Pandora’s Rdio Purchase. What’s An Artist To Do? Part 2: Breaking Down The Numbers

Looking to gain some additional insight on Pandora's plans for the future of Rdio, George Howard recently spoke with John Stimson, the founding director of SoundExchange, about interactive vs. non-interactive streaming services and how they affect artists differently.

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Guest Post by George Howard on ForbesIn a recent FORBES piece, I discussed the potential rationale around Pandora’s purchase of Rdio (leveraging their cash-rich balance sheet to move towards profitability via an acquisition strategy), and put forth a theory about how this purchase could fundamentally impact the way artists who release their own music might be paid.For that column, I spoke with the fantastic Madame Gandhi, who provided an artist’s perspective on the complications and confusion of today’s landscape vis-a-vis an artist who releases her own music. As Madame Gandhi stated:As I start to ramp up my music production under Madame Gandhi in 2016, I find even doing basics such as deciding which distributor to use quite difficult. I find the options limiting especially since the value of recorded music is so low – it’s almost like the split is irrelevant! Should my goal be to find the most ubiquitous aggregator that takes the fairest cut? Should I try to see if I can do a direct deal with streaming companies such as Spotify or Apple Music? Should I put my music in only the free places and attempt to make money in alternative, more interesting ways?I ended the piece with a call for more clarity and transparency:What I worry about, however, is that whenever there is deeply asymmetric relationships with respect to information, the side who has the knowledge advantage almost always utilizes that to prey on those lacking the information. It’s more than just a tired “knowledge is power” axiom. It relates to lack of efficiencies and distribution of information that harkens back — in far too eerie a manner — to those that framed the record business at its inception. We must work to level these information asymmetries if we hope to have a prosperous and sustainable inclusive music ecosystem .To this end, let me first lay out the root of some of the confusion, and then, below, I call in some reinforcement – in the form of the founding director of SoundExchange, John Simson – to help me attempt to level some asymmetries.My last piece put forth the question of what happens now that a non-interactive streaming service has purchased an interactive streaming service and presented a hypothetical argument that showed how Pandora (post the Rdio acquisition) might financially benefit from being classified as an interactive rather than as a non-interactive. The core of the argument is that, as an interactive streaming service, Pandora would not be governed by statutory licenses for performers and sound recording rights holders. Given this classification, it could:1. Make the deals necessary to provide a product that would attract and retain customers. The vast majority of the songs necessary to create this product offering would come via deals with the major labels.2. For ALL other sound recordings, set a rate that made business sense for Pandora and tell the aggregators (TuneCore, CD Baby, et al.) who represent the independent labels/artists who run their own labels to “take it or leave it.”

