Pandora Goes After Artist Royalties In Big Risk

WASHINGTON -- Since Pandora launched its Internet radio service in 2007, it has grown from a startup facing near-bankruptcy to a leader of the digital streaming market. With more than 60 million users in the past month, the company is now estimated to be worth billions, with revenue doubling every year. "On the growth side, it's been a wonderful story," founder Tim Westergren declared at a recent conference. "Our listenership just keeps exploding, and so does our revenue."

It's quite a success for a company that sold itself as an artist-friendly, transformational force that didn't just make radio cool again, but also offered -- through royalty fees -- a potential path to prosperity for musicians who've seen physical record sales plummet. Westergren is a musician himself, and takes pride in championing indies and majors alike. Pandora uses an algorithm that essentially modernized the much beloved free-form radio formats of the 1960s and '70s.

But Pandora has come to see its dominant market share not as an against-all-odds triumph, but as a burden. The more successful it became, the more money it paid musicians in royalties. Lowering its rate, the company has argued, would make it easier for Internet radio companies to thrive, theoretically providing more ways for artists to get compensated. Last week, Pandora CEO Joe Kennedy appeared at a hearing on Capitol Hill in support of the Internet Radio Fairness Act, or IFRA, which would lower the amount of royalties that Pandora and other Internet radio services pay to artists. The industry has estimated the act would allow Pandora to reduce payments to artists by as much as 85 percent.

The company has been spending big to make its case in Washington. Pandora dished out $180,000 on lobbying in 2011 and $160,000 in 2012, according to the Center For Responsive Politics. For much of its lobbying this year, the company retained TwinLogic Strategies, whose other clients include Amazon, Chevron, Motorola and Yahoo.

During the past election cycle, Westergren donated more than $65,000 to candidates, a PAC and state Democratic Party organizations, including $2,000 to Rep. Jason Chaffetz (R-Utah), who introduced the Internet Radio Fairness Act. Westergren also has given thousands of dollars in campaign contributions to members of the House Judiciary Committee, which could help steer legislation friendly to Pandora.

But all of Pandora's lobbying in support for the bill has antagonized musicians, and lawmakers. If it's not careful, industry insiders said, Pandora could end up jeopardizing their business.

"Pandora has to be applauded for doing such great work to grow the webcasting marketplace," said Casey Rae, deputy director of the Future of Music Coalition. "Over the years it's been pretty clear there's been major benefits to musicians. … When you are looking at IRFA and the potential effects -- the sheen starts to come off a bit."

The bill has attracted a We-Are-The-World collection of foes, with musicians, unions and industry executives joining forces. More than 100 artists and musicians across all major genres -- including big-name stars like Katy Perry, Rihanna and Cee Lo Green -- signed an open letter in Billboard magazine in November opposing Pandora and the Internet Radio Fairness Act. The NAACP has also attacked the bill. Pandora's push seems to have stripped the company of a lot of the goodwill it had built within the industry and put the spotlight on its balance sheets. Musicians argue that Pandora already pays them a pittance.

"When you do the math, it's horrifying for an artist," Eric Hilton, who runs ESL Music and is one half of the band Thievery Corporation, told The Huffington Post in an email.

Laura Ballance, co-founder of one of the most successful indie labels, Merge Records, whose roster includes bands such as Arcade Fire, the Magnetic Fields and Spoon, said she isn't happy with Pandora's current rate either. "It should be higher," she told HuffPost. "It doesn't make me feel badly for [Pandora] at all that they should be paying out half of their revenue or more to artists -- that is entirely how their revenue is generated."

At the hearing last week before the House Subcommittee on Intellectual Property, Competition and the Internet, Jimmy Jam, the famed R&B producer and songwriter, calculated that for every spin of a song on Pandora, the copyright holders and musicians get just one-tenth of one cent.

"Put another way, the listener would have to hear that song on Pandora every single day for nearly two years to equal the payments" from one digital purchase on Amazon, Jimmy Jam said. He noted that for each 99-cent download on Amazon, the company pays about 70 cents to rights holders and creators.

Lawmakers on the committee questioned whether royalty rates were the real problem, pointing out that traditional FM/AM stations pay no royalties to performers at all. Rather than lowering the rates that Pandora pays, some congressmen proposed that getting terrestrial radio stations to pay up could be part of a fairer, more comprehensive solution. Others suggested that Pandora might need to fix its business model and perhaps sell more ads.

"We need to find a solution that brings together all stakeholders and ensures that we are not back here in another year adjusting the rates again and inserting ourselves into the market," Rep. Jim Sensenbrenner (R-Wis.) said in an e-mail statement to HuffPost after the hearing.

But Kennedy, Pandora's CEO, maintained that the solution is to lower the rates his company pays to artists, telling HuffPost that the company is not interested in lobbying radio to start paying royalties. "We don't have a dog in that fight," he said. "We think it's important that Internet radio not be held hostage to that issue."

Pandora's legislative push has exposed the company as far short of the transformational force it has hoped to be. It may have a musician as a founder, but it's still a publicly traded company with shareholders to please. The company, critics said, seems less inclined to revolutionize the music business than to enhance its stock price.

"These are all investment bankers," said Danny Goldberg, a veteran manager and former label executive with Warner and Atlantic. He said Pandora is no different than industry's heavyweights. "They are all cut from the same cloth, which is fight for any penny. … I don't know where the self-righteousness comes from."

"Maybe Pandora's business doesn't work," Goldberg said. "That's okay. There's no inherent moral right to have a business plan work."

If Pandora's business model is going to work, it needs musicians and record labels to buy in and supply it with content. Having a deep catalog of music is essential for any digital music startup looking to attract users (and venture capital funding). A lower royalty rate could mean a smaller catalog. "I think that some artists and musicians would indeed pull out of the company if Pandora manages to get the rate lowered," Ballance said.

If Pandora's users start finding that their favorite bands aren't available through the radio service, they may migrate elsewhere.

At least for now, the vast majority of artists do not have the rights to pull their songs from Pandora. But as they sour on the Internet radio service, they are starting to search for alternatives. Damon Krukowski, a member of indie icons Galaxie 500 and Damon & Naomi, began streaming his music for free at his own site partly in response to what he considered to be Pandora's and fellow Internet music service Spotify's paltry royalties. He detailed his decision in a Pitchfork essay, which became something of a sensation.

"The reaction [to the essay] has been a surprise to me, just in that there was so much of it," Krukowski told HuffPost. "I didn't break any news -- those royalty rates have been discussed before. ... I'm always glad to share information and ideas with other musicians. In my experience, we depend on one another for that kind of help. Who else can we ask about that kind of thing, other than one another?"

All the uncertainty in the digital realm reminded Krukowski of being a young indie rocker in the 1980s, when putting out an album and organizing a tour required a pioneering spirit. "There's no normal again," he explained. "I don't think anybody has an answer. I don't think it's necessarily a bad thing. It might just get very creative."

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