Law & Policy, Music Business

Pandora: How Huge Artist Payouts Actually Harm the Music Industry and Artist’s Long Term Earning Potential

pandoraHappy New Month AML readers! Last week I introduced you to the wonderful world of audio streaming in my article titled “Streaming vs. Downloads: Does Free Music Increase or Impair Artist Revenue?” I threw Spinlet, Spotify and Pandora into a three opponent fist fight with Pandora emerging the winner in artist compensation.

As you all know, Pandora is a music streaming website (that is also available as a mobile application) that allows for unlimited online music streaming for free. My last article explored and explained in detail how companies like Pandora make money while still maintaining their ability to provide music for free. Although lucrative for musicians, audio streaming is proving financially difficult for Pandora itself. So difficult in fact that some are worried that the company may no longer exist in the years to come. Pandora’s big payouts are apparently taking a huge bite out of the company’s revenue, leaving Pandora with less than 50% of its revenue to operate with.  Now remember that revenue is not the same as profits; revenue is just plain old income that does not take account for debts or expenses. In a dwindling economy where operation costs and minimum wage are on an incline, what does a company like Pandora do when royalty rates continue to increase as drastically as they currently do?

Royalty rates and Pandora

In the United States, royalties are based on a “statutory rate” set by the U.S. Congress. This rate is periodically increased to follow changes in the economy. The statutory rate that Pandora currently pays for audio streaming is fixed at about $0.12 per stream.

Pandora’s per-track royalty rates have increased more than 25% over the last 3 years, and are scheduled to increase an additional 16% over the next two years. The percentage of company revenue that Pandora ends up paying out for royalties seems to be on a steady incline. In the company’s latest fiscal year, Pandora paid 61% of its revenue to various performing rights organizations for content costs and artist royalties. The year before that the company’s royalty and content costs amounted to 54% of its annual revenue. In order to continue to function comfortably, Pandora has expressed that it would need to bring its content costs down to a maximum of 40% of its revenue. Something, according to Pandora Chief Financial Officer Mike Herring, the company intends to do over the next one to three years.

Pandora has supported legislation that could reduce its royalty burden by changing how the Copyright Royalty Board sets rates. But for now Pandora would have to grow its revenue to successfully cover the rising cost of royalty rates.

In order to manage the escalating costs of audio streaming, Pandora has begun a monthly listening limit.

In late February, Pandora announced that it would begin communicating directly with a small number of its listeners in an effort to introduce a 40-hour-per-month limit on free mobile listening. The average Pandora listener spends about 20 hours listening to music across all devices (including web based and mobile devices) in any given month; hence very few listeners are expected to actually hit this new 40 hour limit. But for those who do, Pandora has provided three viable options.

  1. Listen for free for as many hours as desired on desktop and laptop computers
  2. Pay $0.99 for unlimited mobile listening for the remainder of that month, or
  3. Pay a subscription fee for unlimited listening sans advertising.

Listeners will be alerted when they begin to approach the 40 hour limit.

Mobile listening accounts for 80% of Pandora’s total listening hours. But although Pandora has less annual subscribers than free listeners, the company makes more per annual subscriber than it does per free listener. The advertising revenue per hour from mobile listening is actually less than half of the advertising revenue from web based (desktop/laptop computers) listening. This is probably the reasoning behind allowing mobile listeners who go above the 40 hour limit to continue to listen for free on web based devices.

Although this new 40 hour limit does seem like a sensible solution, you just never know. I really don’t see myself paying $0.99/month for unlimited Pandora access. If I hit the limit, I’ll quit it and wait till next month. Pandora should not expect any increase in revenue from me. But they will succeed in reducing their costs as they will only have to pay $4.80 (40 hours x $.012 stream costs) for my account (while I pay nothing). They said it themselves, not a lot of people hit that 40 hour mark anyway. So how how how does this actually help? And how does Pandora stay in business because we want them to stay in business. We don’t want record labels negotiating the terms of all of our agreements and getting a “cut” of everything like a thirsty ex-wife.

In reality, Congress does need to take a look at the current royalty rates and how they are calculated. Compensating artists is key, but when such compensation deprives us of music access that can actually lead to further artist compensation, somebody needs to go back to the drawing board. If companies like Pandora go out of business, artists will lose a very beneficial and lucrative source of income. So for now, artists can earn great rates but bear the risk of actually losing out in the long run should the payouts bankrupt these audio streaming sources.

-Ollachi Holman

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Ollachi Holman

AML intern Ollachi Holman aka “Enzé is a recording artist commonly affiliated with Syndik8 Records. She has been featured on tracks with the likes of Lynxxx, 2Shotz and MI, and has had a few cameos in clubs and albums. A recent law school graduate from the University of Houston Law School, she is pursuing a career in Entertainment Law. Look for her posts on on Mondays and Wednesdays in the AML categories of "Music Law" and "Celebrities Behaving Badly", now until May 2013. Please give her your feedback and let her know how she is doing, what you like and don't like. Thanks!

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