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# On Eve Of The Internet Radio Fairness Act Hearings
- URL: https://www.hypebot.com/on-the-eve-of-the-internet-radio-freedom-act-hearings/
- Published: 2012-11-27T20:23:00.000Z
- Updated: 2012-11-27T20:23:00.000Z
- Description: (UPDATE 3) With Congressional hearings set for Wed. 11/28, David Macias, president of Nashville based label services company Thirty Tigers, shares his views on The Internet Radio Fairness Act. Somewhere. Continue reading [https://www.hypebot.com/hypebot/2012/11/on-the-eve-of-the-internet-radio-freed
- Author: Bruce Houghton
- Tags: DIY Advice & Tips, Radio & Satellite, Streaming, #wp, #wp-post, #Import 2026-01-21 10:49

[![image from www.google.com](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017d3e38ab14970c-150wi "image from www.google.com")](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017d3e38ab14970c-popup?ref=hypebot.com)

(UPDATE 3) *With Congressional hearings set for Wed. 11/28, *David Macias*, president of Nashville based label services company *[Thirty Tigers](http://thirtytigers.com/?ref=hypebot.com)*, shares his views on *The Internet Radio Fairness Act**.

Somewhere up in heaven, **Rube Goldberg is looking down**,  
thrilled with the method by which owners of recording and publishing copyrights  
are paid for their use in the US (for those of you in the UK that want to follow  
along, substitute Heath Robinson for Rube Goldberg). If a song is played on  
terrestrial radio for a recording that I own, that radio station pays nothing  
for its use, so **the percentage of revenues terrestrial radio pays for the use**  
**of that recording is, let’s say it together, ZERO**. Now let us look at what  
Pandora pays for the use of recordings. It’s estimated that they paid $136M

[\[1\]](#%5Fftn1)

to Sound  
Exchange for the use of recordings on gross revenues of $274m. As a percentage  
of revenues**, Pandora is paying 50 PERCENT.**

On the other hand, let’s look at what owners of publishing  
copyrights and songwriters get paid from terrestrial radio and Pandora.  
According to a recent article in Digital Music News

[\[2\]](#%5Fftn2)

, an  
unnamed executive claims Pandora pays to publishers less than 10% of what they  
pay out to owners of recordings. Let’s assume for the sake of easy math that it  
is 10%. That means that Pandora pays out approximately $15m in royalties to PROs  
(performing rights organizations) on behalf of owners or publishing copyrights  
and songwriters.

*click on chart to enlarge* 
*[![image from convert.neevia.com](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017d3e3eebf0970c-500wi "image from convert.neevia.com")](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017d3e3eebf0970c-popup?ref=hypebot.com)* 
ASCAP and BMI collected revenues of $1.75b in 2011, and adding  
in revenues from SESAC (a private concern that does not divulge information  
about revenues), let us call it an even $2b. According to a 2005 paper by  
Harvey Reid [\[3\]](#%5Fftn3),  
35% of PRO revenues come from terrestrial radio; therefore we can estimate that  
$700m is collected by the PROs on behalf of owners or publishing copyrights and  
songwriters. 

According to a Business Insider article from 2011

[\[4\]](#%5Fftn4)

, Pandora  
accounted for 4% of total US radio hours (and that number is climbing). If you  
extrapolate what Pandora would pay if they paid the same rate as terrestrial  
radio, assuming that they were the same size, they would have paid $375m for  
what terrestrial radio paid $700m for.

  
**[![image from www.google.com](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017d3e389d24970c-150wi "image from www.google.com")](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017d3e389d24970c-popup?ref=hypebot.com)TO RECAP:** **Pandora pays far less to owners of publishing** 
**copyrights than terrestrial radio, and pays far more to owners of recording** 
**copyrights. And satellite radio pays rates on a different scale altogether.**

The  
result of this confusing mish mash of royalty rates is that artists and  
songwriters often cannot keep tabs on how much money they should be earning  
from various mediums. Another outcome is that organizations that act as  
advocates for these constituencies use data selectively to lobby for the narrow interests of their clients, rather than try to look  
holistically at what will allow each link on the value chain to earn fair value  
for the contributions.

Some examples:

The heads of the [National Music Publishers' Association](http://nmpa.org/?ref=hypebot.com),  
Nashville Songwriters Association International and the Church Music Publishers  
Association recently released a joint statement to Congress that said in part,  
"Put another way, for every dollar paid in music royalties by Internet  
radio, only 8 cents of it is going to songwriters and publishers, while 92  
cents is paid to record labels and artists through [SoundExchange](http://www.soundexchange.com/?ref=hypebot.com)," they  
wrote. "This disparity is not defensible."

