1

OPENING PANDORAS BOX:

Music Royalties in the Internet Age



By: Exam Number 25166
Entertainment Law
Professor K.J. Greene
2

TABLE OF CONTENTS
I. INTRODUCTION 3
II. ISSUE 4
III. BACKGROUND 5
A. History of Radio 5
B. Streaming Radio Industry 7
IV. THE PARTIES 9
A. Pandora 9
B. Performing Rights Organizations 11
V. MUSIC ROYALTIES 14
A. History 14
B. Industry Royalty Structure 15
C. Copyright Royalty Board 16
D. Pandoras Royalty Structure 16
VI. DISCUSSION 18
A. Classification 18
B. Pandoras Appropriate Royalty Rates 19
VII. SOLUTIONS 20
A. Pandoras Business Model 20
B. Royalty Rates 21
VIII. CONCLUSION 23
3

I. INTRODUCTION
In 1993, alternative rock band Cracker released their gold-selling album Kerosene Hat.
One of the hit singles on that album was Low, reaching #64 on the Billboard Hot 100. During
the last three months of 2012, the song was played 1.1 million times on the internet radio service
Pandora.
1
Band member and co-founder David Lowery revealed that he was only paid $16.89 for
the one-million plus plays, with another $25.36 going to his fellow band members.
2
Just to
compare, the song was played about 116,000 times on Spotify. Those plays netted Lowery
$12.05, a substantially higher rate than on Pandora.
3

As internet radio services like Pandora grow in popularity, the frequency in which a song
is played increases. There is a much larger market for music than is served by AM/FM
(terrestrial) radio. This is especially true for older music. While a song like Low only has a
short life expectancy on terrestrial radio, it can live on in perpetuity online. Online radio is also
unique in that the customer has more control over the content. They can seek out a particular
song or band whenever they choose. With terrestrial radio, music is selected by the stations
program director or DJ.
This underscores a growing problem in the music industry. There is a growing disconnect
between the expectations of the artists and those of Pandora. Artists feel cheated by the royalty
rates that Pandora is paying them. Pandora maintains that they are paying the highest rates in the
radio industry. Furthermore, they point out that they are paying the rates agreed to by performing
rights organizations such as ASCAP and BMI. In fact, Pandora believes that they should be
paying less. Pandora claims that between the rates paid to performing rights organizations and

1
Timothy Stenovec, Pandora Payout for Songwriters Totals $42 After Song Played Over 1 Million Times, Huffington
Post (Jun 25, 2013), http://www.huffingtonpost.com/2013/06/25/pandora-payout_n_3498615.html.
2
Id.
3
Id.
4

those paid to SoundExchange (more on this later), they are losing a substantial portion of their
revenue to royalty payments.
II. ISSUE
The debate over music royalties is exceptionally complex as there are multiple issues and
parties. First, it must be determined what category of radio Pandora falls under. Once this is
determined, the parties must look to the current legal standard for royalty payments. The final
step is to determine if any viable solutions exist that will improve on the status quo for both
Pandora and the artists.
Perhaps the most important issue from Pandoras perspective is whether internet radio
should be treated the same as terrestrial radio. Pandora has lobbied hard to be classified as
terrestrial radio. The distinction is important because while internet radio services must pay
royalties to the performers and copyright holders of sound recordings, terrestrial radio stations do
not. If Pandora were to receive this treatment, it would dramatically reduce their royalty
obligations. However, courts have previously disagreed with such a notion, most recently in the
United States District Court in New York.
4

If it is determined that Pandora does not qualify for terrestrial radio treatment, the second
issue looks to what the appropriate royalty rates should be. There are established legal standards
in place to answer this question. These include the agreements between Pandora and performing
rights organizations, prior court decisions, and government regulations.
Because of the growing tensions between music artists and Pandora, the legal standards
in place are not enough. Eventually the agreements between Pandora and performing rights

