Tag: Pandora

Pandora wins on appeal. But stay tuned.

This week, the 2nd Circuit Court of Appeals ruled in favor of Pandora, upholding a ruling by Judge Denise Cote in affirming the 1.85 percent of revenue cost set by the rate court as “reasonable.” Maybe, but any way you slice it, songwriters and composers are still getting hosed by streaming services  You’ve probably seen some of the headlines or statements made by songwriters you know saying things like, “20 million plays earned me about two dollars.”  Maybe you didn’t care because you figured the famous person who made that statement was already rich; but setting that logic aside, it ought to be clear that today’s generation of new songwriters and composers will not be building professional careers based on revenue streams that turn millions of plays into pennies.

Music streaming is cool and convenient, but even as the dominant players in the space congratulate themselves for being “innovators,” the reality is that a tiny handful of guys are making millions of contemporary dollars while enjoying the benefit of paying antiquated rates to publishers, who in turn pay songwriters and composers.  This is because ASCAP and BMI (generically called PROs for Performance Rights Organizations), who traditionally negotiate and collect fees on behalf of publishers for public performance licenses are locked into consent decrees whereby a court has set the rate at 1.85 percent of revenue for radio broadcasting.  Spokespeople for ASCAP have consistently pointed out the absurdity that this particular class of artists is more regulated than the corporations that profit by using their work. As such, the PROs back the proposal of the Songwriters Equity Act in an effort to change rate setting to better conform to the new market.

It should be obvious to anyone that a Pandora-like service isn’t exactly radio. The collective earnings of thousands of terrestrial radio stations add up to considerably more than the revenues of a single Pandora.  At the same time, a single Pandora reaches a global audience, even obviating the need for listeners to use terrestrial radio at all.  That’s just technological progress, and nobody hopes or expects to put that genie back in the bottle.  But because the one Pandora is allowed to pay the same percentage of earnings as the collective of all terrestrial stations, that’s the reason millions of plays worldwide translates into pocket change for songwriters and composers.

So, in a nutshell, the appellate court ruled that ASCAP may not raise its rates to new benchmarks that would be aligned with this dramatic shift in the market, and it also ruled that the individual publishers Sony/ATV and UMG may not withdraw only their digital rights from ASCAP  in order to negotiate those specific licenses separately with Pandora.  But consumers should not assume this is a “win” for streaming that will perpetuate their desire to have all the music they want for free for the rest of time.  Because now the major publishers are faced with an all-or-nothing option.  They either leave all their rights with ASCAP and BMI or pull out entirely, which Sony/ATV’s CEO has already indicated may be the response to the courts not allowing them to extricate themselves from the outdated consent decrees. Meanwhile, the Department of Justice is reviewing the consent decrees and may yet recommend that the courts are wrong in their determination that a rights holder may not partially withdraw one of its bundle of rights without withdrawing entirely from the PRO.  Either way, that ruling will likely be the end of that particular debate.

If the larger publishers withdraw from the PROs, they’ll demand higher rates from Pandora no matter what; but attorney and blogger Chris Castle in this post suggests Pandora doesn’t care about that if they can effectively bust the PROs by forcing the big publishers to jump ship and leave the organizations populated with smaller publishers, who have limited bargaining power.  Thus, instead of a system of collective bargaining that represents both large and small publishers, we may see a bifurcated market in which the large players negotiate against one another while the smaller players continue to choke on the crumbs.

There’s no reason to assume this will mean longterm benefits for consumers, either with regard to affordable access or especially with regard to fostering and sustaining the greatest diversity of works.  At the same time, what may happen to public performance licenses other than streaming is unclear.  Presently, your local bar pays an affordable fee to be able to play damn near every song ever recorded, and it pays that fee to no more than three PROs — ASCAP, BMI, & SESAC.  If the major publishers are no longer part of those catalogs, your local bar owner, depending on what music he wants to play as well as other factors like size of the business, may have to pay for all three PRO licenses and also deal with the major publishers, who will be free to charge whatever they want based on any criteria they decide because they are no longer subject to the ASCAP consent decrees.  If nothing else, it sounds like a pain in butt for a small business owner compared to the old system, but it could get rather complicated when you consider the number and types of venues, even websites, around the world that traditionally cover their music needs with one to three blanket license fees.

