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Must Pandora die?

Posted on: 08/21/2008

The Internet radio royalty crisis may be coming to a head, as one of the country’s most-beloved webcasters, Pandora, tells the Washington Post that it is on the verge of shutting down over the issue (here).

As you know, the problem in a nutshell is that whereas all other forms of radio in the U.S. and around the world pay about 3%-5% of their revenues as a royalty to songwriters and 0%-7% of their revenues as a royalty to labels and performers, last year the U.S.‘s Copyright Royalty Board (CRB) set that second royalty rate for Internet radio to the equivalent of 70% to 300% of revenues.

While there’s a judicial appeal of this decision in progress, plus occasional negotiations going on between SoundExchange (representing labels and musicians) and various subsets of webcasters, plus bills introduced in Congress that would roll back the CRB decision, none of these fixes may happen before Pandora’s venture capitalists decide to give up and pull the plug on the service.

What are they thinking?!

I’ve been talking to several journalists this week about the issue, 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:

CONFLICTING INTERESTS WITHIN SOUNDEXCHANGE: The SoundExchange board consists of people representing a variety of different interests — major labels, indie labels, and musicians — and thus may be at an impasse.

Internet radio is clearly good for musicians and good for indie labels, so the major label guys may well be thinking, “Anything that’s good for them might not be as good for us.” My guess is that these internal conflicts may be blocking any productive movement.

RECORD INDUSTRY LAWYERS RUNNING THE PROCESS: Music industry lawyers have a reputation, deserved or not, of being greedy, litigious guys who only think about short-term victories and power plays, not what’s in their industry’s long-term best interests.

These are the same lawyers who, when they were trying to shut down the original Napster in 2001, were told “Don’t do it! Napster is controllable; if you shut it down, you’ll unleash a new generation of peer-to-peer services that will be uncontrollable. You’ll be in much worse shape!” But they did it anyway. For all intents and purposes, it’s really record company lawyers who unleashed BitTorrent and Limewire on the world.

And these are the same lawyers today who are suing grandmothers and poor people for thousands of dollars every week in file-sharing lawsuits, really damaging their lives, even though they’re doing hardly anything to get any worthwhile PR benefit from it.

As long as it’s these guys charged with running this process, we may see that type of behavior.

FEAR OF THE NEW: Here’s a theory: The executives running the music industry don’t like new technology or new business models in any way, shape, or form, so in their minds they’ve lumped us in with home-taping and CD-ripping and file-sharing. (“Anything new is bad.”)

A BIGGER PATTERN OF COPYRIGHT LAW ABUSE: Copyright law was originally designed to benefit the public — by balancing the needs of creators and distributors. What we’re seeing here, specifically in the DMCA, is part of a movement by the entertainment industry to subvert copyright law to simply maximize the revenues of copyright owners, with no more concern for copyright users or the general public.

That may be why SX’s John Simson told the Senate Judiciary committee that the traditional 801(b) standard for rate-setting, which balances the needs of copyright owners, copyright users, and the general public, is “outdated.”

BIG LABELSDESIRE TO MAINTAIN POWER & CONTROL: Independent labels and artists generally welcome the opportunity for the fair and open access that Internet radio offers to all artists and labels. (Prior to Internet radio, radio airplay could be accessed only by the very small number of major label artists who had the benefit of traditional big budget record industry promotion to large broadcasters.)

As musician Matt Nathanson testified at the recent Senate Judiciary hearing, Internet radio has broken the huge bottleneck for artist development and growth that this system represented. On the other hand, the four major labels and their trade association, the RIAA, see the new level playing field that Internet radio establishes as a threat to the old system which they controlled and dominated.

The four major labels seem to have a collective blocking veto over all royalty decisions at SoundExchange; as a result, their view has dominated SoundExchange’s position, even at the expense of its other members.

WE’RE MERELY A STEPPING STONE TOWARD BROADCAST RADIO: This whole conflict may very well simply be part of a longer-term game plan on the part of the record industry to try to get a performance royalty out of broadcast radio. In other words, the big labels may be willing to kill our industry just to give themselves a better negotiating position when they go after that industry.

By the way, as has been noted here in RAIN before, the National Association of Broadcasters (NAB) has been very tame in its support of webcasters, even though most of its members are streaming, perhaps conflicted because they see Pandora, et al., as potential competitors someday. However, this weak support is going to come home to roost soon, as SX says that for “parity” reasons broadcasters should pay what webcasters are paying.


