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Pandora Westergren Speaks For DiMA Before Congress

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Pandora founder Tim Westergren testified today on behalf of the Digital Music Asscoiation before the Senate Committee on Commerce, Science and Transportation. Westergren emphasized the range of radio on the net and noted that independent musicians are benefiting from services like Pandora that promote diverse playlists and enable immediate purchase of music or concert tickets.

Westergren’s testimony also focused on the threat facing Pandora and all of net radio as a result of the Copyright Royalty Board’s decision to raise sound recording royalties 30%. This rate – which effectively requires some internet radio so pay royalties equaling 50-300% of revenue – is unsustainable for most webcasters and is in contrast to royalties paid by broadcast radio (no sound recording royalties), satellite radio (less than 3% of revenue), and cable radio (7.25% of revenue).

  • Read the full text of Westergren’s testimony after the jump
  • Analysis of the hearings from Daniel McSwain of RAIN here.

U.S
Senate Committee
on Commerce, Science and Transportation

Hearing
on  “The Future of Radio”

 Testimony
of Tim Westergren

Founder
and Chief Strategy Officer Pandora
Media

 On
behalf of the Digital
Media Association

Chairman
Inouye, Vice Chairman Stevens, and Members of the Committee:

My name is Tim Westergren. I am the Founder and Chief Strategy Officer
of Pandora, and it is my pleasure today to speak with you on behalf of my
company and the Digital Media Association (“DiMA”), about the radio industry,
and particularly about innovation and the future of radio.

What
is Pandora?

Pandora
is an Internet radio service that listeners enjoy on their personal computers,
through home entertainment products and on mobile phones. Pandora is powered by
a very unique musical taxonomy, called the Music Genome Project, developed by
our team of university-degreed musicologists. Our team has identified hundreds of musical attributes and they assign
values to each attribute in each song. When applied across a repertoire of hundreds of thousands of songs, the
Music Genome Project literally connects the dots between songs and artists that
have something – often quite subtle things – in common. This is the foundation that enables Pandora
to offer listeners – quickly and easily – radio stations that play music that
matches their taste if the listener simply tells us the name of a favorite song
or artist.

The
result is remarkable in many ways. More
than 8.5 million registered Pandora listeners enjoy a better radio experience,
and they are passionate about our service. They listen to more music, they re-engage with their music, and they
find new artists whose recordings they purchase and whose performances they
attend. Pandora is a bit of a phenom –
in only two years since our launch we have become the third largest Internet
radio service in

America

. But the real winners are music fans, artists,
record companies, songwriters and music publishers.

Something
unique about Pandora is that all music, once analyzed by our musicologists and
entered into our database, wins and loses audience in the purest of democratic
processes. If listeners vote “thumbs up”
a song and artist are electronically added to more station playlists, the
exposure is greater, and more people can offer opinions about that music. If listeners consistently vote “thumbs down”
then the song is performed and heard less. Not even my musical tastes or the CEO’s favorites can modify the purity
of how our musical taxonomy determines all Pandora radio performances.

Equally
unique is the breadth of our playlist. Pandora musicologists will review any CD that is delivered to us, and in
most cases enter it into our database and make it available for our millions of
listeners to hear. Pandora’s collection
includes hundreds of thousands of songs across the genres of Pop, Rock, Jazz,
Electronica, Hip Hop, Country, Blues, R&B, Latin and in just a few weeks,
Classical. These recordings range from
the most popular artists to the completely obscure, and each month our nearly fifty
musicologists analyze and add roughly 14,000 new songs to the catalogue – a
very deliberate process that requires between 15 and 30 minutes per song.

There are
no prerequisites for inclusion in the Music Genome Project. Indeed, it is quite common for us to add
amateur homemade CDs to the service. As
a card-carrying independent musician I am proud to report that fully 70% of the
sound recordings in our collection, representing over 35,000 artists, are
recordings of artists who are not affiliated with a major record label. Most important, because we rely only on
musical relevance to connect songs and create radio playlists, all artists are
treated equally in the playlist selection process and as a result independent
music is likely heard more on Pandora then perhaps any other popular radio
service. More than 50 percent of Pandora
radio performances are from independent musicians, compared to less than 10
percent on broadcast radio.

What qualities are unique about “new media” radio, and
what benefits are associated with those qualities?

