Pandora Opens a New Front in Its Royalty War

Pandora Media is already engaged in one tense war with the music industry over its royalty rates. With a new lawsuit, it has expanded that war to two fronts, underscoring how critical royalties are to Pandora's business - as well as to the artists and music groups that accuse the company of asking for a break at their expense.

In September, a bill was introduced in Congress, the Internet Radio Fairness Act, that could lower the royalties Internet radio services pay to record companies. Pandora, which supports the bill, along with Clear Channel Communications and various technology groups, say it believes that such a change would bring its royalty obligations in line with those of other digital services that pay less, like satellite radio. But the music industry has cried foul.

On Monday, Pandora expanded its efforts by suing the American Society of Composers, Authors and Publishers, one of the United States' major performing rights organizations, to lower its r oyalties to music publishers and songwriters. Pandora's last license with Ascap expired almost two years ago, and in the suit, filed in United States District Court in Manhattan, Pandora asked the court to set a new licensing deal with “reasonable rates and terms.”

As it has with the Internet radio bill, Pandora characterized its suit as an attempt to get fair treatment, comparing its situation to that of broadcast radio. Radio stations pay 1.7 percent of their revenue in publishing royalties, minus deductions for advertising commissions; Pandora pays 4 percent, and does not get the same deductions.

“Ascap continues to seek rates higher than the current rates and above the agreement that they reached earlier this year with all of the major radio groups, which covers both broadcast and Internet radio usage for the majority of our competitors,” a company spokeswoman said. “As a result, we are initiating the process that has b een in place for decades to resolve royalty disputes with Ascap.”

Ascap declined to comment. But another industry group, the National Music Publishers Association, criticized Pandora for filing the suit.

“It's outrageous Pandora would try to reduce the already nominal amount they pay songwriters and music publishers, when Pandora's business model is based entirely on the creative contributions of those songwriters,” David Israelite, the president of the publishers association, said in a statement.

The case also touches on the somewhat obscure but contested issue of direct licensing. Ascap offers blanket licenses covering all the repertory it represents, but Pandora wants to be able to “carve out” from that fee the cost of licenses that it must negotiate directly. (Some publishers, like EMI, have opted out of the performing rights groups for their digital dealings.)

The legality of these kinds of carve-out deals has been affirmed by two recen t court decisions involving DMX, a company that supplies music to stores and restaurants. But they are still controversial. Proponents say they believe that publishers can make more money if they negotiate on their own behalf, but critics worry that they will undermine collective bargaining through the organizations and ultimately devalue music licenses, hurting all artists.

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