Thursday, August 21, 2008

Pandora Could Be First Major Casualty of New Royalty Rates

By Eliot Van Buskirk

For over a year, publications including Wired.com have warned that the U.S. Copyright Royalty Board's new rates for webcasters would end online radio as we know it. Now, those chickens are coming home to roost.

Pandora -- practically the poster child for online radio -- says it will shut down if royalty rates enacted in March of 2007 are not altered soon.

Despite all of those warnings, the rates remain intact and must be observed by webcasters, even as the battle over them continues. Aside from a few concessions to small webcasters and those with lots of unique streams, Washington lawmakers have not altered the rates, which currently require Pandora to fork over 70 percent of its revenue to labels and artists.

"We're losing money as it is," founder Tim Westergren's told The Washington Post. "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," adding, "We're funded by venture capital. They're not going to chase a company whose business model has been broken. So if it doesn't feel like its headed towards a solution, we're done."

Westergren agreed to a hasty interview on Monday but was unavailable to talk due to a family engagement. However, a Pandora spokeswoman said the company has been paying the new royalty fees to SoundExchange since July 2007 and that there's no specific day on which Pandora will go offline, assuming the rates are not changed. "It's an ongoing judgment call based on the trajectory of the negotiations," she said.

If Washington lawmakers want to ensure that legal music services cannot compete with under-the-radar alternatives that pay nothing to artists, they're doing a bang-up job.

Record labels and artists have nothing to gain by killing off services that pay them royalties. In fact, a source close to the situation told us last year that SoundExchange, which represents many labels and artists, was as surprised as anyone else that the U.S. Copyright Royalty Board accepted SoundExchange's proposed rates without altering them substantially. What may have been a negotiating tactic has become law, much to the detriment of webcasters, music fans and a flagging industry that desperately needs legitimate music services like Pandora.

While all forms of U.S. radio pay royalties to songwriters and publishers through rights organizations such as BMI and Ascap, record labels and recording artists have not received performance royalties from radio in this country, because radio was thought to have a promotional effect on sales. With sales flagging, labels and artists are trying to collect licensing fees from all uses of their music, including radio. Satellite radio stations must pay a small percentage of revenue, while terrestrial radio stations currently pay no royalty to labels and recording artists.

Rep. Howard Berman (D-California) is reportedly trying to broker a new deal between SoundExchange and webcasters to reduce the per-song, per-listener rates handed down by the Copyright Royalty Board last year. But he doesn't appear optimistic.

"Most of the rate issues have not been resolved," Berman told The Washington Post. "If it doesn't get much more dramatic quickly, I will extricate myself from the process."

Due to rates Westergren called "far too high to allow ad-supported radio to operate," Pandora ceased webcasting to the United Kingdom on January 15. Unless these rates change, the United States is next.

http://blog.wired.com/music/2008/08/pandora-could-b.html