DOJ looks to step into Pandora royalties fight

Steven Loeb · June 4, 2014 · Short URL:

Pandora has been battling over how much to pay right holders, but DOJ could change rules

(Updated with comment from Pandora)

Pandora may be the biggest music streaming service in the world, with over 200 million users, but the company has a real revenue problem, all due to fees from licensing and royalties. As much as the company is paying out already, though, those who hold the rights to those songs want even more. 

That has resulted in a legal battle with the American Society of Composers, Authors and Publishers (Ascap), as well and Broadcast Music Inc. (BMI), each of whom represent hundreds of thousands of songwriters, composers and publishers.

While a judge recently ruled in Pandora's favor, denying Ascap and BMI the higher royalty rates that they wanted, things may not stay rosy for Pandora for long.

The Department of Justice is now looking to be getting involved in the matter, according to a report out from the New York Times on Wednesday. The DOJ will look to review the 73 year-old rules that determine those fees, after which it could recommend that changes be made to the regulation.

Ascap and BMI are expected to lobby the government heavily in favor of changing the rules regarding what are known as "consent decrees," which does not allow Ascap or BMI to refuse licenses to music outlets that request them. Those agreements are then subject to approval by two federal judges. What the organizations want is more flexibility, as well as an updated reviews process.

Any changes recommend by the DOJ would then have to be reviewed by judges in the United States District Court for the Southern District of New York, in Manhattan. So the government's involvement does not mean that the rules would necessarily change anything.

If Ascap and BMI do get what they want, though, and eventually Pandora was forced to pay higher rates, it is unlikely that the company could afford them.

The problem for Pandora is that it relies on an advertising model, rather than a subscription model, to make money, That means that the more songs that listeners access, the more ads Pandora will sell, and the more money the company will get. That obviously works in Pandora's favor, and allows them to offer the service to its users for free. 

But, at the same time, the more songs that users play, the more Pandora has to pay out in royalty fees. And that is causing the company major headaches. 

According to a blog post that the company wrote last summer, Pandora has to pay out $1,370 for every million songs it plays. That translated into over $250 million in 2012 alone, and those costs are only continuing to rise.

In all, for the entire year of 2013, Pandora's total revenue was $600 million. $489 million of that came from advertising, with $111 coming from subscriptions. And yet, the company gave more than half, $314 million, back in aquisition costs alone. The company wound up $26 million in the red for the year after operational costs and revenue expenses.

That expense is also the reason that Pandora had a loss of $29 million, from revenue of $194 million, for the first quarter of 2014 as well.

In the recent case, Pandora was ordered to pay 1.85% of its revenue to Ascap from 2011 to 2015. That was higher rate than the 1.7% that Pandora had proposed, but much lower than the 3% that Ascap was asking for. The company is already struggling to be profitable, and a higher royalty fee could kill it for good.

Dave Grimaldi, Director of Public Affairs for Pandora, has issued the following statement to VatorNews:

"We look forward to participating in the DOJ's review.

The consent decrees under which the PROs operate provide important protections for both songwriters and music users.  For example, the consent decrees provide a mechanism to establish a reasonable royalty rate when songwriters and music users cannot agree on one.  

Additionally, the consent decrees help foster innovation and competition by enabling new industry entrants.Any review of the consent decrees must take into account the careful balance of how to best serve songwriters while also fostering competition and innovation to the benefit of consumers."

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Pandora, the leading internet radio service, gives people music they love
anytime, anywhere, through a wide variety of connected devices: laptop and
desktop computers, smartphones, connected BluRay players, connected TVs,
etc. Personalized stations launch instantly with the input of a single “seed” –
a favorite artist, song or genre. The Music Genome Project®, a deeply
detailed, hand-built musical taxonomy, powers the personalization or
Pandora. Using this musicological “DNA” and constant listener feedback
Pandora crafts personalized stations from the more than 800,000 songs that
have been analyzed since the project began in January 2000.
More than 75 million people throughout the United States listen to
personalized radio stations for free on Pandora through their PCs, mobile
phones and devices such as the iPad, and connected in-house devices
ranging from TVs to set-top boxes to Blu-Ray players. Mobile technology has
been a significant factor in the growth and popularity of Pandora, starting
with the introduction of the Apple app store for the iPhone in the summer of
2008. Pandora instantly became one of the most top downloaded apps and
today, according to Nielsen, is one of the top five most popular apps across
all smartphone platforms.

Pandora is free, simple and, thanks to connectivity, available everywhere
consumers are – at the office, at home, in the car and all points in between.
In 2009 the Company announced that Pandora would be incorporated into
the dashboard in Ford cars via SYNC technology; GM has already followed in
announcing plans to integrate Pandora into its vehicles and Mercedes-Benz
introduced their Media Interface Plus device that works with the
free Pandora iPhone app to provide direct control of Pandora from in-dash
stereo controls. This was all great news for the millions of Pandora listeners
who had been plugging their smartphones into car dashboards to listen to
personalized stations while driving. More than 50 percent of radio listening
happens in the car, making it a crucial arena for Pandora.

Today tens of millions of people have a deeply personal connection with
Pandora based on the delight of personalized radio listening and discovery.
These highly engaged listeners reinforce the value Pandora provides to: 1)
musicians, who have found in Pandora a level playing field on which their
music has a greater chance of being played than ever before; 2) advertisers,
who benefit from the multi-platform reach of Pandora, as well as its best
practices in targeting consumers for specific campaigns; 3) the music
industry, which has found in Pandora a highly effective distribution channel;
and 4) automobile and consumer electronics device manufacturers, who have
noted that incorporating Pandora into their product makes it more valuable
to consumers.

Pandora continues to focus on its business in the United States. The radio
arena has never been hotter, thanks to technology that enables radio to be
personalized to the individual and more accessible than ever before. Right
now millions of people listen to Pandora in the United States and we hope
someday to bring Pandora to billions of people around the world.

• 2000 – Tim Westergren’s Music Genome Project begins.
• 2005 – Pandora launches on the web.
• 2008 – Pandora app becomes one of the most consistently downloaded
apps in the Apple store.
• 2009 – Ford announces Pandora will be incorporated into car
dashboard. Alpine and Pioneer begin selling aftermarket radios that
connect to consumers’ iPhones and puts the control and command of
Pandora into the car dashboard.
• 2010 – Pandora is present on more than 200 connected consumer
electronics devices ranging from smartphones to TVs to set-top boxes
to Blu-ray players and is able to stream visual, audio, and interactive
advertising to computers, smartphones, iPads, and in-home connected

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