If Pandora is forced to shut down, the outrage will be huge — among consumers, journalists, bloggers, working musicians, and even Congressional staffs.

That will be the tipping point that either (1) triggers a consumer backlash against the RIAA, which, if expressed in the form of a boycott, as some bloggers have proposed, could cost the industry hundreds of millions of dollars in record sales, (2) leads to belated reasonable negotiations from SoundExchange, and/or (3) spurs Congress to pass the Internet Radio Equality Act.

But Pandora dosen’t deserve to be the sacrificial lamb that keeps other webcasters alive. They’re loved by millions of listeners, and they’ve been great for musicians, fair to labels, and generous to their fellow webcasters.

Either SoundExchange or Congress should act quickly enough to stave that outcome off.

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  1. To be very clear, the efforts of the largest labels to consolidate distribution and marketing power in the United States, is seriously steeped in myopia. This is not a Standard Oil/Microsoft situation. Those situations never legislated their small competitors out of business. Even still, Standard Oil lost the longer term battle, and even with Microsoft one can now avoid their primary software, setting up a questionable future.

    In the end, American major labels will lose this battle by squandering time and resources that could have been used to find their perfect DNA positioning within the new interactive platforms. As with resistant viruses, the interactive market and it’s highly talented programmers will metamorphous into new, more devastating strains, which will cause major labels more grief than they can imagine. As explained in Kurt’s blog, it already happened after the demise of the first Napster.

    As a piece of advice to major labels, if it were myself in the seats of power at those record companies, I would forgo this mindless path toward a new level of self destruction. “I” would take steps to ‘organize’ communication systems with all webcasters, large and small, in a massive effort to focus releases and tour schedules, as well as have all webcasters offer sales of streamed materials, as well as push stock promotional articles for them to post. Simply put, I would get rid of these stupid fees and ‘Talk to all Webcasters’, especially the small ones (under 300 listeners).

    Webcaster’s mind-set concerning major labels is still somewhat, Godly (like an abusive father). We would love to get calls and emails from major label representatives about new releases and tours- we would love invitations to concerts and promotional events- we would love to be on the inside as direct surrogates to the labels in our geographical areas. Webcasters, small and large, would deliver millions of free promotional man-hours on behalf of the labels for this type of respect and attention. This would also create a ‘learning system’ majors could tap in to, which would uncover untold wealth systems buried deep within this new medium. The close relationships would create a nimble and powerful grassroots system of music promotion which has never been seen before (this is quickly being filled by independent music management/marketing firms).

    So, go ahead. Kill Us.
    Waste this unbelievable opportunity before you with these old arrogant, narrow-minded, business practices. As with the 1990’s ‘Napster to P2P Mutation’, your problems will be back, far more devastating than you can possibly imagine.

    Bill Wilkins, CEO
    Melted Metal Web Radio

    Bill Wilkins · Aug 21, 08:40 AM · #

  2. Here is a thought & my opinion…and this deals primarily with Broadcast radio. If these people (Sound Exchange, RIAA, major labels, etc) want to charge Broadcasters for the air play of their music, then Broadcasters should turn around and charge them for the use of the stations air waves, just like they do for advertisers who want to reach potential customers. Record companies use stations to promote their music to reach potential purchasers of that song or artist. That air time should be worth something. Stations that charge say $75 per minute for air time for advertisers, just tink for a 4 minute song, they coud make $300.00 per play of that song!

    For stations to pay record companies to promote the record companies product, to me that is just backwards. It would be like an advertiser charging the radio station for playing their commercial.

    How would the key players in this feel if they had to pay stations for the air time they use to promote their “product”, something they used to get for free.

    Wow, come to think of it, webcasters could do the same thing, charge labels for the play of their song they want promoted…..what a revenue stream that could be!

    Think about it!

    Steve Griesbach · Aug 21, 09:24 AM · #

  3. Okay, when are you guys gonna “get it!” Go hire a simple country lawyer who understands the constitution and a little bit about “restraint of trade” plus anti trust, anti monopoly law and have him/her do 2 things!

