LEGISLATION OPENS PANDORA’S BOX

Reps. Jason Chaffetz (R-Utah) and Jared Polis (D-Colo.) introduced a bipartisan bill to the House on Friday, the intent of which is to lower the fees paid by Pandora and other Internet radio services—a hot-button issue we’ve been reporting on in recent weeks (see our related piece on Pandora founder and chief Tim Westergren). Sen. Ron Wyden (D-Ore.) is expected to introduce a similar bill in the Senate.

Both bills propose to change the way the Copyright Royalty Board calculates how much money online radio entities must pay labels and acts, the L.A. Times synopsized, saving us the trouble of having to do it again (see our 8/30 piece).

Pandora has actively lobbied Congress to make the change, arguing that the current method is unfair because it charges Internet radio services disproportionately more than similar services provided by cable operators and satellite radio. Titled the Internet Radio Fairness Act, the bill would have the CRB apply the same calculations to Internet radio as it does for satellite and cable radio.

Right on the heels of the bill hitting the House, Westergren posted a statement on the company site. "Pandora applauds Reps. Chaffetz and Polis and Sen. Wyden for their sponsorship of the Internet Radio Fairness Act of 2012 and urges legislators to act quickly to extend a fair rate standard to internet radio,” Westergren wrote. “As written, the legislation would establish a level playing field for internet radio by putting it under the same rate standard of the Copyright Act as cable and satellite radio.

"Royalty rates for different formats of digital radio are astonishingly unequal. Currently, internet radio shoulders the largest royalty burden, far higher than any other form of radio. Last year, Pandora paid roughly 50% of its total revenue in royalties, more than six times the percentage paid by SiriusXM. The Internet Radio Fairness Act of 2012 addresses this discriminatory practice of favoring one form of digital radio over another by extending the common standard to include internet radio.

"The discrimination against Internet radio is not only fundamentally unfair, it also undermines the growth of an exciting new form of radio that listeners have embraced, and that provides unprecedented exposure and revenue for thousands of working artists. A more equitable rate structure would drive investment and innovation, bringing greater choice for consumers, and ultimately greater revenue for performing artists. This bill is a win for consumers, artists and technology innovation."

So, too, not surprisingly, did Clear Channel, which has a massive investment in the next generation of radio via its iHeartRadio online initiative. The radio giant issued a statement of its own on Friday. “We share the view of Representative Chaffetz and Senator Wyden that fundamental aspects of the system governing sound recording licensing royalty rates are out of sync with the realities of the 21st century marketplace and must be fixed,” the CC statement read. “This legislation is an important part of that process. We believe that the rate setting process and royalty standard for the CRB’s determinations must support rather than stifle the growth of digital music for the benefit of consumers, artists and businesses—helping consumers gain more access to their favorite artists, assisting artists in reaching as many listeners as possible and enabling the digital music industry to flourish with a sustainable business model.“

We look forward to working with policymakers and business leaders in the coming months to develop the kind of fair music licensing rate setting royalty standard that benefits artists while reflecting both consumer preferences and the business realities of the 21st century.”

On the other side of what promises to be a fierce battle are artists and labels, who say that changing the royalty structure will hurt musicians.Said Ted Kalo, Executive Director of the MusicFIRST Coalition: “There’s nothing fair about pampering Pandora, with its $1.8-billion market cap, at the expense of music creators.”

The Chaffetz-Polis legislation has the potential to become a replay of the epic—and successful—battle Pandora waged between 2007 and 2009 to lower the royalties it had to pay, Times media reporter Alex Pham noted. In 2009 all parties agreed to a rate formula that required Internet radio providers to pay either a per-song rate that averages about 2 cents per listener per hour of music streamed, or 25% of their gross revenue—whichever is greater.

For Pandora, the 2 pennies is adding up to hundreds of millions of dollars a year. In the second quarter alone, Pandora paid $60.5 million in royalties, or roughly 50% of the company's revenue. The rate for satellite radio is set at 8% of gross revenue, while cable music service providers pay 15% of gross revenue.

"If Pandora was not burdened with these punitive royalties, the company could introduce music services that could grow the industry and grow royalties," John Villasenor of the Brookings Institution and UCLA told Pham. "This will mean more music choices for consumers, a thriving Internet radio industry and more royalties for musicians."