Pandora and the Internet Radio Fairness Act

By Jason Bookman

It’s not a secret that music costs money – or at least it costs someone money. Who that someone is depends entirely on the service that you use to listen to music. After the dust more or less settled onto a new landscape, the enterprising, creative minds out there realized that a niche existed for a legal service that pays the artists their share while remaining free to the consumer – enter Pandora, the streaming internet radio service. Pandora’s rollercoaster ride from success to near implosion and back again is well documented, but the newly proposed Internet Radio Fairness Act may be the final piece of the puzzle that could cement Pandora’s longevity as a viable service. Tim Westregren and company have called on their army of devoted users to help lobby to pass the bill, but not everyone is excited about that prospect. Here’s how everything breaks down.

Every service that distributes music is required by law to pay the people who own the rights to the music, but the amount of money required to be paid out depends on the service being used. For example, songwriters get paid 9.1¢ every time someone downloads a copy of their song from iTunes, Amazon, or any other service where you actually acquire a file that is stored on your hard drive. That same song only costs Pandora roughly .19¢ to stream instead of send as a download, but the difference is that millions of people could potentially stream that song many times. The download that pays 9.1¢ happens only once.

The reason I said “roughly” earlier is because Pandora, under the current laws, is required to pay a percentage of their yearly earnings out as performance royalties, a fraction that breaks down by the number of songs in Pandora’s catalog multiplied by the number of plays over that total yearly earnings. Pandora and other streaming services pay over 50% of revenues in performance royalties, while cable providers pay close to 15%, and satellite radio providers like Sirius XM pay somewhere between 8 and 10% But as we all know, percentages can be misleading when you don’t know from what the percentage is being taken.

Pandora has only been a publicly traded company since June of 2011, so their yearly earnings are not available for much of their life in the public pool. However, we can see based on estimates of their quarterly earnings for the last four fiscal quarters that the company took in roughly $304.1 million in earnings, according to Bloomberg. Sirius XM in their fiscal 2011 took in roughly $3 billion. When Pandora says they pay about half of their earnings in royalties, that number equates to a little more than $150 million. While 10% of Sirius XM’s $3 billion equates to roughly $300 million, or double what Pandora pays annually in mandated royalties.

Sirius XM takes in a lot of money annually and only pays back 10%, but they do also have another great cost that Pandora does not have to pay: equipment and bandwidth. Sirius XM created an infrastructure for their service that comprises of not only the music, but the satellite radio receivers and the bandwidth needed to broadcast all of their various channels. Pandora operates as a software application through your internet/data provider and is available on desktop computers, smartphones, and certain cars, but cannot be used without a third party data subscription for all mobile applications. In other words, Pandora doesn’t have to worry about all of the infrastructure costs that Sirius XM does because their service uses infrastructure for which everyone already pays: the internet.

So the main question shifts from “How can Pandora become a long term viable music service,” to “from where can Pandora acquire revenue?” Much of Pandora’s revenue comes from advertisements and it makes limited money through its subscription based, advertisement-free premium service, Pandora One. If Pandora streamed more advertisements to their non-subscription customers, they would be able to remain financially viable within the current royalty rates. However, as you already probably know, one of the main reasons people switched from terrestrial radio to satellite or streaming alternatives was because of lower advertising content.

Still, others are worried that with Pandora positioning themselves as a gatekeeper for new music discovery and their public appeal for more money may give way to a digital age payola problem where artists looking for exposure pay Pandora for their priority over the internet airwaves. In a strangely direct way, this could contribute to solving Pandora’s perceived financial problems, but in a very ethically ambiguous way.

Pandora isn’t the only proponent of the Internet Radio Fairness Act, and it’s other big supporter may surprise you: Clear Channel. The broadcasting behemoth owns iHeartRadio, one of the other large internet streaming services. By broadcasting their terrestrial stations online, Clear Channel has to pay the same royalties twice, once for terrestrial broadcast and once for internet radio. Their motive is clear, to expand their service and cash in on another revenue stream, but without sacrificing profits by double-dipping their services.

Whether you support it or not, the situation surrounding the Internet Radio Fairness Act is a lot less black and white than Mr. Westregren is allowing you to believe.