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Online music radio / recommendation service Pandora was recently forced to block UK users from tuning in as a result of a rise in royalty rates, backed by the record industry.

The move is a very short-sighted decision from the music execs, represented by the MCPS/PRS, which collects royalties on behalf of composers and publishers.

It will threaten other online broadcasters, which will affect the way music is consumed and distributed online. And it should ultimately affect the record labels too...

Why this is a dumb move
Let's be clear about this: Pandora and Last.fm are fantastic resources for music fans, set up by music fans. They effectively 'market' music for free for the record industry, which has has in no way financed or otherwise supported these online services.

What was that? They market music for free? You got it.

Yet the industry is turning the screw, and hard, not knowing a good thing when it sees one (alas, it can't, as heads have been well and truly plunged back into the sand).

Users of online music services such as Pandora and Last.fm - including E-consultancy's music-mad staffers - have discovered plenty of new music through these services. Many thousands of pounds have been spent on new finds in this office alone, over the past three years, on CDs, iTunes downloads, and gigs.

So why on earth would the industry seek to clamp down on websites that promote their artists, at no cost to the record labels?

You simply have to marvel at the madness of it all.

The numbers don't work
The new rates (PDF) confirmed by the Copyright Tribunal last year, mean that Pandora would have to pay 0.085p for every song played. In addition, Pandora has to pay the PPL, which collects royalties on behalf of record companies, 0.0773p per song played.

So let's add it up. It means that, if a user plays 100 tracks, Pandora has to pay 16.23p to the various copyright bodies. Multiply this by thousands of users and you can see how punitive the rates can be.

Note that the industry is in effect taxing the end user here, the music fan. And music fans will not pay that sort of money to listen to 100 songs, as Pandora has discovered.

Sure, the labels have an obligation to cash in for their artists (and execs / shareholders), but these sites help the music industry. They do not harm it. The instigators of this madness do not see the bigger picture.

Pandora's worldwide revenues amounted to around £7m last year, and the share from the UK will be relatively small, so you can clearly see what kind of impact the new charges would have had.

According to Paul Brown of Pandora:

"The model is about streaming millions of hours of music to lots of active listeners to drive the ad revenues... so that we can then pay royalties based on a sensible percentage of our ad revenues."

"We know it works because in the US, where the market is similar, we have several million users, using Pandora several hours a month and that equates to some good ad revenues which we are sharing with the rights owners and have been writing very nice cheques for two years now."

But the cheques just aren't big enough. The greedhead labels that are driving this - thinking that they have nothing to lose - are once again aiming automatic weapons at their own (possibly webbed) feet. Maybe they just don't know a good thing when they see one.

We asked a few more questions to Pandora CEO Tim Westergren about this sorry affair, and specifically, the threat to its wider business model:

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How much are the rates in the UK and how does this compare with the US?

"The rates we were expected to pay to broadcast to UK users would have accounted for 80% of gross revenue. Rates in the US account for around 70% of revenues, though rates will rise year on year."

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Why did you decide to switch off the service in the rest of the world?

"Because we play so much different music, we need a central organisation to deal with the royalties, and the US and UK are the only two countries with organisations like this."

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How many users does Pandora have?

"In the UK, somewhere in the low hundreds of thousands. We have around 8.5m registered users in the US."

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Are you able to continue operating in the US?

"As things currently stand, we are living week by week – Pandora is VC-funded and is not yet profitable so things may come to a head at some point. We may be forced to turn off if we are unable to renegotiate the royalty rates."

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Is there any way you could continue by changing to a subscription model?

"We have tried this but there doesn’t seem to be much appetite for this – only a very small percentage of our users are paid subscribers. People expect to listen to online radio free of charge."

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Do you have any hope that the RIAA will compromise over royalty rates in the US?

"We are still hopeful, and this is what keeps us going, but things are moving very slowly at the moment. We do at least have some hope as we now have the attention of a few congressmen."

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Do you feel record companies will be missing out on sales if more online broadcasters are forced to close?

"That is my experience – we have had thousands of emails from users in the UK, stating that they have bought plenty of CDs and downloaded tracks as a result of Pandora recommendations."