4
Ben Sisario, Pandora Wins a Battle, but the War Over Royalties Continues, New York Times (March 20, 2014),
http://www.nytimes.com/2014/03/21/business/media/pandora-wins-a-battle-but-the-war-over-royalties-
continues.html?&_r=0 [hereinafter Pandora Wins Battle].
5

organizations like ASCAP will lapse, leading to hostile and unproductive renegotiations. It is in
the parties best interest to resolve the dispute now before it leads to a breakdown. Although it
will be difficult, creative problem solving can improve the relationship between the parties and
create an outcome that leaves everyone satisfied. This paper will propose solutions which will
help bridge the gap and aid the parties in reaching a fair and equitable agreement for the long-
term future.
III. BACKGROUND
A. HISTORY OF RADIO
In 1886, German physicist Heinrich Rudolph Hertz demonstrated that rapid variations of
electric current could be projected into space in the form of radio waves.
5
A short time later,
Italian inventor Guglielmo Marconi proved the feasibility of radio communication in 1895 by
sending and receiving a radio communication.
6
He would later send the first successful
transatlantic telegraph in 1902.
7

During the early 1900s, Lee Deforest invented space telegraphy, the triode amplifier, and
the audion.
8
He provided an efficient detector of electromagnetic radiation, making it possible to
amplify radio waves.
9
This amplitude-modulated (AM) radio allowed for the creation of radio
stations.
10


5
Mary Bellis, The Invention of Radio, About.com Inventors,
http://inventors.about.com/od/rstartinventions/a/radio.htm.
6
Id.
7
Id.
8
Id.
9
Id.
10
Id.
6

During WWI, the United States government took control of all patents related to radio
technology.
11
They were released in 1919, and the Radio Corporation of America (RCA) was
created to distribute control over the patents.
12

In 1933, Edwin Howard Armstrong invented frequency-modulated (FM) radio.
13
This
improved signal quality by controlling noise static. In 1965, the first master FM antenna system
was created, which allowed individual FM stations to broadcast simultaneously from one
source.
14

The AM/FM radio industry would continue to develop over the next several decades. In
1992, the Digital Audio Radio Service was created by the Federal Communications Commission
(FCC) to establish segments of radio frequency for satellite radio.
15
Through an auction, two
companies would be awarded a license to operate on these satellite radio frequencies.
16
The
companies selected were American Mobile Radio (later renamed XM Radio) and CD Radio
(later renamed Sirius Satellite Radio). After starting out in select test markets, both would be
launched nationwide between late 2001 and the summer of 2002 respectively.
17

Satellite radio is convenient for customers because its signal is capable of reaching where
traditional AM/FM radio will fail. Although popular in the city, its true benefit can be utilized in
rural areas. This makes satellite radio especially valuable for farmers and travelers. Satellite
radio is also able to provide exclusive and unique content to its users. Most stations on Sirius and
XM are unique to the satellite radio platform, and not available without a subscription. Popular
musicians and radio personalities such as Eminem, Bruce Springsteen, and Howard Stern have

11
Id.
12
Id.
13
Id.
14
Id.
15
The History of Satellite Radio, Satellite Radio USA, http://satelliteradiousa.com/satellite_radio_history.html.
16
Id.
17
Id.
7

their own satellite radio stations. For more traditional radio listeners, they can still hear their
favorite talk radio stations, such as ESPN radio or NPR.
The two satellite radio services would monetize through subscription and advertising
revenue. While most music stations on the platform are commercial free, stations that offer news
and talk programming still utilize commercial breaks. Both Sirius and XM offer a variety of
subscription packages. Their goal is to sell more long-term subscriptions, so the price per month
decreases as the term of the agreement increases.
On July 25, 2008, the FCC approved a merger between the two companies. Sirius XM
Radio is now the only competitor in the satellite radio market. This has drawn backlash from the
National Association of Broadcasters and many politicians.
18
They believed that approving this
merger would create a monopoly in the satellite radio market. Nevertheless, the merger went
through. Today, Sirius XM boasts 25.6 million users and revenue of $3.8 billion.
1920

B. STREAMING RADIO INDUSTRY
There are three battlefronts in which radio services compete for listeners in todays
market: home, mobile, and online. The home market has traditionally been served by terrestrial
radio. Before television, listeners would gather around the radio for entertainment. However, the
home radio market is changing as technology continues to improve. Online radio services like
Pandora are on their way toward to becoming the primary source of radio in the home.
The mobile market includes the automobiles and a wide variety of portable electronic
devices (such as terrestrial pocket radios, 3G/4G/Wi-Fi enabled phones and tablets, etc.). Society

