Maybe There Are No Willing Sellers

I’ve been thinking lots about the latest round of royalty struggles between Internet radio players (such as Pandora and iHeartRadio) and artists and record companies, represented by SoundExchange and MusicFIRST (and other lobbying organizations). The history behind this is complex and multi-layered.

The crux of the matter is that webcasters have a compulsory license to stream music as long as they pay performance royalties to SoundExchange and follow certain programming rules. That license was designed to make it easy for webcasters to stream without having to go door to door to each artist and record label to get licenses. Unfortunately, that left the matter of determining how much the royalty paid to SoundExchange should be, and that is supposed to be determined by a willing buyer/willing seller equation.

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Pandora, which bears the biggest share of the royalty burden because they have the most listening of any of the webcasters, is paying somewhere around 50% of their revenues in royalties. They want a more equitable rate. But they have to get SoundExchange, funded by the record companies to agree, and that’s been a challenge.

The reality is that if Pandora claims they can’t pay what the record companies and artists claim is the rate they are willing to accept, then there is no willing seller in the room. And if that’s the case then webcasting services like Pandora, with more than 100 million listeners, go away. Can that possibly be what artists want?

Pandora has made some mistakes recently in their PR battle for a fair royalty. Top executives have been selling shares of the stock in big numbers and pocketing cash, and while there is nothing wrong with that, this might not be the best time to be taking profits while claiming that their business model is broken. But the bottom line is that Pandora is a hugely popular music platform that enables lots of musicians to reach their audiences, and artists need to notice that. If they gave one hoot about the business model they would have to admit that the royalty was too high. The willing buyer/willing seller model is supposed to incentivize artists to care about the business model and include them in the market process.

Instead, it’s created a battle of words controlled by lobbyists and press relations firms. It’s time to stop pandering to the press and start figuring out a way to stream music that works for everyone.

One response

  1. Nice overview of a complex situation.

    What Pandora employees make is no more relevant to the process than what Universal Music Group employees make or even the artist themselves. Should Bono who’s very wealthy get less royalties because he’s wealthy? If that’s not relevant why is it relevant how much stock Pandora executives sell?

    I would challenge the notion that Pandora executives should not be selling shares. The royalty battle will go on for a very long time. The current rates are set until the end of 2015. There will never be a time when there’s no scrutiny when shares are sold. And SEC rules are such that programmed selling where a certain number of shares are sold every quarter regardless are prudent otherwise executives are liable to get sued if the stock ever goes down after a sale.

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