[\[5\]](#%5Fftn1)

Were the gentlemen that run those organizations as outraged  
by the fact that their membership receives 100% of the benefits for terrestrial  
radio play, while record labels receive none? I haven’t seen the entire  
statement, but my guess is that they probably neglected to mention that particular  
indefensible disparity.

[![image from www.google.com](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017d3e3898eb970c-150wi "image from www.google.com")](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017d3e3898eb970c-popup?ref=hypebot.com)

On the other hand, Pandora founder Tim Westergren has been  
arguing for a royalty rate that equals 8% of revenues, essentially asking for  
the same percentage of revenues that [SiriusXM](http://www.siriusxm.com/?ref=hypebot.com) pays for music. That rate would  
set a dangerous precedent for the recording industry and artist community,  
setting off what Rep. Jerrold Nadler has correctly termed “a race to the  
bottom” in terms of compensating the creative community for the use of their  
works. That 8% rate was set at a time when Sirius and XM were two separate  
companies, struggling for financial viability. That is no longer the case. It  
is time to revisit that rate, while we’re on the subject. One suspects that  
Mr.Westergren has done the math and understands the devastating effect that an  
8% rate would have on the recording community.

**I also find a couple of the bill’s points a little** 
**disingenuous.**

For those that have not read them, here are the five points the  
Copyright Royalty Judges will need to consider in addition to what is already  
listed as the criteria for setting royalty rates in the 801(b) section of the  
Copyright Act:

**not disfavor rates that** 
**are set based on a percentage of the online service’s revenue,** **establish a fee** 
**structure that encourages competition among copyright owners and between** 
**online radio and other services,** **consider the promotional** 
**value of online radio,** **consider the value** 
**online radio gives to the value of the works it streams, and** **not consider interactive** 
**license fees or prior CRJ rates.**

Points  
1, 2 and 5 seem reasonable enough. There are plenty of businesses that pay a  
specific percentage of their revenues for the right to use or license  
intellectual property. The US economy is best served by not giving competitive  
advantages to one segment of an industry over another, something that is  
clearly happening under the current royalty regime. And comparing rates that  
non-interactive streaming sites pay to those paid by on demand interactive  
sites seems obvious enough.

However,  
points 3 and 4 seem incredibly self-serving and could reinforce a dangerous  
precedent. Terrestrial radio has justified using, royalty free, the recordings  
owned by artists and labels for years with the same argument. It’s especially  
specious when it comes to Pandora. Artists and labels have no control over why  
and when their music is selected to be played. Unlike terrestrial radio or satellite  
radio, the industry cannot “promote” through Pandora, which frankly, is one of  
the reasons consumers probably like it so much. But to disallow any path to  
promote while simultaneously touting the promotional value is, well,  
disingenuous.

  
**[![image from www.hypebot.com](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017c3409cd9c970b-300wi "image from www.hypebot.com")](http://hypebot.typepad.com/.a/6a00d83451b36c69e2017c3409cd9c970b-popup?ref=hypebot.com)The Critics Fight Back**

Critics of the recently proposed Internet Radio Fairness Act  
(IRFA) that Pandora has been lobbying so hard for have started fighting back.  
An ad ran in Billboard that was signed by a slew of artists asking why Congress  
is considering cutting the royalties that artists depend on. Ben Sisario of The  
New York Times wrote in a recent article that there is a widespread belief (a  
belief I have heard espoused personally) that Pandora could climb out of  
unprofitability, and lower that 50% number simply by selling more ads or  
increasing the number of subscribers. Undoubtedly that is true. But as someone  
who recently switched over from the ad supported side of Pandora to their  
ad-free paid Pandora One service because I was tired of hearing so many ads, I  
have sympathy for Pandora’s unwillingness to alter their ad mix to the possible  
detriment of their business. Advertisers seem to be coming around to the value  
of Pandora, however. 88% of Pandora revenues were from ads, and those revenues  
have skyrocketed in the past two years ($55m in YE 1/31/2010 and $274m in YE  
1/31/2012). Their listenership grew by 50% last year, while their revenues grew  
by 100%. That would seem to indicate that, as listenership grows, revenues will  
grow even faster, which makes sense. Even if the rates per stream don’t change,  
other marginal costs per new listener should not be very much at all, as it the  
case with almost all technology-based mediums. I’m also confident that more  
people will opt, as I did, for the Pandora One service. People are gladly paying  
over $150 for SiriusXM service, so it’s not a stretch to think that, with some salesmanship,  
Pandora could grow from around 1m paid $36 subscriptions to 10m in the near  
future (SiriusXM has 25m), which would generate $360m annually, with a decent  
amount of revenue still to be garnered from advertising. Pandora will probably  
grow their way into profits in the near future regardless of whether the rate  
structure changes.

