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Pandora happier than SoundExchange following mixed bag CRB royalty rate ruling

By Chris Cooke | Published on Thursday 17 December 2015

So, the Copyright Royalty Board in the US yesterday delivered what could be seen as a mixed bag ruling over the rates online radio services in the US must pay in the coming five years, though it was Pandora which was smiling, while record industry rep SoundExchange is “reviewing the decision closely and considering all of our options”.

As much previously reported, online radio services Stateside – including personalised radio services like Pandora – can license sound recordings under a compulsory licence, which means labels and artists are obliged to allow these services to use their music. When a service exploits the compulsory licence it must pay royalties via collecting society SoundExchange, with rates ultimately set by the CRB.

The judges who make up that board have been busy of late considering what rates such services should pay over the next five years. Although there have been plenty of CRB rulings before, much more attention has been given to this review simply because online music services have become so key to the record industry in recent years, and personalised radio set-ups like Pandora and iHeartRadio completely dominate the streaming sector in the US in terms of users.

Needless to say, the streaming services wanted the rates they pay to be cut, while SoundExchange, speaking for the labels and artists, argued for rates to be increased, claiming that current royalty fees undervalue the music online radio platforms utilise.

Services have been paying 0.14 cents per stream in recent years. Pandora wanted that cut to 0.11 cents per stream, while SoundExchange was pushing for 0.25 cents per stream. Tiny differences per play of course, but given the high number of streams, a lot of money was actually at stake.

In the end the CRB went for something in the middle, increasing the per stream rate to 0.17 cents from next year, and then locking that to the US Consumer Price Index for subsequent years through to 2020, meaning rates will be amended every twelve months more or less in line with inflation. So, more than the digital services are currently paying, and more than they wanted to pay, but some way off what SoundExchange asked for.

It is worth noting that this figure relates only to free streams, ie where the consumer doesn’t pay. It’s the most important metric because the vast majority of consumers using personalised radio services like Pandora and iHeartRadio aren’t paying, opting for ad-funded services. But some such streaming platforms, including Pandora, do offer a paid-for ad-free option.

On paid-for streams the rate has actually been dropped, from 0.25 cents per stream to 0.22 cents. Although that is basically bad news for labels and artists, it does make premium subscription services more viable and more attractive to the likes of Pandora, and generally the music industry is keen to push more users from the free services onto paying services. Therefore the silver-lining for the labels on that rate – if you must insist on finding one – is that it might persuade personalised radio services to put more effort into upselling premium, which even Pandora has not done a particularly good job on to date.

Not that SoundExchange itself was particularly looking for any silver lining last night, saying that it was “deeply disappointing” that online radio services were getting what it considers to be below market rates, on top of the zero rate terrestrial radio stations enjoy when it comes to sound recordings (because in the US AM/FM stations aren’t obliged to pay any royalties to labels or artists).

The rights society said: “SoundExchange presented a strong case on the fair market rate for music played by webcasters utilising the statutory license. Our rate proposal used data from dozens of marketplace deals and was based on what willing buyers and sellers would agree to. Music has tremendous value and is the core foundation of the webcasting industry. It’s only fair that artists and record labels receive a market price when their music is used”.

It went on: “We believe the rates set by the CRB do not reflect a market price for music and will erode the value of music in our economy. We will review the decision closely and consider all of our options. As music advocates, SoundExchange represents the entire recorded music industry and we remain united on the principle that recording artists and rights owners deserve a fair market rate when their music is used”.

The “considering of options” could mean that SoundExchange may as yet appeal the CRB’s ruling, which also has to be approved by the US Register Of Copyright, so this big rate review may not as yet be over. But the digital services, for now, seem basically happy. Well Pandora does. And although this rate ruling affects plenty of other online operators in the US, it is the publicly listed Pandora which has had the most attention, not least because the insecurity caused by the review has caused the firm’s share price to dip.

Pandora boss Brian McAndrews said he was “pleased” with the outcome because, while the new rate was higher than he wanted, it was within “our range of expected outcomes”. He also welcomed the “much-needed certainty” the ruling provided (any appeals pending, of course). Though, speaking to investors, he also said that he saw Pandora doing more direct deals with the record industry in the future, meaning the firm will rely less on the SoundExchange licence during the period these new rates cover.

As previously noted, Pandora has relied heavily to date on the compulsory licenses available in the US to operate (collective licensing rules mean that there has been a virtual if not actual compulsory licence on the publishing side too).

Of late it has started doing direct deals, with indie-label repping Merlin on the recordings side, and Sony/ATV, Warner/Chappell, Songs and BMG in the publishing domain. With ambitions to expand globally and into on-demand streaming – where the SoundExchange licence does not apply – these direct deals will become all the more important.

Which could all mean that this super important ruling by the CRB actually becomes less relevant in the next few years as the biggest personalised radio service – and any of its competitors which also have global or on-demand ambitions – increasingly go the direct licensing route. But still, in the short term, Pandora can probably switch on a happy playlist today. SoundExchange may be mainly listening to something a little more mellow. Or angry. Maybe angry.