Music publishers, record labels, civil rights groups and even members of Pink Floyd have spent the past year piling on internet radio service Pandora Media. They’ve called its founder, Tim Westergren, a robber baron. They have accused Pandora of making millions off musicians’ work. They claim it’s trying to slash artists’ pay through legislative manoeuverings over royalties.
Chalk it up to the perils of pioneering. In eight years Pandora has moved to the top of the internet radio charts, with 71 million monthly active users. It accounts for 70 percent of internet radio and 8 percent of total US radio listening. Advertising, which accounts for 80 percent of revenue, will hit $643 million this year. Mobile ad sales topped $100 million for the first time in the third quarter of 2013, making Pandora third in mobile ad revenue, behind Google and Facebook. Shares have nearly tripled in the past year.
But Pandora is renegotiating (likely downward) its royalty rates with artists, labels and music publishers.
That put Westergren and Pandora’s new CEO, Brian McAndrews, in the middle of a public relations mess just as they’re facing what may be their biggest existential threat: Apple’s new iTunes Radio. Westergren admits there have been “misunderstandings” about Pandora’s royalty moves but says it’s just trying to balance a system that’s forcing it to carry an “unfair” and “high royalty burden”. Proof point: Pandora has yet to turn a profit, and it’s expected to continue to rack up losses.
“In spite of all the rhetoric, Pandora supports very healthy royalties for artists,” says Westergren, who worked as a struggling musician before turning internet entrepreneur. “We’re going to play music by artists that have never been played on radio before—and play it to a wide enough audience that we’ll create a musician’s middle class.”
The warm-and-fuzzy message has been adopted as well by McAndrews: “Musicians should be fairly compensated for their art.”
Pandora does have a point when it talks about the complicated US music royalty system: Internet services pay higher royalties than cable and satellite radio, while AM/FM radio doesn’t pay a cent to performers. Last year Pandora paid out about 56 percent of its $427 million revenue in performance royalties; rival satellite service Sirius XM paid out 8 percent of sales.
Pandora’s PR problem stems from its support of the Internet Radio Fairness Act of 2012, which many view as a betrayal, intended to benefit the company at artists’ expense. IRFA requires the Copyright Royalty Board, which sets royalty rates, to use the same standard across music services. That would effectively lower Pandora’s payout. Even so, music rights holders would love to see the system changed because they believe it shortchanges them.
“We want Pandora to succeed,” says Ted Kalo, executive director of the musicFIRST Coalition, which persuaded 138 bands and artists to oppose the bill (which quickly died in committee). “But there’s a fundamental compact between these services and the people who create music. Our musicians want to receive a fair day’s pay for a fair day’s work. But by running to Congress to get their own deal, [Pandora has] run away from that compact.”
Former members of Pink Floyd were more blunt, citing “Pandora’s internet radio royalty ripoff ” in a USA Today op-ed. “A business that exists to deliver music can’t really complain that its biggest cost is music,” wrote Roger Waters, David Gilmour and Nick Mason.