Pandora recently acquired the streaming service Rdio. This move likely fortells more consolidation, and with it additional confusion around an already complex music business. (AP Photo/Richard Drew)In some respects this scenario is not a “strawman” to be easily defeated, but rather an honest attempt to display the tension between the fluidity of technological change and the relative stasis of the rules governing the music business today, and, most importantly, an example of the complexities independent artists face.Attempting to gain some clarity, I once again turned to John Simson. Mr. Simson was the founding Executive Director of SoundExchange from 2001 to 2010. SoundExchange collects on behalf of the labels and performers as described above. Mr. Simson is now the Business and Entertainment Program Director at American University’s Kogod School of Business and the President of theMusic and Entertainment Industry Educators Association.George Howard: John, thanks for speaking to me again. My thesis is that indie artists/labels might be hurt by the acquisition of Rdio if Pandora moves from non-interactive to interactive, because – if they do this – the performers/labels would go from being paid via SoundExchange and into a direct licensing relationship with Pandora. however, it’s really NOT direct licensing because they’d essentially just be getting whatever rate the aggregator with whom they’ve signed on to (Tunecore, CD Baby, et al.) have negotiated. Can you give me some commentary? John Simson: It’s a complicated question. If an interactive service pays a higher rate per stream, then the independent artist makes more per stream from the interactive service, even if they’re paying an aggregator fee to put their tracks on a service like Spotify or Rdio; because most independent artists will also require an aggregator to get their tracks on Pandora or other non-interactive services.Remember too, on non-interactive streams, in addition to a lower per-stream rate, SoundExchange will take five percent (5%) of their collections and send that to background musicians and vocalists, even if there weren’t any on a particular track – that’s just the law in the United States. But this five percent (5%) deduction isn’t applied to interactive streams, making those streams even more valuable.So an independent artist will generally receive more from an interactive service than from a non-interactive one, provided that they own their own master recordings and don’t have a label collecting the interactive royalties.GH: Right, John, but the complicated nature/answer of/to this question is what’s so troubling to me. It shouldn’t be this hard to answer, and if it’s complicated for people like you and me, how can we possibly expect artists to make reasoned decisions?JS: It would be nice if there were a simpler answer but there isn’t.For example, some independent artists use aggregators who take a percentage of their revenue while other aggregators may charge a “load fee” or take both a load fee and also take a percentage.The load fee means that if an artist has a lot of tracks to be uploaded to various services, the load fee can exceed the revenue that the artist will receive. Is it worth it for that artist to be on the service even if the net result is lost revenue?GH: Of course not, but how transparent are these aggregators with respect to “Load Fees,” etc. And, again, I’m not saying that the aggregators are doing anything wrong, nor am I excusing artists for sort of covering their heads in the sand, and just screaming that they’re being undercompensated, but I do think transparency is relevant/important here….It’s why I talk so much about Blockchain tech.JS: The biggest issue is likely to be transparency. This is also the case with respect to your interactive vs. non-interactive point.With non-interactive services, there is a statutory license, thus a statutory rate – everyone knows what that rate is; although it is complicated by the fact that there are many different statutory rates that vary by the size of the service and the type of service.For example, Sirius/XM pays a much lower percentage of revenue than Pureplay webcasters, but their monetization is so much better, as a subscription service, that they pay a greater annual revenue per user than any of the Pureplay webcasters by at least a factor of two or maybe even three.GH: By Pureplay, you mean what Pandora currently is. Can you detail a bit these rates?JS: Sure. If Spotify pay rates are actually four tenths of a penny per stream on their freemium service (or forty cents per hundred streams) or seven tenths of a penny per stream on their paid subscriber service (or seventy cents per hundred streams) then it would seem that Spotify pays significantly more than a Pureplay webcaster like Pandora who currently pays fourteen hundredths of a penny per stream (or fourteen cents per hundred streams), and a nearly two or three times more than large webcasting services, which are currently paying in the twenty two hundredths of a penny to twenty four hundredths of a penny range.If the artist is their own label, they are collecting 100% of the money less costs of collection (aggregator cut) from interactive services; from non-interactive, they are collecting about 90% of the money, after SoundExchange takes about 4-5% fee, then sends an additional 5% share for background musicians and vocalists.GH: That’s helpful, John, but, break it down further for me, please, because for non-interactive services an aggregator may not be necessary, etc. So, can you give me an example:JS: Right, not all independent artists will need to use aggregators to get their music on Pandora or other non-interactive streaming services, including Sirius/XM, because there is no need to negotiate a license, since it is compulsory.Transaction costs are much higher for interactive services who do need to negotiate licenses for every single piece of content, thus their preference to deal with aggregators who can deliver thousands or tens of thousands of tracks vs. doing one-off deals with an artist who might own 20 or 30 masters.As an aggregator might not be required, it will typically result in an increase in the value of the non-interactive service. Here is a good example:In this example, Indie artist John Simson, who also owns his own masters, must use an aggregator to have music on Spotify and pays 15% of revenue to the aggregator for the service, but no upfront load fee. Simson was fortunate to have his music selected by Pandora and he needed no aggregator to have his music on this non-interactive service since Pandora didn’t need to negotiate a license and could use his master recordings under compulsory license. If Simson received 100 streams on both Spotify and Pandora, here’s how it would look:Spotify 100 streams on the ad-supported service at four tenths of a penny ($0.004) per stream equals forty cents ($0.40), less 15% commission to aggregator = Thirty Four Cents ($0.34).If he also receives 100 streams on Pandora’s Pureplay service, he would receive 100 times fourteen hundredths ($0.0014) of a penny or fourteen cents ($0.14) less SoundExchange costs of collection (about 4%) and less a deduction of five percent (5%) for the background musicians and vocalists who performed on the track. This would leave a net payout to Simson of approximately 12.75 cents after those deductions.GH: This is amazing, John – I’ve been looking for this type of transparency/clarity forever.JS: As you can see, the interactive service pays out nearly three times more than the Pureplay.For larger web services, such as Sirius/XM’s streaming, or Broadcasters who simulcast their signals online, the rates are significantly higher, yet still almost fifty percent less than interactive service rates.The result: unless your masters are owned by a record label that will collect not only the label share but your artist share from interactive services (or from direct licensed non-interactive services), you are more likely to see more money from interactive services than from non-interactive.However, one caveat is required here: under statutory licenses all parties, major or independent receive the same rate for each stream. In the interactive world, it is completely possible that a major service could say, “we will only carry your material at a large discount or if it’s free.”If you or your aggregator are not able to secure the same rates as the major labels or major independent labels, that could severely change the calculations I’ve made! (Note: in the early days of webcasting there were many non-interactive webcasters who went directly to small labels and independent artists claiming that they couldn’t afford to pay and obtained royalty-free licenses to stream content.)GH: And, this is only have the equation, right, there’s the songwriting as well. If the artist is also a songwriter, who pays more to songwriters and music publishers?JS: Yes, we have only looked at the master component of streaming here.Under U.S. law, Spotify and other interactive services have a compulsory license to stream any composition and pay roughly 10.5% of revenue sprinkled over every track they’ve played.Based upon the volume of tracks streamed, each track gets a specific value. Pandora and other non-interactive services have been paying less than half of that, recently as low as 4% of revenue (sprinkled over all of the tracks streamed during the period). SONY/ATV’s recent deal may have resulted in an increase, but it is still likely less than what interactive services pay.Mr. Simson is the authority on this, and can explain the complexities better than anyone, and yet, it’s no wonder that even HBS-schooled artists like Ms. Gandhi find it somewhat inscrutable.Perhaps, as Mr. Simson states, it is just complicated, and therefore, only those who derive the most benefit from understanding the complexities will put forth the necessary time and effort to do so. I just want someone to convince me that it’s not the artists who should most benefit from their works .