Whatever is to come, people should be clear that Pandora’s strategy isn’t about consumers, it isn’t about innovation, and it sure as hell isn’t about competition.  Nobody I know dislikes  streaming in principle. What’s not to like?  But it’s not THAT innovative. If you didn’t see it coming at least by the time Napster became a thing, you weren’t paying attention. The companies that have emerged as dominant players in this space aren’t particularly great visionaries; they’re just the guys who were in the right place at the right time to capitalize on a relatively obvious means of distributing music akin to what we historically called “radio.”  So, let’s not beat the word innovation to death when talking about companies like Pandora; and let’s especially not get suckered into thinking this is about competition.

It is the nature of business leaders to want to dominate, which is healthy in a market that doesn’t foster natural monopolies.  Unfortunately, the Internet does foster natural monopolies. Why do you think Google+ couldn’t take, or even share, the market with Facebook?  Because most of us don’t really need two of the same kind of social media environments  in our lives.  Hell, many of us, have to force ourselves to limit the use of just one.  It doesn’t matter how dominant Google is in other areas or how good their programmers are; the Internet generally favors one winner at a time in certain lines of business. And so it may be with music streaming.

On that note, it will be interesting to watch the relaunch of Apple’s entry into the streaming market. Reported to be a subscription-only service, Apple may be in a position to offer the best available terms to all publishers and re-assert itself as the only game in town much as it did with digital downloads in the wake of Napster. Of course that move was directly tied to sales of a little device called the iPod, produced by the company that rules in the arena of attracting customers to new gadgets.  Streaming, of course, isn’t about gadgets, at least it’s not about any one particular gadget.  At the same time, both European and US trade officials are already investigating whether or not Apple is using its still-dominant position in digital downloads as leverage against rivals like Spotify and Pandora.  Sure, but again, I think there are natural reasons why one player at a time will be dominant, regardless of trade regulations.

Whether it’s Pandora, Spotify, YouTube, Apple, or some other company, one downside of digital, worldwide distribution is that consumers may not need more than one service provider when all is said and done. And, if all this is heading toward consolidation of delivery models and consolidation of production models, while limiting the variety of career paths for the next generation of writers and composers, there is no guarantee that either consumers or makers of music are going to win in the long run.  As with other copyrights, the so-called reformers seeking “balance” in the new market are only too happy to leave intact any outdated provisions that favor their own earnings to the detriment of those whose works are essential for their business models to work at all.

What’s at the bottom of the Pandora box?

Once again, Pandora internet radio is attempting to use an act of Congress to lower the royalties it pays artists, and once again, musicians are speaking out against both the tactics and the two-faced approach being taken by CEO Tim Westergren to pay lip service to his respect for artists while sticking his already well-greased palm into their back pockets.  The members of Pink Floyd wrote an open letter to other musicians to beware Pandora’s recent “outreach” toward artists, and David Lowery famously got to the nuts and bolts of the matter by posting a royalty statement revealing that 1.1 million plays of one of his songs on Pandora earned him $16.89.  Opening up Pandora’s box, if you will, raises many issues, including the overarching question as to just how well digital-age models, at their best, are working for artists.  But while we’re still mid torrent issuing from Pandora, one question too often overlooked is where the songs come from in the first place. It’s been said before, but the generation raised on round-the-clock, free access to entertainment really may be as disconnected from the production of that entertainment as many of us through modern convenience became disconnected from the production of food. Perhaps, as we see a renaissance in understanding farming and other food production, a similar awareness might take place with regard to the creative works that feed the soul.

In this New York Times article, author/musician Wesley Stace describes his experience collaborating with poet Paul Muldoon to teach a class in songwriting to students at Princeton.  Stace poses the question as to whether or not songs (and by implication other art) can be produced on demand like any other homework assignment, leaving open the more whimsical question of being struck by one’s muse. While reading, I could not help but think of the famous Brill Building, that songwriting factory of the 1950s whence came many of rock-n-roll’s most famous hits.   Stace concludes that, yes, songwriting is a craft like any other, and that it has a process that can be taught and learned and accomplished, even by students with little background in creative writing or music.  By leading their students to delve into emotion in this otherwise intellectual setting, Stace and Muldoon found the results both prolific and astounding.  “I wish I’d written, or could write, some of the songs I heard on these Tuesday afternoons; sometimes it felt like my sole qualification to teach the course was that I was old and experienced,” writes Stace.