18
Richard Siklos, Merger Would End Satellite Radios Rivalry, New York Times (Feb 20, 2007),
http://www.nytimes.com/2007/02/20/business/media/20radio.html?pagewanted=all&_r=0.
19
Georg Szalai, Sirius XM Reports Record Quarterly Revenue, The Hollywood Reporter (Feb 4, 2014),
http://www.hollywoodreporter.com/news/sirius-xm-reports-record-quarterly-676898.
20
SiriusXM Reports Fourth Quarter and Full-Year 2013 Results, SiriusXM Investor Relations (Feb 4, 2014),
http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=823023.
8

has become very mobile, yet as technology continues to improve, this market will continue to
grow. For example, automobile manufacturers are beginning to produce vehicles equipped with
Pandora and capable of streaming radio online.
Advances in technology as well as the growth in the home and mobile markets are aiding
in the growth of the final battlefront, online. In recent history, there has been a significant
increase in the popularity of online radio. If theres one thing we know about our society, its that
we dont go backwards when it comes to technology. The music industry will not go back to
vinyl (except for a small niche market). The motion picture industry will not go back to using
film. As technology continues to improve, the customer experience will improve and online will
become the customers primary source of radio.
The first online radio stations began broadcasting in the early 1990s.
21
Due to the early
stage of the internet, it did not take off right away. Some of these internet stations belonged to
actual radio stations that were looking to expand online. As technology improved, many internet
radio stations and music downloading sites (including Napster) began to pop up. In 1998, the
Digital Millennium Copyright Act set forth specific rules for internet broadcasters regarding
copyrighted material. Broadcasters cannot make a copyrighted work available for free without
the permission of the copyright holder.
22

Unlike terrestrial radio, streaming internet radio can be accessed anywhere in the world
where there is an internet connection. This makes it very popular in todays mobile connected
society, as well as in rural areas.
Recognizing its importance, most terrestrial radio stations carry an online option. They
have to in order to compete with the likes of Pandora and Sirius XM. This makes it possible for

21
A History Lesson about Internet Radio, 977 Music, http://www.977music.com/blog/2010/03/a-history-lesson-
about-internet-radio/.
22
Alex Cosper, The History of Internet Radio, Tangent Sunset, http://www.tangentsunset.com/internetradio.htm.
9

listeners to hear their favorite radio stations when out of market. Along with their mobile radio
service, Sirius XM also has an online option available, making them available to customers on
all three of the battlefronts discussed above. However, Sirius XMs internet radio is not a stand-
alone package. It must be purchased through one of their higher tier subscriptions.
The main competitors in the internet radio market include Pandora, Spotify, Beats Music,
Sirius XM, and potentially Apple. At the moment, Pandora is the market leader. There are two
kinds of internet radio; selective and non-selective.
23
Selective internet radio allows the user to
specifically choose which song they want to listen to. Examples of selective internet radio
include YouTube or Spotify. Non-selective internet radio stations choose the music for the
customer. However, some use algorithms to personalize the experience for the user. An example
of non-selective internet radio is Pandora. These distinctions will become more important later
on in this paper.
IV. THE PARTIES
A. PANDORA
Founded in 2000, Pandora Media, Inc. (Pandora) is a publically traded company,
incorporated in Delaware
24
and with its principal place of business in Oakland, CA. From
humble beginnings, Pandora has quickly become the largest player in the internet radio market.
They went public in 2011, generating $235 million in capital.
25
In 2012, they had 175 million

23
How Radio Royalties Work, Indie and Unsigned (July 12, 2012), http://www.indieandunsigned.com/how-radio-
royalties-work/ [hereinafter How Radio Royalties Work].
24
State of Delaware Corporations, https://delecorp.delaware.gov/tin/controller.
25
Alex Pham, Pandora Media prices IPO at $16 a share, above expectations, Los Angeles Times (June 15, 2011),
http://articles.latimes.com/2011/jun/15/business/la-fi-ct-pandora-ipo-20110615.
10

registered users
26
and 72.1 million monthly users.
27
Today Pandora has 250 million registered
users and over 1,000,000 songs in their library.
28

Pandora offers customers a personalized listening experience. Customers can choose a
song title, artist, or genre of music and Pandora will create a personalized station for them based
on the style and similarity of their search criteria. Customers can give the song a thumbs-up or
thumbs-down. This action gives Pandora additional data, which they use to further personalize
the station. Although the station is highly personalized, the customer does not actually choose the
songs that are played, making it a non-selective form of internet radio.
Pandora offers two kinds of subscriptions: basic and premium. With a basic subscription,
the user is not required to pay for the service. Instead, Pandora creates its revenue through
advertising targeted at the particular user (a benefit of Pandoras personalization algorithm).
Basic subscribers are limited to 320 hours of listening per month.
29
With a premium subscription,
there is no advertising. Here, Pandoras revenue comes from a monthly fee paid by the user. The
premium subscription also offers fewer disruptions, better audio quality, and a variety of
cosmetic appearances.
At this point, advertising accounts for almost 80% of Pandoras revenue
30
, totaling $643
million in 2013.
31
This means that the majority of Pandoras customers are signing up the basic
subscription package. Nevertheless, they have managed to capture 8.4% (and rising) of the

