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Pandora Buys South Dakota Radio Station To Lower Royalty Rates

Jimmy Haas

by Jimmy Haas

Published June 12, 2013

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Internet radio giant Pandora has purchased KXMZ-FM in Rapid City, South Dakota in an attempt to qualify for lower royalty payments for its online streaming service. These royalty payments have been Pandora's biggest cost since its start, and they feel that the rates they have been charged were too high in comparison to other services.

Each time a song is streamed on Pandora, they must pay royalties for both the sound recording and the publishing for the songwriter. The songwriter royalties go to collection societies such as ASCAP and BMI. However, internet radio companies pay much higher royalty rates than terrestrial radio companies.

But, according to Pandora, the main problem of this system, and the reason Pandora is suing ASCAP, is that 16 of the top 20 internet radio services pay the terrestrial radio royalty rates because they are owned by terrestrial radio companies, such as Clear Channel's service, iHeartRadio.

Pandora assistant general counsel Christopher Harrison explained Pandora's motives in an op-ed piece on The Hill:

"Terrestrial broadcasters and their Internet properties were given preferential treatment via a January 2012 agreement between the Radio Licensing Marketing Committee (RMLC) and ASCAP and BMI. To put this in perspective, at least 16 of the top 20 Internet radio services that compete with Pandora operate under the RMLC license that has not been made available to Pandora."

By buying this station, Pandora believes that it should now qualify to pay the terrestrial radio rates, just like its competitors do.

Harrison also explains why Pandora is suing ASCAP:

"The motion outlines how we believe ASCAP has violated the terms of its antitrust consent decree with the Department of Justice by (a) discriminating in license fees and terms between Pandora and other similarly situated licensees such as Clear Channel’s iHeartRadio; (b) failing to provide required transparency in identifying songs ASCAP claims it can license to Pandora; and (c) creating a scheme by which member-publishers can withdraw their catalogs from ASCAP's license for Pandora but allow them to remain for everyone else, including competitors like iHeartRadio."

Harrison claims that "ASCAP and its members have abruptly shifted away from 100 years of business practice and attempted to create a new right to “withdraw” from ASCAP the right to license certain songs on what is essentially a case-by-case basis." Which means that Pandora would suddenly lose licenses to certain songs, and other companies would still keep their licenses.

Billboard explains the situation that led to this claim. EMI Publishing withdrew its rights last year, forcing Pandora to negotiate directly with them, rather than ASCAP. Furthermore, they did not tell Pandora which songs had their rights withdrawn, so Pandora would not know which songs were not allowed. This forced Pandora to make a quick deal (much against their own best interests) so they would not face copyright infringement claims, which could be as high as $150,000 per song. After this, other publishers began to do the same thing.

Pandora believes that ASCAP is willingly working with other companies against them, violating antitrust laws. They also believe that they may be a target because, as Harrison says:

"Certain powerful music incumbents see Internet radio as a threat to the status quo...The status quo is a dead end for the vast majority of working musicians and the Internet is driving a sea change that will fundamentally shift the equation away from big industry players towards a more democratic and inclusive industry for both listeners and artists."

It wouldn't be the first time big companies have worked together to fight off changes in their industry. We'll have to wait and see what lies ahead for Pandora and internet radio.

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