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Pandora Radio Founder Tim Westergren had been one of the most vocal critics of the royalty rates that small online radio broadcasters were forced to pay per government edict. However, Tuesday's announcement of an agreement between those webcasters and SoundExchange, the organization tasked by the recording industry to collect music royalties, has made him change his tune.
"We're very, very pleased and very relieved to have this," Westergren told the E-Commerce Times.
"For two years now we've been under the cloud of this royalty issue," he said, referring to a controversial 2007 increase in rates. "This represents a long-term resolution to what has really been a life-threatening issue for this company. Having long-term rate stability will allow Pandora to continue into the indefinite future."
What changed during two years of intense negotiations between SoundExchange and so-called pure-play webcasters? A decision to allow what SoundExchange is calling "innovative, experimental new terms" for paying artists' royalties. It's a formula that includes revenue sharing and stricter reporting requirements for the webcasters in exchange for a discount on the per-stream rates that had smaller online radio companies claiming they would have to go out of business if they had to pay them.
"The crux of this is the substantial reduction of per-song fees, which is what really threatened the whole webcasting industry when the ruling came out a couple of years ago," Westergren said.
Willingness to Compromise
"We have steadfastly maintained that we were looking to find business solutions, and I think we've always pursued that approach," SoundExchange Executive Director John Simson told the E-Commerce Times. "We look at webcasters as our partners. To the outside world, it's easy to gloss over webcasters and see one group of services and lump them all together, and we saw them as an incredibly wide universe with different business models and different levels of services."
What raised the concerns of artists and copyright owners, Simson said, was the idea that they weren't able to share in the tremendous growth in online radio over the past few years. "People were taking the experimental rates we had in 2003, paying us very tiny amounts of royalties, building audiences, and then flipping the companies. People were using our music to build businesses -- we didn't capture any of that value -- and then they sold them."
The new agreement sets up three levels of pure-play Web rates: large commercial webcasters that have annual revenue of more than US$1.25 million, smaller commercial outfits that earn at or less than $1.25 million, and webcasters that feature bundled, subscription or syndicated programming. Larger webcasters will pay whichever is greater: 25 percent of their revenue or a slightly lower version of the 2007 Copyright Royalty Board rates. Smaller webcasters can pay a percentage of total revenue or total expenses. The agreement is retroactive to 2006 and runs through 2015.
"While we've agreed to slightly lower per-stream rates for this category of services, we're willing to put all of their revenue in the bucket," Simson said.
The agreement ensures that as the nascent market grows, artists and webcasters can thrive together, he added, and perhaps encourage new services. "It took a while to get together, but it was a great meeting in the middle."
Pandora's Box of Relief
The agreement represents the recording industry's realization that onerous royalty rates ultimately threaten their artists as well as webcasters, according to Westergren, who also serves as Pandora's chief strategy officer.
"We play a tremendous variety of music," he said. "The beauty of the Web is that it can accommodate a tremendous depth of catalog. In our case, 70 percent of our collection is independent, and most isn't getting played on broadcast radio. Web radio is a vital outlet -- a promotional outlet for artists.
"This is a huge day for us, but it's huge for artists too," Westergren added.
For Pandora, the ruling means it can continue to enjoy the growth it's seen in new listeners, thanks to the rise of Internet radio applications on smartphones, especially Apple's (Nasdaq: AAPL) iPhone. Pandora gets as many as 70,000 new listeners a day, "and well over half come from mobile 
devices now," Westergren said.
For Simson, the agreement represents the last piece of a three-part puzzle involving the digital world's impact on musicians and record companies. SoundExchange completed deals earlier this year with the National Association of Broadcasters regarding simulcasts of terrestrial radio stations and with the Corporation for Public Broadcasting, along with other smaller commercial webcasters.
"It took a long time to work our way through all of this, but we have, and obviously I feel very excited," Simson said. "We're representing people who create great music, and we're making sure they're getting great value."
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