26
Claire Suddath, Should Pandora Pay Less in Music Royalties?, BusinessWeek (July 1, 2013),
http://www.businessweek.com/articles/2013-07-01/should-pandora-pay-less-in-music-royalties#p1 [hereinafter
Should Pandora Pay Less]
27
Associated Press, New Pandora CEO Faces Royalty Fight with Artists, Billboard (Sept 12, 2013),
http://www.billboard.com/biz/articles/news/5694958/new-pandora-ceo-faces-royalty-fight-with-artists.
28
2014 Pandora Annual Report, available at http://investor.pandora.com/phoenix.zhtml?c=227956&p=proxy
[hereinafter Annual Report].
29
Id.
30
Connie Guglielmo, Pandora Plays Nice As Apples iTunes Radio Spins Up, Forbes (Nov 13, 2013),
http://www.forbes.com/sites/connieguglielmo/2013/11/13/pandora-media-needs-a-new-music-royalty-deal-will-
it-be-the-same-one-apple-got/.
31
Id.
11

market share for radio listening in the US market.
32
Despite their success, Pandora has not been a
profitable venture since going public in 2011. Their net loss has increased each of the past three
years. In 2013, their net loss was $38,148,000. To be successful in the long-term, Pandora will
need to cut costs and increase revenue.
B. PERFORMING RIGHTS ORGANIZATIONS
Performing rights organizations (PROs) have been called an artists best friend. They
protect the rights of composers, songwriters, and other artists. Their main function is to collect
royalties from those seeking to use the works publically, and distribute these royalties to their
member copyright holders. Membership in one of these organizations is beneficial to the artist
because of the organizations expertise, resources, and diligence in protecting its members.
In the United States, there are four main PROs. These include the American Society of
Composers, Authors and Publishers (ASCAP), Broadcast Music Inc. (BMI), the Society of
European Stage Authors and Composers (SESAC), and SoundExchange.
ASCAP
Representing songwriters and publishers, ASCAP is the oldest of Americas PROs.
ASCAP was founded by Victor Herbert in February 1914. Its mission was to protect the
copyrighted music of its members, who were associated with New York Citys famous Tin Pan
Alley.
In 1917, the United States Supreme Court issued a unanimous landmark decision in
Herbert v. Shanley.
33
In that case, the defendants arranged for unauthorized public performances

32
Annual Report, supra note 28.
33
Herbert v. Shanley, 242 U.S. 591 (1917).
12

of the plaintiffs music with the intent of drawing customers to their hotel or restaurant.
34
The
court said that it didnt matter whether the defendants charged admission or not.
35
They
concluded that the defendants use of the plaintiffs music was done for commercial gain and
violated the plaintiffs copyright.
36
This ruling was significant because it gave ASCAP the legal
backing to license their members music to users.
The introduction of radio technology was an important step for ASCAP. It created a new
source of revenue for artists. The District Courts holding in Witmark & Sons v. Bamburger &
Co. (see infra) further legitimized the organization by allowing them to begin collecting radio
royalties on behalf of their members. As a result, ASCAP membership and royalty payments
grew significantly.
Today, ASCAP is still a membership organization of songwriters and music publishers.
With nearly 500,000 members, it is one of the largest PROs in the world with membership made
up of some of the biggest names in the industry. ASCAP has non-exclusive rights
37
to license
works created by their membership and collect royalties on their behalf. They license music to
over 11,500 local commercial radio stations, more than 2500 non-commercial radio broadcasters
and hundreds of thousands of general licensees. Users have the option of buying a blanket
license to the copyrighted works. In 2010, ASCAP collected $935 million in royalties.
38
Finally,
ASCAP is a far-reaching global organization that maintains reciprocal relationships with 100+
other performing rights organizations around the world.
39