    File suit in federal court… You can’t have “separate but equal” in anything under our constitution, period! The definition of broadcasting is “from 1 to many!” Federal laws authorizing the CRB are unconstitutional, therefore the CRB must be dissolved and all members of the board of SoundExchange with ties to the record companies removed or both organizations disbanded! There cannot be separate but equal agreements between SoundExhange and terrestrial, SX and satellite, SX and webcasters, even SX and the STTC network! That’s right, the STTC network, “String To Tin Can” network has a constitutional right to exactly the same treatment as terrestrial broadcasters, AKA the “almighty” NAB!

    Next… This good country lawyer could find several ways to swear out criminal complaints against SX and CRB for violations of antitrust and anti monopoly laws!

    If you don’t do this you will loose! The opposition is counting on you not to file a lawsuit and criminal complaints… “Divide and conquer!”

    Mike Heid
    Executive Producer
    Program Creator

    Mike Heid · Aug 21, 11:00 AM · #

  4. Reply:

    Ok- how about that, Save Net Radio.org? Let’s follow Mike Heid’s lead, ramp up our fundraising, get the country lawyer (with $500 shoes), and file ..

    Bill Wilkins
    Melted Metal Web Radio

    Bill Wilkins · Aug 21, 01:16 PM · #

  5. You’ll lose.

    Sorry. But have you been paying attention to any recent court decisions? Or who’s filled out most of the current Supreme Court?

    They will “defer to the will of Congress” – ie, to the deepest pockets – in any case that involves established business interests VS anyone else. Unless, of course, Congress itself is the anyone else.

    That’s even if you could get standing which, good luck with that.

    Look how they treated the infinite copyright extensions, and that language really actually is in the Constitution.

    All three branches are bought and paid for in this issue, sadly. We only got away with it for this long because who cares about what a bunch of geeks do with their geekness. But as soon as they smelled the money, the steamroller engine started warming up…

    Brad Bulger · Aug 21, 07:08 PM · #

  6. Brad, you’re right they are all bought and paid for which is why I want our “country lawyer” to first swear out a criminal commplaint in in some federal district! At the very least SX is already violating FTC “restraint of trade” regs, but I’m sure a case can be made that SX, RIAA and the record companies that support both are violating federal anti trust and anti monopoly laws. “Let’s Book ‘Em Danno!” Our country lawyer does a little research on these laws and regs, goes to a fed U. S. assistant D. A. and files a criminal complaint! The same federal judge hearing the criminal case would be forced to acknowledge the unconstitutional nature of the CRB, the enabeling legislation and subsequently SX itself. It’s a “house of cards” that can easily be brought down with a criminal case followed by the correct legal arguements in a concurrent civil suit. First get the crinimal action started then quickly file the civil suit in the same district… This will work because they are breaking the law!

    I Wish I had the money for the lawyer!

    Okay, stepping down from the soap box!

    Mike Heid

    Mike Heid · Aug 22, 05:58 AM · #

  7. Great comments, guys!
    This is obviously one of the paths by which to move the issue forward.
    Thank you very, very, much!

    Bill Wilkins
    Melted Metal Web Radio

    Bill Wilkins · Aug 22, 07:15 AM · #

  8. It’s really simple, and has been from day one. The major labels want the internet all to themselves and are going to use their lawyers and money to accomplish their goal. That’s really all that there is to understand, no matter how much sense it makes in the big picture. They’ve never once taken their eyes off of the ball and they never will until they win or they exhaust all avenues and are defeated. They have time and money on their side.

    DJ · Aug 22, 07:35 AM · #

  9. Right On DJ… This is classic “David and Goliath” stuff! We need a “Blood Sucking, Veins In The Teeth, Ambulance Chasing,” though most important “Affable,” easy going country lawyer! The big law firms are just as lazy as the big corporations and organizations (the NAB)that hire them making all their comments on potential legal action irrelavent! All real court victories begin with a lawyer that is willing to stake everything he or she has on winning. Movies have been made, starring Julia Roberts and John Travolta about real environmental cases that yes took a long time to win but win they did! We have something bigger and better going for us right now… SX, the RIAA and the record companies paying for them are already violating federal anti trust and anti monopoly laws as well as violating FTC “restraint of trade” regs. Our “blood sucking, ambulance chasing, though affable” lawyer need only find the right federal D. A. (looking to make a big name for themselves to run for higher office) and this becomes a “slam dunk!”

    SX, the RIAA and the record companies built their whole arguement on a house of cards and the right lawyer will know immediately how to bring the whole thing crashing down. FYI, I’ve covered “David and Goliath” cases like this as a broadcast journalist for a major radio network!

