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A Response to Rob Pegoraro

Rob Pegoraro is usually an informed and thoughtful commentator, but in our view his column last week on Pandora seriously missed the mark. Here is our response: 

Rob Pegoraro’s May 12th column on Pandora raises some important issues, but from the perspective of the artists and music creators that make up musicFIRST, it presents a disturbingly false narrative of a company under siege. In fact, the vast majority of the music licensing reforms under consideration today would actually boost the company’s fortunes.

That’s as it should be – in many ways Pandora is the greatest victim of the inconsistent rules and special interest deals that have plagued music licensing laws for decades. The company offers a popular service and has been a pioneer in online radio – it should have a fair shot to compete for listeners on the merits of its product, without market distortions or Calvinball rules undermining its efforts.

Obviously, Pandora doesn’t see it that way and sadly has chosen to join the rule twisters and backroom dealmakers with its latest stunt of buying a South Dakota AM/FM station. That kind of gimmickry isn’t going to lead to a fairer more transparent radio business. 

It’s a shame because there is a real opportunity here to make meaningful progress on issues that concern us all. As I said before, most of the music licensing reforms under consideration – the Fair Play Fair Pay Act pending in Congress, for example – offer a huge opportunity for Pandora to improve its competitive lot. 

The most fundamental issue is the creation of an AM/FM performance right. 

Pandora has complained for years that it must compete against AM/FM stations that pay nothing to artist and musicians. Back in 2009, Pandora Founder Tim Westergren wrote “The system as it stands today remains fundamentally unfair both to Internet radio services like Pandora, which pay higher royalties than other forms of radio, and to musical artists, who receive no compensation at all when their music is played on AM/FM radio.” The Fair Play Fair Pay Act ends that fundamental unfairness, leveling the playing field for Pandora as it works to challenge AM/FM for supremacy in cars. 

Pandora also faces a stacked deck against SiriusXM, which pays performers according to a below-market royalty rate standard granted by Congress nearly twenty years ago. All this time, Pandora has been governed by a fair market value standard while SiriusXM has special Congressional protection against royalties that would disrupt its business model or profits. It’s an ugly and unjust state of affairs – one that the Fair Play bill would also change, establishing true platform parity so that all competitors play by the same rules regardless of the technology they use to broadcast music. That would clearly be another Pandora win.

The other two main provisions of the bill have a limited impact on Pandora. It would require royalties for pre-1972 recordings, which Pandora has claimed it doesn’t currently have to pay. However, the courts are already requiring artists to be compensated for pre-72 music and Pandora has indicated that, at least in some circumstances, it wouldn’t have a problem paying for pre-72 recordings just as it does for newer music. The bill would also streamline royalty payments to producers and engineers, but that doesn’t impact Pandora at all.

Fundamentally, of course, what is really driving Pandora, and animating Mr. Pegoraro, is concern about royalty rates. Mr. Pegoraro calls them “confiscatory,” which is definitely a very bad word.

I can understand a business wanting to lower its costs and keep more money for itself. Bosses don’t like giving raises, landlords never lower anybody’s rent, and prices always seem to find their way up. But the current royalty standard for Pandora simply directs the Copyright Royalty Board to set royalties at market value – the price Pandora itself would agree to pay in a truly free and open market for radio music (the current market isn’t free in that way because Pandora already has a government-granted license to use whatever music it wants and neither artists nor record companies can say “no”). The Fair Play Fair Pay Act would ensure all Pandora’s competitors are governed by this same standard. 

In a free, capitalist economy how can fair market value be the wrong standard for royalties? In what other business can you demand the government legislate below market prices? Pandora complains it pays too much for music, but music is virtually its entire business. Netflix pays more for movies than Pandora does for music and you don’t see them lobbying Congress to cut their costs. Mr. Pegoraro worries that Pandora still isn’t showing operating profits, but neither is Amazon or many tech companies that have chosen to focus first and foremost on growth and market share. Should Congress step in and legislate below market costs for all of them too? Profits will come for Pandora when it decides to prioritize them.

The Fair Play Fair Pay Act would be a clear win for Pandora – assuming Pandora actually believes in fair play and fair pay.