Other PROs

34
Id. at 593.
35
Id. at 594.
36
Id.
37
This means that an ASCAP member can be a member of another performing rights organization.
38
Frederic Choquette, The Returned Value of PROs, Berklee College of Music, Music Business Journal (May 2011),
http://www.thembj.org/2011/05/the-returned-value-of-ascap-and-bmi/.
39
International: Collecting Foreign Royalties, ASCAP, http://www.ascap.com/about/collecting.aspx.
13

Although this paper puts a special focus on ASCAP, there are three other major
performing rights organizations in the United States. These PROs include SoundExchange,
Broadcast Music Incorporated (BMI), and SESAC (formerly the Society of European Stage
Authors and Composers).
SoundExchange is different from the other performing rights organizations in that most
of the time they represent different parties. Rather than representing the songwriter,
SoundExchange represents the recording artist. However, there are times in which the songwriter
and recording artist is the same person.
SoundExchange is controlled by a board of directors. The board is made up of recording
artists and copyright holders (record labels).
40
They are designated by the Librarian of Congress
to collect and distribute royalties from companies using digital transmissions of sound
recordings.
41
Authority was created by the Digital Performance Right in Sound Recordings Act
of 1995, as well as the Digital Millennium Copyright Act of 1998. The rates owed to
SoundExchange are set by the Copyright Royalty Board, but more on that later.
BMI was founded in 1939 by the National Association of Broadcasters.
42
Its purpose was
to compete with ASCAP, which had dominated the music industry up to that point.
43
Their early
success was dependent on finding artists which ASCAP ignored, as well as purchasing libraries
of music to license.

40
Board of Directors, SoundExchange, http://www.soundexchange.com/about/our-team/board-of-directors/.
41
Notice Of Designation As Collective Under Statutory License, United States Copyright Office,
http://www.copyright.gov/carp/notice-designation-collective.pdf.
42
Broadcast Music Incorporated, Princeton,
https://www.princeton.edu/~achaney/tmve/wiki100k/docs/Broadcast_Music_Incorporated.html.
43
Id.
14

Today, the organization is made up of more than 600,000 songwriters, composers, and
music publishers.
44
Their membership has created more than 8.5 million musical works in over
85 countries.
45
In 2013, BMI had its best year yet, bringing in revenues in excess of $944 million
and distributing $814 million in royalties.
46

SESAC was founded in 1930 by German immigrant Paul Heinecke.
47
Its purpose was to
serve European composers, who at the time were not adequately represented in the United
States.
48
Based in Nashville, SESAC is different from ASCAP or BMI in that they operate for
profit. SESAC is the smallest of the American performing rights organizations.
V. MUSIC ROYALTIES
A. HISTORY
At first, the introduction of radio was damaging to the music industry. The industry that
relied mostly on record sales saw a steep decline during the Great Depression. Among other
reasons, radio was cited as a significant factor in that decline. Consumers could either pay for
records or listen to them on the radio for free. It was such a threat that some record labels even
had their stars sign agreements to not appear on radio.
In 1923, the first major radio music copyright case created a right to royalties.
49
The
defendant, L Bamburger & Co., was a large department store that sold a wide array of items,
including radios. The controversy arose when the defendant used the plaintiffs copyrighted

44
Id.
45
Fast Facts, Broadcast Music Incorporated, http://www.bmi.com/press/presskit/BMI-Fast-Facts.pdf.
46
Broadcast Music Inc. Reports Record-Breaking Revenues of $944 Million, Broadcast Music Incorporated (Sept 23,
2013), http://www.bmi.com/press/entry/563077.
47
Our History, SESAC, http://www.sesac.com/About/History.aspx.
48
About Us, SESAC, http://www.sesac.com/About/About.aspx.
49
M. Witmark & Sons v. L. Bamberger & Co., 291 F. 776 (D.C.N.J. 1923).
15

song to demonstrate the use of their radios.
50
The District Court in New Jersey found that the use
was unauthorized and for commercial gain.
51
That made it a public performance for profit and
entitled the copyright owners to payment.
With the holding in Bamburger, ASCAP began collecting licensing fees from radio
stations. This turned radio into a profitable venture for both radio stations (because of
advertising) and songwriters (because of royalties).
B. INDUSTRY ROYALTY STRUCTURE
There are two types of rights associated with a recorded song. There is a copyright which is
held by the writer of a song. There is also a copyright held by performer (usually held by the
record label).
52