In one
sense multimedia convergence has already blurred the line between traditional
‘terrestrial radio’, Internet radio, mobile radio, cable radio, satellite radio
and even community radio. For example:

  • Your mobile phone today can transmit a “webcast”, and
         with a $2 adaptor you can listen to that Internet radio through your car
         stereo.
  • You can start a “community” radio station on the
         Internet and while content is focused locally, an audience is available
         (and may actually listen) globally.
  • Your car stereo today comes pre-loaded with AM/FM and
         perhaps XM, but in only a few years cars will have WiMAX broadband access
         and you will be able to enjoy Internet radio directly and throw away the
         adaptor I just spoke of.

To a
listener who is hearing a single station at a given time, it is just radio and
their choices are amazing – which content do I want to hear, when do I want to
hear it, and on what device?

 

But in
another sense, Internet radio is uniquely different from broadcast, satellite
and even low-power FM radio, because on the web there are virtually no spectrum
limitations and therefore no capacity or scarcity issues. As a result, Internet radio offers almost
unlimited “stations” which results in unlimited content diversity.

 

For music
fans, Internet radio means no longer being confined to local or even satellite
stations playing homogenous music for broad audiences of thousands or tens of
thousands of listeners. Instead,
individuals can hear the types of music they enjoy and simultaneously discover
new songs and artists that would otherwise be literally invisible to them.
Unconstrained by spectrum limitations, webcasting has created a genuine
explosion of accessible musical diversity. Lute music, classic country, jazz, klezmer, dixie, gospel, Latin and
Hawaiian music – you name it and you can find it – every kind and color of
music has found a home and connected with its audience, no matter how small, on
the Internet.

 

Another unique feature of Internet
radio is click-to-buy purchasing opportunities, and immediate access to artist
information, including the artist’s promotional website and tour schedule. Pandora is a powerful platform for recording
companies and artists during this tumultuous period for recorded music. An August 2007 Nielsen/NetRatings research
study concluded that Pandora listeners are three to five times more likely to
have purchased music in the last 90 days than the average American. Similarly, Pandora is one of the top referral
sites for music purchasing from both Amazon.com and the iTunes Music Store. Other studies have documented that Internet
radio listeners are generally more engaged with music, they talk about it more
and attend more performances, and they inevitably promote artists and music
through word-of-mouth marketing.

 

Finally,
of course, there is the issue of royalties to performers and recording
companies. As you know, traditional
broadcasters do not pay royalties but the rest of us – cable, satellite and
Internet radio – do pay. You may not be
aware that Internet radio has the smallest of all radio revenue streams, but we
pay proportionately the highest royalties.

 

RADIO REVENUES AND ROYALTIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internet Radio

 

 

Cable/Satellite Radio

 

 

European Radio (Music)

 

 

Broadcast Radio (Music)

 

 

2006 Revenue

 

 

$100-150 Million

 

 

$1.5-2 Billion

 

 

unknown

 

 

$15.5 Billion

 

 

Sound Recording
  Royalties

 

 

47-300% of Revenue

 

 

3-7.25% of Revenue

 

 

4.3% of Revenue

 

 

0% of Revenue

 

 

Songwriter Royalties

 

 

4% of Revenue

 

 

4% of Revenue

 

 

5.2% of Revenue

 

 

3% of Revenue

 

 

 

I am
proud that in 2006 Pandora paid more than $2 million in royalties to artists
and recording companies, and had the old royalties rates stayed in effect, then
in 2007 we would be on track to pay over $4 million. Instead, unfortunately, the Copyright Royalty
Board recently increased royalty rates more than 30% so our royalty in 2007 is
now likely to reach over $6 million, almost 50% of our total revenue. And per listener per track royalty rates for
Internet radio are scheduled to climb an additional 27% in 2008, and 29% more
in 2009.

 

Under the
CRB decision Internet music radio is economically unsustainable; it is not even
a close call. Pandora has skyrocketed
from a standing start to millions of listeners in two years; we were getting
within sight of cash-flow positive operations under the old rates, but now we
are back under water with no hope of ever emerging as the royalty rates
continue to increase. Of course our
disappointment is magnified because our broadcast and satellite competitors
enjoy no royalties or very reasonable royalties, respectively.

 

It is for
these reasons that Pandora and the entire Internet Radio industry thank
Senators Kerry and Dorgan for cosponsoring the Internet Radio Equality Act, S.
1353, which would resolve this industry crisis by reversing the Copyright
Royalty Board’s recent rate-setting decision and set royalties at a reasonable
7.5% of revenue – higher than that paid by any U.S.-based radio service and
higher than the average royalties in Europe that the recording industry references
as the bastion of sound recording performance royalty fairness.