One might conclude from the article that “anyone can write a song,” and Stace would probably agree up to a point.  The 24/7 coffeehouse known as YouTube has certainly helped  feed this notion that “we are all authors” now, which in turn spawns the illusion that songs and other works are of lesser value today than they were 15-20 years ago. But to quote Stace, “Songwriting is a skill — best practiced, easily improved. If you exercise regularly, keeping fit becomes easier and less unpleasant, until it becomes a habit.”  In other words, it’s work.  And what makes the songs you and I want to hear over and over again is a combination of, yes, luck in the form of possessing raw, unique talents, and then a ceaseless investment of work, often by many people.

My Pandora stations include both a Camper Van Beethoven and a Pink Floyd, and if you ever heard me play “Comfortably Numb” on the six string, you would need no further proof that we are not all musicians.  But when we consider the combination of both effort and circumstance that yields just this one song about an experience most of us will never have, yet so many of us can understand, we should recognize that it is rare and therefore valuable.  In fact, not unlike the story of Pandora’s Box, the album The Wall itself concludes with destruction and then the sound of an accordion playing like a solitary flower growing though the gray rubble, and the voice of Roger Waters reciting a eulogy with just a tinge of hope.  I know for sure that I need Pink Floyd in my life and that I don’t need Pandora to get it. So, that’s what’s at the bottom of the box.

Pandora Isn’t Exactly Struggling

Yesterday, on Capitol Hill, the House Judiciary Committee held a hearing to discuss the Internet Radio Fairness Act, a bill largely backed by Pandora Media, Inc. and opposed by a growing number of musicians and songwriters.  In fact, I recommend Chris Castle’s excellent synopsis of the message taken to The Hill by a handful of songwriters.  If you want legal context for understanding the IRFA, I’ll direct you to Terry Hart’s Brief History of Webcaster Royalties, but if that’s more nitty and gritty than you want to know, consider this:

In defense of Pandora’s position that internet radio services should pay lower license fees to musicians and songwriters in the interest of “fairness,” you’re likely to encounter the bullet point that “Pandora isn’t even profitable yet,” conjuring an image of some fledgling, innovative enterprise trying desperately to survive within an outdated system.  But as a guy who grew up around the motion picture industry, knowing something about the shenanigans of some producers, I know that literal profitability ain’t necessarily the same thing as everybody making buckets of money.

Keeping in mind that Pandora, like so many internet-based services, is basically a means by which software delivers a product that someone else has invested to produce, I had to wonder what kind of costs other than licensing Pandora has to cover while it is supposedly staggering toward profitability. Not surprisingly, according to the income statement on Yahoo Finance, the Operating Expenses shows two lines:  R&D at a mere $130k and Selling General and Administrative at just over $249 million.  This is from January 30, 2012 against revenue of just over $274 million.  Presumably, the cost of licensing music is part of this second line item along with basic overhead like rents, servers, etc.  But the rest is salaries and bonuses.  What else do they have to pay for?

Now, when an ordinary entrepreneur thinks of a business that isn’t profitable yet, he thinks in terms of continually reinvesting in his business, keeping his own and any other founders’ salaries in check while growing that business and pouring in a ton of sweat equity.  It just so happens that this is exactly what a songwriter, performer, or emerging new band does most of the time.  But web entrepreneurs have a history of making money while losing value.  Remember the Dot Com bubble?  There was plenty of loss, but plenty of start-up founders also made out like bandits in the process.  Failing with a few million in one’s pocket would be an artist’s dream because the nature of the work is so fickle, but I digress.

The top five executives at Pandora, not including founder Tim Westergren, earn combined salaries of just under $3 million, although CTO Thomas Conrad had exercised stock options of $5.9 million as of the January 30 report.  Mr. Westergren is worth an estimated $100 million.  According to Pandora’s own statements, it paid “50% of its revenue in fees” last year.  Assuming this is true, that’s $137 million, plus the $3 million in top executive salaries, plus some unknown number to Tim Westergren, but let’s estimate that there’s at least $100 million or so left for other expenses, including the salaries of 530 employees.  Divided evenly, which of course it is not, that would be annual salaries of over $180k per employee.

So, there is a world of difference between a company being profitable and those in the company making lots and lots and lots of money.  If Pandora fails because, as it claims, the licensing fees are unfair, then many people involved with the company will walk away having failed upward.  Meanwhile, it won’t take long for a new internet radio service to appear — one that can be profitable without exploiting the people and companies who make the real investments in the products that make radio function in the first place.