The royalty structure in the music industry depends on which forum the music is being
played in. There are five forums, which include terrestrial radio, selective internet radio, non-
selective internet radio, satellite radio, and physical locations (restaurants and bars).
Terrestrial radio stations have been treated very leniently with respect to royalties. They
are not required to pay royalties to performers or copyright holders (which are most often record
labels) for sound recordings. Instead, they are only required to pay royalties to the songwriter
and publisher.
5354
While this isnt always the case, the recording artist often is the songwriter,
and the sound recording copyright owner is often the publisher.
Internet radio and satellite radio currently receive the same treatment. They must pay
royalties to the songwriter and publisher, as well as the recording artist and sound recording

50
Id.
51
Id.
52
Should Pandora Pay Less, supra note 26.
53
Ann Sanner, Musicians want radio stations to pay to play tunes, ABC News,
http://abcnews.go.com/Business/story?id=6952903.
54
How Radio Royalties Work, supra note 23.
16

copyright owner. This is the structure that platforms like Pandora and Sirius XM must work
within. This means that in order to acquire a license to play music in a public performance for
commercial gain, the user could potentially owe royalties to four different parties. Not
surprisingly, this could get quite expensive.
C. COPYRIGHT ROYALTY BOARD
Formed in 2005 pursuant to the Copyright Royalty and District Reform Act, the
Copyright Royalty Board (CRB) determines the rates which licensees must pay in order to
license sound recordings. The CRB is a subdivision of the Library of Congress
55
that is made up
of three judges who are appointed to a six year term.
56
These judges are empowered to adjust the
rates and terms of the statutory licenses (pursuant to current and developing copyright law) and
determine how the royalty pool is allocated.
57

Every five years, the CRB sets royalty rates that radio stations must pay to artists and
copyright holders (represented by SoundExchange) for sound recordings. The rates set forth by
the CRB are binding in that they set rates that must be paid absent some special agreement
between parties. Companies like Pandora are free to negotiate (and have done so) with
SoundExchange to change the agreement as they see fit.
D. PANDORAS ROYALTY STRUCTURE
Without question, Pandoras largest costs are for content acquisition. In 2012, Pandora
paid $258.7 million in royalties, or $1.48 per user.
58
This is actually quite low when compared to

55
Andy Fixmer, Pandora Is Boxed In by High Royalty Fees, BusinessWeek (Dec 20, 2012),
http://www.businessweek.com/articles/2012-12-20/pandora-is-boxed-in-by-high-royalty-fees.
56
Copyright Royalty Judges, The Library of Congress, http://www.loc.gov/crb/background/.
57
Licensing, United States Copyright Office, http://www.copyright.gov/licensing/faqs.html.
58
Should Pandora Pay Less, supra note 26.
17

Sirius XM, who paid $11.33 in royalties per subscriber.
59
However, Sirius XM brings in much
more revenue than Pandora. These include royalties for works of music and sound recordings.
Pandora pays royalties to SoundExchange for sound recordings on a per performance rate. The
standard rates are set by the Copyright Royalty Board, discussed above. The current agreement
sets rates through the end of 2015. However, rather than paying the rates set forth by the CRB,
Pandora reached a settlement with SoundExchange in which the rate is determined by which
kind of subscription the listener has.
60
For the year 2014, Pandora must pay SoundExchange
.00130 cents per performance rate when a song is listened to by a basic subscriber. They must
pay .00230 cents per performance rate when a song is listened to by a premium subscriber.
61

Pandora pays royalties for musical works to ASCAP, BMI, and SESAC.
62
Pandoras
agreement with SESAC automatically renews every year, but may be terminated by either party
at the end of each year.
63

Pandora operates under interim licenses with ASCAP and BMI.
64
These are governed by
a consent decree from the United States Department of Justice.
65
The rates can be established
through negotiation or with a rate proceeding through the United States District Court, in the
Southern District of New York.
66

In an effort to reduce their royalty costs, Pandora briefly lobbied the Congress to pass the
Internet Radio Fairness Act.
67
The legislation, which was ultimately unsuccessful, was aimed at