It has been speculated that the reason this has become such  
a cause for them of late has to do with the company going public in June of  
2011, and that their case will be viewed more sympathetically now, when they  
are losing money, as opposed to the near future, when it is possible that they  
won’t be. There is undoubtedly intense pressure from shareholders to right the  
ship financially, but critics who mention this are wrong to use this as a  
justification to dismiss their argument. What difference does their timing  
matter, and why shouldn’t Pandora be able to pay a more reasonable rate to boost  
profits? Although I think Westergren probably overstates his case, the current  
rate structure is hard to justify, and Pandora has every right to compete without  
one arm tied behind its back. I would imagine that Pandora’s attorneys have  
looked at and rejected an argument that this violates the Clayton Act’s  
strictures on price discrimination, but how one runs a business paying for  
something that your competitor does not have to pay for would strike me as  
grounds for an argument of this sort.

**I think it’s also possible that the music business could be** 
**doing itself a favor by agreeing to a lower fixed percentage of revenues**

, say  
25%, if Pandora would agree to that. Pandora’s revenues for the first two  
quarters of 2011 were $118K; the first two quarters of this year were $182K.  
Revenues grew by 100% the previous year, and it is on pace to grow another 54%  
this year. Assuming that revenue growth tapers off over time, but they continue  
adding 10m subscribers annually, revenues from 25% of gross revenues will outpace  
revenues from the current royalty system by 2016 and pay more total revenues  
through 2020 (see table).

One would also hope that it would give moral authority to Congress  
to finally allow passage of a law allowing the collection of performance  
royalties from terrestrial radio stations (currently a much bigger piece of the  
radio pie). If terrestrial radio were able to pay just 1% of revenues in  
royalties to the owners of recordings, it would mean an additional $100m in  
revenues paid, at least according to proposal offered by the NAB to start  
paying performance royalties to owners of recording copyrights. That would more  
than make up for the loss in revenues that would come from moving Pandora from  
paying 50% of their gross revenues to 25%. That 1% rate seems too low to me,  
but I also recognize that terrestrial radio has built its business without  
having to pay these royalties (thank goodness that they seem to have dropped  
that nonsense about calling it a tax). A 1% royalty is a good place to start,  
as long as it can go up slightly over time, thus letting terrestrial radio financially  
adjust to the brave new world of performance royalties.

**Of course, a similar reimagining of the pie would have to** 
**occur on the publishing side as well.**

If Pandora gets its way in paying 8% of gross revenues, the  
owners of recording copyrights will be underpaid for their work. If some  
version of the IRFA does not pass, then we will be asking internet based radio  
entities to conduct business in an unfair environment that impairs their  
ability to compete and possibly even survive. If the IRFA passes without ALSO  
passing legislation mandating the payment of performance royalties by  
terrestrial radio stations, then it will have a devastating impact on the  
recording industry and its artists. If Mr. Westergren wants the music  
community’s support, perhaps he should call on Congress to finally rectify the  
wrong of the US being one of the only countries on earth that does not mandate  
the payment of performance royalties by terrestrial radio stations to owners of  
recordings. These two issues should absolutely be linked.

It is time to end the jury-rigged method of royalty payments  
that leaves the entire music creator community utterly confused about revenue  
streams due them, but it is also high time that all the players involved stop  
foisting one-sided viewpoints into the arena.   
A sensible approach that allows artists, songwriters, labels and  
broadcasters to earn their fair share can be crafted if we put our minds to it.  
I encourage the members of the House Judiciary Subcommittee on Intellectual  
Property, Competition, and the Internet to discuss the NAB’s previous offer to  
finally start paying a small performance royalty as a part of an equitable  
solution.

**Also from Dave Macias – [Making Dollars: Clearing Up Spotify Payment Confusion](https://www.hypebot.com/clearing-up-spotify-payment-confusion/)**

> *\[1\] From Sound Exchange presentation attended by author in Nashville, TN, November 15, 2012.*  
>  
> *\[2\] “Pandora Is Now Suing ASCAP to Lower Songwriter Royalties…”, Digital Music News, November 6, 2012\. (http://www.digitalmusicnews.com/permalink/2012/121105ascap)*  
>  
> *\[3\] “ASCAP & BMI – Protectors Of Artists Or Shadowy Thieves?”, (http://www.ram.org/ramblings/philosophy/fmp/royalty-politics.html)*  
>  
> *\[4\] “Songwriters Oppose Pandora-backed Internet Royalty Bill”, The Hill, November 16, 2012*  
>  
> *\[5\] “Pandora Radio Growing Like Gangbusters” Business Insider, November 23, 2011 (http://articles.businessinsider.com/2011-11-23/research/30432348\_1\_pandora-higher-revenue-spotify)*

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