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Related stories:
Pandora forced to close in the UK
RIAA plots royalty fee hikes

Graham Charlton

Published 21 January, 2008 by Graham Charlton

Graham Charlton is the former Editor-in-Chief at Econsultancy. Follow him on Twitter or connect via Linkedin or Google+

2565 more posts from this author

Comments (8)

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Sam B

Oy. Nothing wrong with webbed feet. Please don't associate us fine genetic specimens with those short-sighted sharks in the recording industry. Even if we both resemble something that only just crawled out of the primordial ooze.

over 8 years ago

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Liz Rice

Good article, but there's a maths error - should be 16.23p, not £16.23, for 100 streamed tracks, no?

over 8 years ago

Graham Charlton

Graham Charlton, Editor in Chief at ClickZ Global

Hi Liz - you're right, thanks for pointing that out.

The rates are still too high though. If Pandora has 200,000 users playing 200 tracks a month, which is a conservative estimate, then this is almost £65,000 per month in royalty fees.

over 8 years ago

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jon webster

This is a facile article about a complex subject. All parts of the value chain (artists, record companies, composers, publishers) have a right to be paid. In the UK (unlike the USA) PPL collects money for the record companies and the performers and the MCPS/PRS Alliance for the songwriters and publishers. Terrestrial radio pays large fees for the use of music to both organisations so why should internet radio be different?
The public pay for radio by a license (BBC) and advertising (commercial radio). The promotion argument is at least partly a red herring. It's the reason radio stations in the USA have a multi billion dollar business... but pay nothing to the performers to use the music on which that business was built. That is plain wrong and hopefully will change soon.
We are in uncharted territory for these new services and a tariff has to be set somewhere. The difference between 70% and 80% of revenues is not huge.
There has to be an entry cost for new businesses who are using music. No other business would set up and say "We absolutely need your product (music) to launch but we will not pay you anything for it until we see if our new business works". If Pandora think their model will work in the long term then get the VCs to put up the money, lose in the set up phase whilst the business is established and reap the rewards later.
There are precedents. last.fm were recently sold for $240 million and had established themselves by using music that they had very few, if any, rights to. Are they sharing that money with the one product that they could not have existed without?
Yes recommendation sites and internet radio have an important place in the future especially with the lack of choice from terrestrial radio but it is NOT a one way street. I am sure Pandora will get there eventually and sincerely hope it thrives.

Jon Webster
CEO, Music Managers Forum (representing artists and managers)
London

over 8 years ago

Graham Charlton

Graham Charlton, Editor in Chief at ClickZ Global

Hi Jon - I'm not arguing that Pandora and other internet radio services shouldn't be paying artists, composers etc for their music.

My point is that rates need to be set at affordable levels so that Pandora and others can sustain their current ad-supported business models, and the music industry can benefit from the added exposure which these services provide.

over 8 years ago

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Dave Cobley

Agree with your last post Graham. It is a very sad situation to see Pandora off limits to UK users - it is (or rather was) such a great resource for discovering new music.

over 8 years ago

Drama 2.0

Drama 2.0, Chief Connoisseur at The Drama 2.0 Show

I don't necessarily disagree that it would be in the music industry's best interest to set rates that make businesses like Pandora viable, however I agree with much of what Jon said.

The bottom line is that the music industry is under no obligation to subsidize companies like Pandora. The rates are what they are; the burden should fall on these companies to come up with a business model that works at those rates. If they can't, the music industry should not have to reduce the rates solely to make it possible for the Pandoras of the world to survive.

If companies like Pandora are unhappy with the compulsory licensing rates, there is nothing stopping them from trying to strike deals under more favorable terms with all the individual rights holders. That, in and of itself, would be a daunting task and therefore one might argue that a premium is justifiable under compulsory licensing arrangements. It gives anybody an opportunity to get into the market without costly and time-consuming negotiations with all rights holders.

I've discussed my feelings on this topic on my blog in the past:

http://www.drama20show.com/2007/06/23/omg-they-killed-internet-radio/

over 8 years ago

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rob

This is clear indication of the Music Biz ignoring the what is going on around them in the real world. They are still clucking at itunes, the most successful music retailer at the moment, note declining CD sales, astronomic download sales. It really is time that the industry woke up and realised that the model they have used for the last 60 years or so, is as dead as the dodo. The sooner they realise this, the sooner they can start working with the internet and organisations like Pandora, rather than grinding them to dust, and alienating the buying public.

over 8 years ago

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