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

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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.    

Although her hit song “Heaven Is a Place On Earth” was played nearly 3.2 million times on Pandora, Ellen Shipley only received $39. Digital Music News published her statement, which led to a flurry of angry comments that Pandora doesn’t pay songwriters fairly.

However, a number of critical details were omitted from discussion. Take time to consider these facts.

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

But, Pandora does pay for the performance of songs that its listeners stream. Pandora pays performance rights organizations, or PROs, whose job it is to pay publishers and songwriters their fair share.

The biggest PROs include ASCAP, BMI and SESAC.

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

Although the licenses are confidential, Pandora is obligated to pay approximately 4.5% of its gross revenues to PROs. Pandora is currently earning $100 million each quarter, so all PROs receive a share of $4.5 million. These PROs pay their songwriters and publishers 50% each after taking admin fees.

2. The real issue is 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 PROs receive money from licensees like Pandora, they use complex confidential formulas to decide how to pay their members.

The basic concepts are simple. They assign values to each media that played the music and distribute with number of plays.

Pandora is one small part of the formula. If Shipley’s complaint is accurate, it shows 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 her meager $39, Ms. Shipley seems equally enraged that Pandora is seeking a reduction in royalties. As discussed above, Pandora pays PROs 4.5% collectively and is seeking to lower the rate it must pay ASCAP in particular. But like her first complaint she leaves out important relevant facts.

3. Pandora is seeking a reduction in public performance revenues

ASCAP and BMI recently negotiated fees lower than what Pandora pays in an industry-wide agreement with the Radio Music Licensing Committee (RMLC). The agreement covers both broadcast and internet radio usage for the majority of Pandora’s competitors. This includes iHeartRadio, owned by Clear Channel.

Pandora has started legal action against ASCAP, not BMI, in the ‘Rate Court’. The court supervises the fees charged by both ASCAP and BMI. If successful, Pandora may use that decision to try to reduce BMI’s fees.

4. Pandora 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
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 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.