    Okay, climbing back down off the soapbox, that is all!

    Mike Heid

    Mike Heid · Aug 22, 12:14 PM · #

  10. Howdy Bill Wilkins… Just tuned into Melted Metal… What a Kickin’ Station! Email me from my website… Don’t wanna publish my address here… We should talk!

    Outstanding station and website!

    Mike Heid

    Mike Heid · Aug 22, 12:46 PM · #

  11. I do hope someone manage to stop RIAA and Soundexchange soon. Their stance on music and the business of selling music threatens to destroy much of the music scene we have today.

    In a way I can understand them; they and the powers behind them have for 3 decades decided what music most people are going to listen to; have decided what styles are to be pushed towards the public at large and have made loads of money on it.

    And for the last decade this control has been dwindling; much because there has been a structural change within the systems of the majors themselves. They have cut down more and more expenses in departments that communicated with artists and buyers; in their neverending struggle to earn more and more money. Until they suddenly found themselves unable to predict what the average Joe wanted in music, and without the connections to push their own agendas through as well.

    Sales go down because they no longer know what people want, and they don’t have the connections anymore to make volunteers push their new artists either.

    Sales stop, and they seem to think that if they gain total control over other providers of music they can again set the order of the day; and use the various new technological solutions to push their own stuff.

    It might work, but it is also a very elitist way of thinking. They think they are the elite, and they want to force the public to share their views one way or the other.

    In this case they want to achieve this by eradicating as many of their opponents as possible; exterminating other parties possibilities to offer alternatives and thus exterminating artists and labels in the process – as they will be left with fewer and fewer avenues to promote their stuff.

    I think there’s a good call for making a longer article about modern day fascism on this subject.

    What’s worse is that if this situation continues in the US and RIAA and Soundexchange continues getting support for their elitist thinking, eventually their positions will be cemented.

    Regular radio stations will be the next targets then as have been pointed out. In addition, the legal precedences means that this phenomenon can and will start spreading internationally too.

    The issue at hand for lovers of music is a big one – freedom of choice. Our freedom to be able to find and discover artists is on the way to disappear, and the artists possibilities to get their music played so that people can decide whether or not they like it is just as much under threat.

    Personally I see Simson and his brownshirts as archetypical representatives of a way of thinking that should have been eradicated from this earth 63 years ago.

    And although the music scene as such is of minor importance measured against the events ending in 1945, the legal precedents these guys seems to get away with now is scary to look at, as it is quite clear that if this line of thinking gets cemented and established, it will spread to other parts of society as well.

    And the future developments this can lead to aren’t jolly – to put it that way.

    Olav Björnsen · Aug 23, 07:40 AM · #

  12. The origins of this debacle go all the way back through 20 years’ worth of change in the way government treats electronic media. We’ve long since abandoned the concept that the airwaves are a common resource, to be used to serve “the public interest, convenience and necessity”, in favor of auctioning it all off to the highest bidder. We’ve witnessed the reassignment of emergency-radio frequencies to mobile-phone auctions; why not expect the same government to hand the broadcast bands over to domination by a few giant radio chains, still in collusion (does anybody really think otherwise?) with their pals in the plush offices of the major labels? If that’s true, wouldn’t you expect that same government to work to kick the little guys off the Internet as well?

    Art Marriott · Aug 26, 08:42 AM · #

  13. Actually, Art, you are absolutely correct. Major companies would like nothing better than to make the internet a higher-tech version of cable- only big players need apply. But, the emergence of wireless internet technologies (which developed in sync with file sharing and P2P technologies) put an end to that. Start-up wireless internet providers link directly to the grid, running around the obstructionist cable/satellite systems. Add on encryption technologies to that scenario and this creates big problems for major providers who ‘had wanted’ to design a technological control model. Now, legislation is the only way to take control, and we all can see what that means. By looking at the major labels within this context I think one can start to see a much larger-scale movement to gain control over all media.

    Bill Wilkins, CEO
    Melted Metal Web Radio

    Melted Metal Web Radio · Aug 26, 03:55 PM · #

  14. The RIAA and sound ex. will have alianated the public. a few weeks ago Metalica released an album free on the web their site was full of comments from people most said syick your album where the sun dont shine. WHY? because the group had been part of the fight against nabstar. People have not forgotten let alone forgiven. If Pandora closes the backlash will be worse.

    Mike Allen · Aug 26, 07:08 PM · #

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