Why Pandora Media Inc. Is Happy to Pay Higher Royalties

20 Jan 2016 | Author: | No comments yet »

Behind Closed Doors: Where the New Webcasting Rates Actually Came From.

The Tullo U-turn is the most intriguing, he was bullish when shares were $8 (and was right, 5x), turned bearish when shares were above $30 (and was right, -60%) and is bullish now. The Copyright Royalty Board rate determination that has disappointed many in the artist and label community came about because the judges relied on Merlin’s direct licensing deal with Pandora and the Warner Music Group’s direct licensing deal with iHeartRadio, according to Billboard sources who have been briefed on the ruling.NEW YORK:- Internet radio leader Pandora was ordered to pay 21 percent more in royalties to record labels, a modest increase that the company hoped would allow growth.

After months of anticipation, a federal board ruled that online radio stations like Pandora must pay higher royalties to publishers for the music they play.Pandora subscribers will be sad to see the incoming price hike in subscription fees over the upcoming year, following a government decision that will require the company to pay more royalties to artists. But the selling over the past year can entirely be attributed to investors’ fear over CRB rates, it was just too murky for a cautious investor, and everywhere you turned there it was… “overhang” (the CRB did have the power to bury Pandora’s business model). That disclosure comes from those who have spoken with outside legal counsels, who relayed their interpretation of the CRB ruling to their clients — the record labels and digital companies that were participants in the rate trial.

Industry watchers had been closely watching the US govt decision for clues on Internet radio’s future as royalties account for nearly half of Pandora’s expenses. The federal board decision was modest in the increase, at least to what most investors were expecting it to be, leading to an overall net gain for Pandora, at least for now.

While the CRB’s new rates are known, the full document from the CRB judges determinations are not publicly or privately available to participants — outside counsels for each of the participants are reviewing the ruling to redact proprietary information before it’s released to the public. Judges said that Internet broadcasters such as Pandora next year will have to pay 17 cents back for every 100 streams of a song on its advertising-backed free tier, up from 14 cents this year.–AFP And honestly, if the CRB had come out with lower rates, while shares would have exploded, probably wouldn’t have lasted because SoundExchange would have appealed and if they lost they would have launched another smear campaign “artists hate Pandora”, not good long term (even with all their artist friendly moves, settling for pre-1972 works, giving up on the South Dakota radio station thing, the stigma is going to take a while to wear off). They aren’t radio, they’re 10x better than radio ever was!) Here’s how I think it goes, Q4 beats (I think they sandbagged their guidance, “playing the pauper” before CRB), but 2016 guidance is modest as integrating Ticketfly and getting the Rdio product up won’t be cheap, but as we start to get some color on Ticketfly’s growth, stock will start to climb. Not only will the company be forced to eliminate the annual subscription option, but an increase of $1.00 a month to its monthly subscription has been announced.

And a year or so down the road, they’ll have their “House of Cards” moment (reference to Netflix’s Emmy & Golden Globe winning original content which put the naysayers to rest) when Pandora finds not 1, not 2, but 3 Grammy winners! (could they be among these? http://pdora.co/1Oekilo ). According to Fortune, even though the stocks increased in light of the decision, Pandora’s shares are down overall this year, by as much as 50 percent since its peak in February. Many didn’t catch this, as everyone was busy with the headline rates, but the CRB also removed the minimum percent of revenue that was part of their former deal, a major impediment to an acquisition. Seeking guidance on what’s called a “novel material question of substantive law,” the CRB asked the Register of Copyrights if the Copyright Act prohibited the judges from setting different rates for different types of licensees. And it’s not as though the company is rolling in money: In the most recent quarter it lost about $85 million, news that caused the shares to fall by more than 30% in a single day.

The Pureplay Agreement had required that services pay the higher of the per performance rate or 25% of the webcaster’s *gross* revenues from all sources, limiting their growth outside of webcasting, and preventing companies with substantial other business interests from entering the Internet radio market and relying on the Pureplay rates. Instead, the CRB relied on the Merlin deal and the WMG deal to determine per play rates for commercial and non-commercial (respectively paid subscription and ad-supported digital radio). Of the remaining half of income, the company made four times more money from ad revenue from its free service compared to the monetary gains from subscribers. Some of that drop is a result of investors becoming increasingly disillusioned with the company’s business model, in particular its reliance on advertising for its free music tier.

At the time, Merlin was attacked by some for cutting the deal because it was feared that the CRB would look at the overall deal, including the discounts baked in, and use it as a market-negotiated benchmark in setting the current deals. But sources within the Merlin community countered that there is no way the deal could be considered a free-market negotiation because the deal used the CRB-imposed rate as the ceiling. Another part of this attempted transformation is a move to become more like Spotify, in other words a streaming-music service that charges a monthly fee instead of free online radio. While iHeartMedia cast that deal as covering both terrestrial and digital, sources say that the radio syndicate just paid a lump sum that didn’t distinguish between either type of play. In any event, the CRB apparently ignored the other promotional benefits that WMG supposedly received — such as incremental and promotional radio airplay for its music — and only focused on the payment.

Streaming-music services often wind up paying more for their music than radio services like Pandora do, because of historical differences in how radio and streaming music have been treated by regulators. But they have the opportunity to cut deals with specific record labels for lower rates, whereas radio services just pay whatever the board tells them to. One source disputes that math, however, saying the Judges’ determination states the new rate was not “an average” between the Merlin and WMG rates. This attempted transition helps explain why Pandora CEO Brian McAndrews recently wrote an essay arguing that unlimited radio-style free music—the very thing that created the company he works for—is ultimately a bad thing for society.

And Pandora is probably hoping that by siding with the record industry on the free music question, it can build some bridges that will allow it to cut more favorable music licensing deals. The latest news from the rate court is further proof of the need for the passage of broad music licensing legislation.” SoundExchange itself, responsible for collecting the royalties that result from the CRB’s ruling, expressed disappointment with the ruling almost immedieately. But the Future of Music Coalition, an artist advocacy group based in D.C., is upbeat about the rates. “The new rates will allow artists and independent labels to participate in this success at a higher level,” the organization’s CEO Casey Rae said in a statement. “The fundamental value of popular Internet radio services comes from music creators, and we are glad this has been recognized in a healthy rate increase for non-subscription services.” “This decision allows for competitive experimentation in the music discovery space, opening up endless options for listeners,” reads a statement from Mike Montgomery, executive director of CALinnovates, a San Francisco advocacy group for technology companies.

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