Pandora Media Inc. (P), the biggest online radio service, is subject to an "astonishingly high royalty burden" that Congress should fix, Chief Executive Officer Joseph Kennedy told U.S. lawmakers today.
"The current rate-setting structure is a clear case of discrimination against the Internet and innovative services," Kennedy said in testimony submitted to a House Judiciary subcommittee hearing today on music licensing. "This lack of a level playing field is fundamentally unfair and indefensible."
Pandora, based in Oakland, California, is pressing lawmakers to pass a bill that would bring Internet radio services such as Pandora under the same standard for paying performers that applies to satellite and cable radio services such as Sirius XM Radio Inc. (SIRI)
SoundExchange Inc., an organization that collects royalties for artists, says Internet radio services are charged fair royalties and that, if anything, Sirius XM and traditional broadcast radio stations should pay more.
"The claims that the current rates are 'too high' are wrong, overblown, and based on an incomplete and premature record," Michael Huppe, president of Washington-based SoundExchange, said in written testimony for the committee.
Pandora chose "to focus on building its audience -- and thus its usage -- while keeping its advertising load and subscription fees low," Huppe said. Musicians shouldn't be asked to accept lower royalties to subsidize Pandora's business decision to sell fewer ads, Huppe said.
This year, Pandora will pay SoundExchange almost $250 million, more than half of its revenue, while satellite radio services will pay 7.5 percent of their revenue and cable radio will pay 15 percent, Kennedy said.
The legislation backed by Pandora could cut its content costs by as much as half and be a "major catalyst" for the company's earnings, Rich Tullo, an analyst at Albert Fried & Co. in New York, said in a Sept. 24 research note.
The Pandora-backed bill was introduced Sept. 21 in the House by Representatives Jason Chaffetz, a Utah Republican, and Jared Polis, a Colorado Democrat. Ron Wyden, an Oregon Democrat, introduced the bill in the Senate.
"Internet radio should be a boon to the entire audio market," Chaffetz said at today's hearing. "But instead it's barely hanging on."
Rihanna, Maroon 5 and Katy Perry were among 125 artists who signed a letter this month protesting the measure, saying it would "gut" royalties for thousands of musicians. MusicFIRST, a group representing the Recording Industry Association of America and musician groups, opposes the legislation, along with the NAACP and AFL-CIO.
Pandora, a publicly traded company, is urging a measure "that would cut royalties and deprive artists of the fair- market value of their work," Representative John Conyers of Michigan, the senior Democrat on the House Judiciary Committee, said at the hearing. For some musicians, "this is their only compensation," he said. "They depend on royalties and their careers aren't always that long either."
Pandora has urged its users to contact members of Congress in support of the legislation and formed a coalition with CC Media Holdings Inc. (CCMO)'s Clear Channel Media and Entertainment to lobby for the bill.
Under the current system of performance royalties, Internet radio services pay a fraction of a cent for every song they play while satellite and cable radio pay a percentage of revenue. Rates are set by a three-person Copyright Royalty Board, appointed by the Librarian of Congress. Traditional radio pays no performance royalties for over-the-air broadcasts.
Webcasters' royalty rates expire at the end of 2015, and they want Congress to change the framework under which the rates are set before the royalty board's next rate hearing, Paul Gallant, a Washington-based analyst with Guggenheim Securities, said in a note yesterday. The royalty board will start its next proceeding in 2014 on rates for the years 2016 to 2020, according to Gayle Osterberg, a spokeswoman for the Library of Congress.
While Amazon.com Inc. (AMZN) pays about 70 cents to rights holders and creators for every 99-cent download in its mp3 store, Pandora pays about a 10th of a penny to SoundExchange when a song is streamed, Jimmy Jam, a producer who has worked with Usher and Mariah Carey, said in testimony to the committee.
The Pandora-backed bill would "lower these already small payments by as much as 85 percent," he said. Before tackling rates, Congress should close the "loophole" that allows broadcast radio to avoid performance royalties, he said.
SoundExchange and musicFIRST support a draft bill from Representative Jerrold Nadler, a New York Democrat, which would bring digital radio from terrestrial, satellite, cable and Internet under the current royalty standard applied to Pandora.
The Internet Radio Fairness Act is H.R. 6480 in the House and S. 3609 in the Senate.