Digital Notes: A Royalty Dispute Spills Over Online

Music October 4, 2012, 4:13 pm

By BEN SISARIO

Normally the negotiations over music royalties are almost painfully dry affairs. The most excitement might be a few words tucked amid reams of gray financial reports.

But a bill in Congress that would change the process by which rates are set for Internet radio services like Pandora has gone loudly public since it was introduced last month, with Pandora and various groups representing musicians taking their arguments to the public online.

The bipartisan bill, called the Internet Radio Fairness Act, concerns the obscure legal standards under which a panel of federal judges determine royalty rates for digital radio. There are two slightly different processes for Internet radio companies (like Pandora) and satellite radio (Sirius XM). The bill would align them all on the satellite standard, which includes a crucial provision allowing judges to consider whether rates would have a “disruptive” effect on the industry.

As the bill was being introduced, Pandora began sending letters to its users from the service's founder and public face, Tim Westergren. He asked users for their “urgent help,” and directed them to their Congressional representatives to support the bill. The letter points out that last year Pandora paid more than half its revenues in music royalties, while Sirius XM Radio “paid less than 10 percent.” Pandora has more than 150 million registered users.

In response, the MusicFirst Coalition, whose members include the Recording Industry Association of America and the American Federation of Musicians, posted a statement calling Pandora's proposal “dishonest” and “misleading,” and saying that it would be “devastating to music creators.”

The A.F.M. has also taken to its Facebook page - and to Twitter - to promote a petition titled “Say No to Slashing Musicians' Pay.” Among others who have weighed in against Pandora are Bob Lefsetz, a gadfly commentator who is followed widely in the music industry.

Pandora argues that its current standard - known as “willing buyer, willing seller” - results in an unfairly high royalty rate. The musicians' groups, as well as some financial analysts, counter that its effective royalty would decrease if the company made more money from advertising and subscriptions. (Pandora pays a “penny rate” - a fraction of a cent each time a song is streamed - and its total royalties must be a minimum of 25 percent of its gross revenue.) They also note that Pandora actually pays a preferential rate - less than that of radio companies for their online streams - negotiated after the last rate fight in Washington several years ago.

Ted Kalo, the executive director of the MusicFirst Coalition, said in an interview on Thursday that his member groups' use of social media was necessary to counter Pandora's huge reach.

“We agree that there should be parity between platforms,” Mr. Kalo said, “but that parity shouldn't be a race to the bottom.”

Ben Sisario writes about the music industry. Follow @sisario on Twitter.