59
Id.
60
Annual Report, supra note 28.
61
Id.
62
Id.
63
Id.
64
Id.
65
Id.
66
Id.
67
Glenn Peoples, Pandora Stops Internet Radio Fairness Act Legislation Efforts, To Focus on CRB, Billboard (Nov 25,
2013), http://www.billboard.com/biz/articles/news/digital-and-mobile/5800772/pandora-stops-internet-radio-
fairness-act-legislation.
18

lowering the royalty rates paid by webcasters. In lieu of the legislation, Pandora is focusing their
efforts on persuading the Copyright Royalty Board to reduce the rates.
VI. DISCUSSION
A. CLASSIFICATION
The first issue looks to how Pandora should be classified. Pandora strongly believes that
it should be classified as terrestrial radio. Accordingly, they assert that they should be given the
same lenient royalty treatment. This means that Pandora would not be forced to pay royalties to
recording artists and sound recording copyright owners (SoundExchange). There is no doubt that
this would be good for Pandora. Their content acquisition costs would drop dramatically (music
would become almost free for them), and they would likely become profitable.
This decision would be devastating for both songwriters and recording artists. Many PRO
member songwriters are also recording artists. This means that their royalty revenue would
plummet. From an economic standpoint, many artists would have no choice but to leave the
industry. For every one Jay-Z, there are thousands of starving artists. With a royalty rate
reduction further inhibiting the artists ability to earn an income, they are left with a difficult
choice to make. While it is true that a majority of artists work in the industry because they are
passionate about what they do, they also have to feed their family. Maslows Hierarchy of Needs
suggests that there is a point where a person has to put his physiological needs (food, water,
shelter) above all others.
68
This means leaving the music industry to take a job that will meet
such needs. If this were to happen, the music industry would significantly suffer due to a loss of
the creative forces that drive the industry.

68
Saul McCleod, Maslows Hierarchy of Needs, Simple Psychology (2007),
http://www.simplypsychology.org/maslow.html.
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As I mentioned earlier, the court has disagreed with Pandoras assertion. Judge Denise
Cote of the United States District Court for the Southern District of New York stated that unlike
traditional broadcast AM/FM radio, in which one program is played for many listeners,
Pandoras digital radio service provides the opportunity to have a unique program created for the
enjoyment of each listener. This distinction between programmed and customized radio has been
referred to as the one to many, versus the one to one distinction. But, despite that differentiation,
made possible by digital technology, Pandora is radio.
69
Judge Cote found that while Pandora
does qualify as a form of radio, she did not agree that it was equal to terrestrial radio.
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B. PANDORAS APPROPRIATE ROYALTY RATES
Armed with the knowledge that Pandora will not receive treatment equivalent to that of
terrestrial radio, the next step is to determine what their appropriate rate payments are. To answer
this question, we need to look at current case law and government regulation.
Pandora must negotiate with the artists PRO and pay the fees agreed to for the right to
license music. This means that each PRO will have a different arrangement. In the most recent
case between Pandora and ASCAP, Judge Denise Cote set the rate owed at 1.85% of revenue.
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This was largely a victory for Pandora (who sought a lower rate of 1.7%) as ASCAP was seeking
a gradual rate increase to 3%.
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As was briefly discussed earlier in this paper, Pandora must pay SoundExchange for the
license to use sound recordings. In the absence of a particular agreement, the parties must go
with the rates set forth by the CRB. However, because they reached their own agreement,

