the company’s quest for profitability. But thankfully for Pandora, the company has been planning for this all along.

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Starting next year, each song streamed on Pandora will cost the company $0.0017. Currently, the company pays $0.0014 per stream on its free, ad-supported service (and $0.0023 for songs streamed to paying premium users). Pandora was pushing for its per-stream rate to drop to $0.0011, while the music industry–represented in this particular battle by SoundExchange–was gunning for an increase to $0.0025. The CRB decided to meet the parties halfway.

“This is a balanced rate that we can work with and grow from,” Pandora CEO Brian McAndrews said in a statement. “The new rate structure will enable continued investment by Pandora to drive forward a thriving and vibrant future for music.”

In other words, the rate hike is modest enough that it doesn’t bury Pandora alive. Meanwhile, the company has some dramatic changes in the works for 2016, as it starts to plot the next phase of its decade-old business.

Today’s ruling is the latest milestone in a protracted battle Pandora has been fighting for years over the huge chunk of its revenue the company pays in royalties to copyright holders. After a failed attempt to have the rates adjusted by Congress in 2013, Pandora has been awaiting today’s ruling to learn how much money per stream it would be required to pay copyright holders over the next five years.

The company’s campaign for lower royalty rates was not only unsuccessful, but resulted in a momentary PR black eye, thanks to a rhetorical backlash from high-profile artists like the surviving members of Pink Floyd, who claimed that Pandora was trying to unfairly cut artists’ pay.

At the heart of the online radio royalties debate is a striking imbalance: Internet radio providers like Pandora are required to pay royalties to the artists who perform songs, in addition to the composers and publishers of those songs. Traditional radio companies do not pay performance royalties (while they do pay publishers and songwriters). Pandora argues that it’s unfair for them to pay extra royalties that traditional radio does not have to pay. Some artists’ advocates, on the other hand, are basically saying, “Yeah, it’s messed up that you pay and they don’t. Traditional radio should have to pay performance royalties too!”

For Pandora, the issue isn’t just about fairness (although that certainly makes for a compelling talking point), but rather a core business problem: Despite amassing 80 million users and continually growing its revenue, the company has struggled to turn a profit. Its single biggest expense, by far, is the licensing costs it pays for the music it streams. With today’s ruling, that problem gets even tougher.

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Pandora is well aware of its economic predicament and has been plotting its future accordingly. While it tries to iron out the royalties issue, the company has been bolting on new potential streams of revenue. Earlier this year, in an increasingly eyebrow-raising series of moves, Pandora bought music analytics firm Next Big Sound, concert ticket company TicketFly, and, most recently, the assets of Rdio, a longtime direct competitor to Spotify. It also recently launched a partnership with the hit podcast “Serial,” its first foray into podcasting, which has the potential to add listener hours (and ad revenue) without the hefty licensing costs that come with streaming music.

While the on-demand streaming music business isn’t much more economically sound than Internet radio, at least subscription services like Spotify and Apple Music are able to negotiate their music licensing rates directly with labels, rather than rely on a panel of judges to decide the fate of their bottom line. That isn’t to say that these changes will be a silver bullet for Pandora: The on-demand streaming space is a notoriously tricky business with lots of large, or otherwise very well-established competitors. But hey, if transforming itself into the latest Spotify competitor doesn’t woo shareholders, Pandora can try selling more concert tickets and finding new ways to monetize mountains of music data that nobody else has. Pretty smart.

A year from now, Pandora may be paying out significantly more in artist royalties, but the service as we know it is likely to look very, very different.

Related: Taylor Swift, Apple Music, And Streaming’s Big, Enduring Problem

About the author

John Paul Titlow is a writer at Fast Company focused on music and technology, among other things.

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