Royalties
Pandora's business model was threatened by changes to royalty structures affecting internet radio in the United States, with the Copyright Royalty Board having ordered increases to per-song performance royalties (which are not paid by terrestrial radio) in March 2007.[11][67][68] Pandora was a member of an industry group, SaveNetRadio, which opposed the increases.[11] In August 2008, Westergen told The Washington Post that they were "approaching a pull-the-plug kind of decision", arguing that "the moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we're doing is wasting money."[69]
On July 7, 2009, SoundExchange announced that agreements had been reached on royalty rates for internet radio, with larger webcasters paying a minimum of 25% of total revenue or rates per-song per-listener, whichever is higher. Pandora described the new rates as being "a middle ground that, while perhaps not meeting all of our aspirations, still represents a thoughtful and reasoned outcome under the circumstances." Due to the new rates still being relatively high in comparison to terrestrial radio, Pandora announced that ad-supported service would be limited to 40 hours per-month, and that users would be required to pay a $0.99 fee (separate from the Pandora One subscription, which is ad-free) to receive unlimited listening for the remainder of the month [70][71][72] With an update to the Pandora player in September 2011, the 40 hour cap was extended to 320 hours.[52][73]
On November 22, 2011, Pandora reported its Q3 earnings. Royalty costs accounted for 50% of revenue, slightly better than expected. Its revenue, most of it from advertising, continued to rise at respectable rates. Not only has Pandora attracted more users but the average number of hours per user have also increased. Pandora now accounts for an estimated 4% of total US listening hours. As Pandora grows, it hopes to gain leverage on music labels and drive royalty costs down.[74]
Pandora CEO Tim Westergren has supported The Internet Radio Fairness Act or IRFA (H.R. 6480/S. 3609), which would reduce the company's royalty payments to the performers by 80 percent.[75]
On November 5, 2012, Pandora filed suit in federal district court against ASCAP over royalty fees.[76] In the suit, the company sought to advocate for lower licensing fees on all the songs represented by the ASCAP's 435,000 members.[77] On February 27, 2013, Pandora announced a 40-hour-per-month limit on free mobile listening. Pandora CEO Tim Westergren cited escalating royalty costs as the reason for the mobile cap.[78]
In a ruling made public in March 2014, US District Judge Denise Cote ruled that Pandora's rate paid to ASCAP should remain the same, 1.85%. She cited (p. 97) "troubling coordination" between two of the biggest publishing companies (Sony and UMPG) and ASCAP that alludes to core antitrust concern in the industry.[79]
After arguing that both ASCAP and BMI were showing bias towards international broadcasters who own terrestrial radio stations, Pandora announced on June 11, 2013, that it would attempt to acquire KXMZ, a radio station in Rapid City, South Dakota, under the presumption that doing so would allow it to access the same preferential licensing terms offered to services such as iHeartRadio (which is owned by iHeartMedia, Inc., itself America's largest radio broadcaster).[31][32] The move was criticized by David Israelite, CEO of the National Music Publishers Association, who declared that Pandora was now "at war with songwriters," and had lost its credibility because it was resorting to "lawsuits and gimmicks" to make its point. However, a member of Public Knowledge praised the move, by stating that it was "a perfect example of the twisted incentives and strange results we get from a music licensing system that is based on who wants a license instead of just what they want to do with the music they’re using."[80][81] ASCAP also objected to the deal, filing a petition to deny with the FCC. The organization argued that the acquisition was not in the public interest because of Pandora's intent to use it as a "bargaining chip" for royalty payments. ASCAP also alleged that Pandora did not provide enough information about its ownership structure, failing to prove that less than 25% of the company was owned by foreign interests. On January 14, 2014, the FCC denied the acquisition until Pandora "demonstrate[s] adequate support for its foreign ownership compliance certification."
In July 2013, David Lowery, the frontman of the rock bands Cracker and Camper Van Beethoven, wrote an article criticizing Pandora's royalty rate for Cracker's song "Low", which was streamed over one million times. According to his BMI royalty statement, Lowery earned only $16.89 for his 40 percent stake in the song.[86]
On September 1, 2013, Pandora removed the 40-hour-per-month limit on free mobile listening (originally announced on February 27, 2013). Pandora stated that it was able to make this change "thanks to the rapid progress of its mobile advertising."[87]
In 2014, Pandora signed an agreement with some music copyright owners for lower royalties in exchange for more frequent streaming of songs. Though not illegal, this practice raised comparisons to payola, which is illegal payment for airplay on terrestrial radio.[88]
