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