Pandora Is Out Of Tune With Songwriters, Says CD Baby Founder Derek Sivers

As Pandora shareholders convened their annual meeting this week, the streaming music giant’s executives predictably omitted an ongoing battle with songwriters over royalty rates in the hopes of focusing attention on the company’s recent growth.

By CD Baby founder, author and entrepreneur Derek Sivers. It originally appeared on TechCrunch.

But when it comes to Pandora’s relationship with songwriters, investors would be wise to dig deeper.As someone who has both worked as a professional musician and run a successful music technology business, I remain puzzled as to why Pandora has chosen to wage an expensive and exhaustive fight against the songwriters that form the very foundation of its business – in courts, in the media and even in the halls of Congress – rather than negotiate with them. It just doesn’t make long-term business sense."Under Pandora’s current business model, it takes about a million plays for a songwriter to see just $90 in royalties. And yet, Pandora is still actively working to pay songwriters less."I was a full-time professional musician from 1988 to 1998. In 1998, I started a music distribution company called CD Baby that had revenues of $139 million and paid $83 million directly to musicians by the time I sold the company in 2008. It was a sustainable business model that helped musicians, helped music fans, and benefitted everyone in the supply chain.Most small business owners find that when you create a model where everyone benefits, it generates not just profits but good feelings for everyone involved. A Pandora-sized business can learn from this, too.Music drives Pandora, and its business is soaring, with revenues of more than $920 million in FY2014 alone. One might assume that as the company’s revenues grow, the rate it pays songwriters for the use of their music would increase as well.But, despite repeated claims by Pandora executives that they are on the side of music creators, it hasn’t worked out quite that way. Instead, barely four percent of Pandora’s total revenue is spent on licensing public performance rights from songwriters and composers.

Under Pandora’s current business model, it takes about a million plays for a songwriter to see just $90 in royalties. And yet, Pandora is still actively working to pay songwriters less. The company’s latest trick involves attempting to purchase a small South Dakota FM radio station in order to qualify for a lower licensing rate. And Pandora is one of the fiercest opponents of reforming America’s music licensing laws, many of which were written before the Internet even existed and which are in urgent need for reform.With Apple’s soon-anticipated entrance to the streaming business, it’s clear that streaming is the future. But we need to uphold the value of songwriters and their contributions in the streaming marketplace, or they will eventually put our nation’s music creators out of business. And, without their music, what will they have to offer its millions of listeners?Like CD Baby, Pandora has created any easy way to connect music creators and music consumers. And anyone who loves music should be rooting for Pandora to succeed. But Pandora’s claim that it cannot afford to pay songwriters any more – that in order to succeed, it must pay those who supply its most fundamental business input even less – rings hollow."With Apple’s soon-anticipated entrance to the streaming business, it’s clear that streaming is the future. But we need to uphold the value of songwriters and their contributions in the streaming marketplace."Success comes from persistently improving and inventing, not from persistently doing what’s not working. Today’s music licensing system isn’t working for today’s music creators. And since business and music are both creative pursuits, it’s critical that all stakeholders should come together to create a solution that serves everyone’s long-term interests. The Songwriter Equity Actthat is currently making its way through Congress – with more and more co-signers recently supporting the legislation – is an important first step, but a comprehensive solution is still needed in the form of consent decree reform.Pandora ought to be on the frontlines with songwriters, working towards a solution – not standing in the way of meaningful reform.By undercutting songwriters, Pandora’s approach to music licensing is not just self-serving, but shortsighted – and this is something its shareholders need to hear.To be sure, an effort to modernize our WWII-era regulatory system is not an easy task. But it is worthwhile, long overdue and essential to securing a strong future for American music. That would be a success story of which we could all be proud.