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RAIN 8/21: Hanson asks, "Does Pandora have to die?"

Posted on: 08/21/2008

MUST PANDORA DIE?” ASKS HANSON: In his blog post at right, RAIN publisher Kurt Hanson writes, “I’ve been talking to several journalists this week about the issue [of Pandora considering shutting down], and the question they always ask me is this: ‘Trying to bankrupt your industry doesn’t make any sense! WHY is SoundExchange doing this?‘ As near as I can read the situation, there are several phenomena at play simultaneously that explain their seemingly-irrational behavior…” Read the full blog posting at right or here.

SIMSONLOVES PANDORA,” BUT “I CAN’T LIVE WITH 21 CENTS: SoundExchange executive director John Simson says webcasters don’t make enough money for his organization to consider agreeing to collect royalties based on a percentage of webcasters’ revenue. Wired’s Eliot van Buskirk reports today (here) on comments Simson made in a recent interview (video of which is available). Simson, who calls Pandora his favorite music discovery service, says that with the low ad sales on services like Pandora, they’re only monetizing listeners at about $3.50 per listener per year. If webcasting were to pay royalties at a percentage similar to satellite radio (about 6-7%), “that would be 21 cents… I can’t live with that.” Simson also characterized webcasters arguing for more equitable rates as a vocal minority, and that any lack of progress isn’t due to his side’s unwillingness to talk. “80% of the big services are paying the current rates… 80% are paying 95% of my royalties… There’s a small handful that say ‘we can’t afford it.’ We’ve been sitting down with them now for over a year, trying to negotiate…” Simson spoke with Loyola University professor George Howard (video here).

RAIN ANALYSIS: What SX’s John Simson is conveniently forgetting in his comments above is this: Pandora is giving airplay to thousands of musicians and bands that have never received significant radio airplay before — and, thanks to its Music Genome Project underpinnings, is exposing each of those musicians and bands to the exact consumers who are most likely to become fans! As a result, hundreds of indie labels and thousands of artists are seeing increased download sales, CD sales, and concert ticket sales. If each Pandora user discovers only one new group per calendar quarter, and buys only one CD per group, that’s still a $320 million value! On top of that, Pandora will pay almost $2 million to ASCAP, BMI and SESAC for distribution to songwriters. If SoundExchange got another $2 million to distribute to labels and musicians, would that be so bad? Is saying “I can’t live with that” — and instead trying to grab 70% of Pandora’s advertising revenues — really a reasonable response? — KH

MANY WEBCASTERS WILL PAY MORE THAN PANDORA’S 70% OF REVENUE FOR ROYALTIES: We’ve been reading extensively about Pandora’s royalty plight, but for some webcasters, royalties would eat up even more than 70% of revenue. The Mercury News reports that AccuRadio would pay $67,000 a month in royalty fees when it only brings in revenue of $40,000 to $50,000. “We would be totally bankrupted under these rates,” said AccuRadio CEO and RAIN publisher Kurt Hanson. Michael Huppe, general counsel of SoundExchange, argues against the implementation of a percentage-based royalty system (that seemingly works fine for other types of royalties and other breeds of radio), stating, “You can’t just look at the percentage of revenue quote and think that tells [the] whole story.” According to Huppe, some webcasters seek listeners rather than revenue, while others “see Internet radio as a loss leader to lure in customers to other parts of their sites,” thus revenue figures are not an accurate way to determine royalty payments. Read the full article here.

COLUMNIST WONDERS, “SHOULDN’T PUBLIC’S BENEFIT BE CONSIDERED IN ROYALTY DEBATE?”: In covering the Internet radio debacle, PC Mag questions why no one considers how devastating webcast royalties would affect the public. “The enforcement of copyright laws has never been purely about getting rights owners paid. Protection for public interests is written into copyright law,” author Dan Costa writes, “The current royalty scheme seems to be designed solely to fill record label coffers.” With 72 million monthly listeners, Costa argues that the Internet radio audience “is diverse, mainstream, and likely willing to spend a little cash to enjoy their music. These consumers may not be united in the fight for more sensible royalties, but they are hardly powerless.” Creating a royalty rate that solely hunts for the copyright owners’ profit while destroying a service that the public enjoys and uses at growing rates, is clearly against public interest. Read Costa’s full article here.

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  1. “If webcasting were to pay royalties at a percentage similar to satellite radio (about 6-7%), “that would be 21 cents… I can’t live with that.”

    And if that’s all the revenue that Pandora was ever able to generate they wouldn’t live with that either, they’d go under. That’s the beauty of revenue based royalties – both sides take the ride with each other and their successes are linked.

    And what does hme mean when he says “he” can’t live with that? “He” is supposed to be running a neutral royalty collection service, not shilling for either entity. How can anyone have confidence is SoundExchange’s objectivity if it’s head honcho is unabashedly biased toward one side?

    Bob Bellin · Aug 21, 06:40 AM · #

  2. It would be a crying shame if a wonderful, innovative, and ground breaking music service such as Pandora becomes the sacrificial lamb of the industry, in order to create the public outcry needed to bring this issue to the forefront and closer to resolve.

    If they do plan to shut down, I hope that they have a plan B that will allow them to rise from the ashes like the Phoenix after they’ve been burned at the stake by SX.

    Val Starr · Aug 21, 07:34 AM · #

  3. “I can’t live with that…”

    Simson ought to have violin music playing to accompany his idiotic sob story, except it’s doubtful he’d want to pay his own proposed royalty for it.

    Art Marriott · Aug 21, 07:47 AM · #

  4. Simson most certainly can’t live with that 21 cents – especially since he’s pulling down $264k/year (in ’06) according to the IRS, up from $225 in 2005. Wonder what he’s making this year? At that rate he’s at, what, $340k/year now?

    All that money – and most of it from artist royalties.

    A total disgrace.

    anon · Aug 21, 02:18 PM · #

  5. It’s very tempting to jump on Simson’s “I can’t live with 21 cents” comment, as some others have done, but I think a review of some of the data is in order first. What is the revenue per aggregate tuning hour for Internet radio services, and how does that compare to terrestrial, satellite, or cable radio? A few figures on that should give us a much clearer picture of whether Simson has a point or is just blowing smoke.

    mwalimu · Aug 22, 04:29 AM · #

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