 

In the
starkest possible terms, the Committee and the Congress should be aware that
Pandora and the entire Internet music radio industry cannot afford the CRB
royalty rates. Today, we still are
hopeful and we believe that some combination of Congress, the courts, or a
negotiated resolution with SoundExchange will favorably resolve this
threat.

But if we
conclude that the CRB royalty rates are not going to be rectified, Pandora
would shut down immediately.

 

Congress
should also understand that Pandora and our DiMA colleagues are not alone in
our effort to reverse this unfair CRB royalty decision. Since the SaveNetRadio campaign began several
hundred thousand people have contacted Congress and urged support for Internet
radio and more than 6,000 artists have joined the effort in support of the
Internet Radio Equality Act and more reasonable royalties for artists and
recording companies. Everyone in the Coalition
wants artists to be paid fairly and supports the growth of Internet radio which
directly and indirectly benefits tens of thousands of working artists. But without reduced royalties there is simply
no way for Pandora, or any other webcaster, to remain in business.

 

* * * *

 

In just ten years more than 70 million listeners have
flocked to Internet radio, a virtual fountain of music discovery. Many of our listeners are returning to radio after
years of exile spent listening to the same CDs they bought in college, or not
listening to music at all. And musicians
are back in business also, as they can now find fans and build community with
people who want to buy their music and want to attend their performances. The Internet continues to be a remarkable
democratizing force for creativity and innovation.

 

It has
been a wonderful experience to watch our service grow and to witness our
listeners’ passion and enthusiasm as they have rediscovered their love of
music. I am Pandora’s traveling minstrel,
and in the last 18 months I have visited almost 100 different towns and cities
meeting in “town hall”-style with Pandora listeners. From

Biloxi

and

Baton Rouge

to

Seattle

and

San Francisco

I have met with tens and often hundreds of listeners at each meeting and
enjoyed the energy of enthusiastic music fans and musicians who are re-engaged
and re-committed to their music and their newfound radio experience.

 

As a
former performing musician and composer, it is exciting to be at the dawn of a
new renaissance for musicians, who are empowered with new ways to market their
music and successfully develop a fan base. I often wish I could start my band now instead of back in the early
nineties when our resources were a van, a staple gun and a pile of flyers that
we handed out or stapled to telephone poles.

 

It is my
hope, indeed the reason I started this company, that we are at the beginning of
the development of a musicians’ middle class, as radio services like Pandora
allow musicians to find a fan base and maintain a steady career making music, which
is a real alternative to the major-label system that makes you an enormous star
or leaves you unemployed. These emails
from Pandora listeners testify to this new era for independent musicians:

 

“I
think the best thing you’ve done is introduced me to so many artists that I
love but would have never known that they existed otherwise. Now I buy their
albums and look for upcoming shows in my area. You’ve done the music industry a
great service from what I can tell.”

 

“Let me tell you that you are a
blessing in my life. I’m 77 years old and the music I like and grew up with
just isn’t played much any more. Sometimes tears come to my eyes when I hear
certain songs. They bring back so many memories. I don’t think I have
heard any songs I haven’t liked.

Thank you from the bottom of my heart.
I send you arms full of appreciation.”

 

And from a musician:

 

“Hi
guys – just wanted to thank you for putting my music into your system. I have had sales all over the

US

from people
who found me via your site. Pandora is great. I use it all the time. And I
can’t believe what a promotional tool it has become for my own music.”

 

Since
1999 Pandora has survived the dot-com collapse thanks to more than 30 employees
who worked months without salaries, and we are now one of the largest payors of
sound recording performance rights in this great nation. We employ more than 100 people, most of whom
are trained and experienced musicians and most of whom work at our headquarters
in an enterprise zone in

Oakland

,

California

. We have invested; we have innovated; and we have
had some very good initial success. Please support resolution of the Internet radio royalty crisis by
cosponsoring the Internet Radio Equality Act so our industry can continue to
grow, and continue to benefit artists by paying fair royalties and developing
new audiences.

 

As a
musician who spent a decade walking in the shoes of the working artist, I am
heartbroken at the prospect of silencing what has become an extraordinary
resource for the artist community. As a
listener and music lover, I am depressed at the prospect of losing the most
powerful music discovery tool ever put in the hands of music lovers. And as a webcaster, I am dismayed at the
prospect of telling millions of devoted listeners that their radio stations are
dead.

Thank you
for your time and consideration.

 

 

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