Fact: Pandora Doesn’t Pay Songwriters, They Pay PROs…

The following guest post comes from music industry attorney Steve Gordon, who argues that the debate over internet radio royalties is missing some critical facts.    

Recently, Ellen Shipley claimed that although her hit song “Heaven Is a Place On Earth” was played nearly 3.2 million times on Pandora, she only received $39.  Digital Music News published her statement, which led to a massive flurry of angry comments that Pandora doesn’t pay songwriters fairly.  I was dismayed  by the level of emotion being poured into this discussion because a number of critical facts were being omitted.  I hope you’ll take the time to consider these important ‘details’…

1. The most important fact is that Pandora does not pay songwriters at all!

But, Pandora does pay for the performance of songs that its listeners stream, it just doesn’t pay the songwriters directly. Rather, Pandora pays ASCAP, BMI and SESAC (the performance rights organizations, or PROs), whose job it is to turn around and pay their publisher and songwriter members their fair share of the money.

Shipley is a member of BMI, and the song is registered there as well as ASCAP because her co-writer, Richard Nowels, registered his share of the song at ASCAP.  Apparently, the check for $39 payable to Ms. Shipley came from BMI.

Although the licenses are confidential, Pandora is obligated to pay, according to credible sources (including a Vice President at ASCAP), approximately 4.5% of its gross revenues to ASCAP, BMI and SESAC collectively.  Pandora is currently earning $100 million each quarter, so it’s obligated to pay approximately $4.5 million to the PROs, all of whom pay their songwriter members 50% and their music publisher members the other 50% after taking their admin fees.

2. Instead of asking whether Pandora is paying songwriters enough, Ms. Shipley’s complaint really raises the issue of whether the PROs, particularly BMI, are fairly crediting the value of plays on Pandora.

Last year, ASCAP collected $985 million and BMI collected $898.8 million. When the PROs receive money from licensees such as Pandora, they use complex formulas which are mainly confidential to decide how to pay their members. The basic concepts are simple though. They assign values to each media in which music is played (for example, commercial radio, network TV, cable, nightclubs, etc.) and distribute money in accordance with how much each song was played. Pandora is one small part of the formula.  If Shipley’s complaint is accurate, it simply demonstrates that BMI does not count Pandora plays appropriately. The issue of whether Pandora is paying the PROs enough money is a completely different matter.

In addition to complaining that she only received $39, Ms. Shipley seems equally enraged that Pandora is seeking a reduction in royalties. As discussed above, Pandora is currently obligated to pay ASCAP, BMI and SESAC 4.5% collectively, and it is true that Pandora is seeking to lower the rate it must pay ASCAP in particular. But like her first complaint she leaves out important relevant facts.

3. Like, this one: Pandora is seeking a reduction in public performance revenues because ASCAP (as well as BMI) recently negotiated lower fees than those Pandora has to pay in an industry-wide agreement with the Radio Music Licensing Committee (RMLC). The RMLC represents major radio groups, and the agreement covers both broadcast and internet radio usage for the majority of Pandora’s competitors. That includes iHeartRadio, which is owned by the Clear Channel.

(As a technical point, I should probably note that although Pandora has commenced a legal action against ASCAP, not BMI, in the ‘Rate Court’ which supervises the fees charged by both ASCAP and BMI, if it is successful, Pandora may use that decision to try to reduce BMI’s fees.)

4. There’s another ‘inconvenient fact’ here.  Pandora also believes it should pay the PROs lower rate because some rights holders — particulary EMI Music Publishing – have withdrawn digital rights from ASCAP and BMI and have negotiated private deals. The complaint explains that Pandora reached an agreement with EMI in March that covers January 1st, 2012 to December 31st, 2013. Pandora does not yet have a deal with Sony/ATV, according to the complaint.  But Sony/ATV (which took over the administration of EMI a few months ago) is also withdrawing digital rights in its songs from ASCAP and BMI. All of this means that the value of the PROs’ blanket licenses is diminished by about a 1/3 (Sony ATV’s market share inclusive of EMI).  Although Direct Licensing may not be good for songwriters (see my article on that, here), it is not Pandora’s fault that

(a) the PROs’ repertoires and thus their blanket licenses are now less valuable, and

 

(b) Pandora now has to pay other stakeholders in order to secure performance rights in all the songs they offer listeners.

I wrote this piece to lay out the facts to properly frame the issues. Specifically, if Shipely really did receive only $39 for more than 3 million plays on Pandora, Pandora did not write the check or determine the amount — BMI did.  And, I am not taking sides for or against Pandora’s move to reduce ASCAP’s rates.  I just wanted to present the reasons why Pandora decided to do so.

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