69
Pandora Wins Battle, supra note 4.
70
Id.
71
Id.
72
Id.
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Pandora must pay the agreed upon .00130 cents per performance when a song is listened to by a
basic subscriber and .00230 cents per performance for a premium subscriber.
VII. SOLUTIONS
A. PANDORAS BUSINESS MODEL
Right now, Pandora is in trouble because their business model is not suitable for the long-
term. As I mentioned earlier, they have incurred a loss every year since going public. Whats
more, these losses have only increased over the past three years. While losses for a new business
are common in the short-term, there comes a time when the business has to turn the losses into
profits. That time has come for Pandora. To operate a sustainable business, Pandora must lower
their costs or increase revenue (the most successful strategy would find a way to do both). My
first recommendation is that Pandora work with the PROs and SoundExchange to figure out a
way to find long-term sustainability.
While Pandora might be resistant to do so, it is logical for the parties to work together to
solve this problem. They have nothing to lose. If Pandora continues to operate at a loss, their
debts will grow to an unmanageable level and they will not have the money to cover their
operating costs and interest payments. This will force Pandora into bankruptcy and most likely
out of business. If this were to happen, nobody wins. In the short-term, the radio industry
(specifically internet radio) will take a significant hit. Many jobs at will be lost. With almost nine
percent of the market share disappearing overnight, the amount of royalties paid will decrease
significantly. In the long-term, a new competitor will fill Pandoras shoes. However, a
substantial amount of royalty money will be lost while waiting for that new market leader. Even
when the new competitor reveals itself, they will face the same problems as Pandora. A few
years down the road, we will be back to the exact same situation.
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Pandora needs to show good faith in letting the PROs and SoundExchange help them claw
their way to profitability. Whether its increasing the amount of advertising or finding additional
ways to draw more people to the premium subscription package, the parties should be able to
brainstorm a way for Pandora to move toward a healthier income statement.
Additionally, opening the channels of communication between the parties will create trust.
This will create a better negotiating environment that is conducive to problem solving rather an
overly competitive environment in which both parties are trying to win the negotiation. For
example, if SoundExchange knows of Pandoras financial struggles, they will be more likely to
work with them in order to find a solution that benefits both parties. There is no reason to fight
over a piece of the pie when it is possible to grow the whole pie.
B. ROYALTY RATES
Its clear that the current royalty rates are not going to work for either party. Pandora wants
them lowered while the PROs want them raised. Although there might be some fundamental
differences between them, the parties can reach a solution which will make both sides happy. I
recommend that they turn their focus toward terrestrial radio.
If theres one thing that the parties agree on, its that terrestrial radio does not pay nearly
enough in royalties. This is an opportunity for internet and satellite radio companies to work with
the PROs (including and especially SoundExchange) to lobby for legislation that will remove the
lenient treatment afforded to terrestrial radio. Terrestrial radio is still the largest player in the
radio market, yet they pay the least in royalties. They essentially get a free blanket license to play
copyrighted for commercial gain. President Obama has even spoken in support of artists
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receiving royalties from terrestrial radio.
73
And really, logic would dictate that they should be
paid. Terrestrial radio stations are using their sound recordings as a public performance for
commercial gain.
Terrestrial radio stations today are not the same as they once were. Most have taken
advantage of technological advances in order to move online. Moreover, many have figured out a
way to monetize their content online in some form or another (through exclusive memberships or
advertising). They are now directly competing with Pandora and Sirius XM. So why should
terrestrial radio receive such a competitive advantage? What difference is there between them
and Pandora? Its a restraint on competition, one which is fundamentally opposed to American
ideals.
Up to this point, the terrestrial radio market was an untapped source for SoundExchange. If
the parties were able to convince the legislature to remove (or even reduce) terrestrial radios
lenient treatment in regard to sound recordings, SoundExchange should expect to see an
avalanche of royalty payments heading its way. After all, terrestrial radio is still has the largest
market share in the radio industry.
This will allow SoundExchange to amend their current agreements with Pandora, Sirius XM,
and other internet radio services. In exchange for their help, SoundExchange should agree to
lower rates, but with the caveat that the internet and satellite radio companies must increase their
rate agreements with the PROs. While this may seem to go against SoundExchanges interest, it
really doesnt. First, many SoundExchange members will receive those royalty dollars back
through their PRO. Second, as I mentioned above, Pandora staying in business is the best thing
for SoundExchange. SoundExchange stands to lose a lot of money if Pandora goes under.

73
Frank James, Obama Supports AM-FM Radio Royalties For Musicians, NPR (April 1, 2010),
http://www.npr.org/blogs/thetwo-way/2010/04/obama_supports_amfm_radio_roya.html.
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In this situation, we have a scenario where all boats will rise (except terrestrial radio, but
theyve been unjustly enriched by their royalty structure for far too long). Pandora will save
money on royalty obligations because the reduction in royalties paid to SoundExchange will be
greater than the increase in royalty payments made to PROs. This should help them reduce costs
and fight their way to profitability. The PROs will benefit because they will see an increase in
royalty payments owed to them. SoundExchange will be the biggest winner of all, with a huge
new market to draw royalty payments from.
VIII. CONCLUSION
There is significant friction between music artists and Pandora. Artists believe that they
are being cheated because of the low royalty rates in place. Pandora believes that they pay far too
much in royalties and are seeking to pay less.
Pandoras financial situation dictates that they work with PROs to solve these difficult
problems. They need to open the channels of communications and work toward growing the pie,
rather than fighting over it. They should focus on terrestrial radio. By lobbying Congress to
remove the lenient treatment afforded to terrestrial radio, Pandora, the PROs, and the internet
and satellite radio industry will significantly benefit.