Why Internet Radio Royalties Led Pandora to Buy an FM Radio Station
Why Internet Radio Royalties Led Pandora to Buy an FM Radio Station
Why Internet Radio Royalties Led Pandora to Buy an FM Radio Station

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    Pandora’s recent
    purchase of a South Dakota FM radio station to obtain lower rates for its
    webcasting service reminds us how inefficient and illogical our music licensing
    system can be today.

    Sparked by an op-ed penned by Pandora employee Christopher Harrison, yesterday reports surfaced
    that Pandora has purchased a terrestrial radio station in South Dakota. At
    first glance, it seems downright bizarre to see an internet radio company
    invest in a single FM radio station in a relatively small market. But a closer
    look at the thicket of licensing rules surrounding internet radio reveals how
    our current music licensing system can create nonsensical incentives for
    companies on both sides of the negotiating table.

    The real reason for Pandora’s purchase of an FM radio
    station is Pandora’s royalty rate for musical compositions on its internet
    radio service. Note: this is a separate legal issue from the licensing Pandora
    pays for its use of sound recordings. The underlying musical composition gets
    its own copyright, and must be licensed in addition to the sound recording

    Here, Pandora is focused on the music composition licenses
    it gets from the performing rights organization ASCAP. ASCAP itself long ago
    entered into an antitrust settlement with the federal government and now
    operates under special rules designed to prevent it from wielding its leverage
    anticompetitively against licensees. Now, Pandora has announced that it has
    filed a motion in federal court alleging that ASCAP has been discriminating
    against Pandora compared to similarly situated services like Clear Channel’s
    iHeartRadio in various ways.

    One of Pandora’s complaints is that ASCAP refused to give
    Pandora the royalty rates it gives to fellow webcaster iHeartRadio because
    iHeartRadio is owned by Clear Channel, which also owns several hundred AM/FM broadcast stations. So, Pandora has now purchased an FM radio station so it can also be eligible for the lower rates that are only available to internet radio services owned by
    terrestrial broadcasters.

    This is a perfect example of the twisted incentives and
    strange results we get from a music licensing system that is based on who wants a license instead of just what they want to do with the music
    they’re using. This makes no sense. The
    law should treat like uses alike.
    Regardless of how high or low you think
    performance royalty rates for webcasting should ultimately be, there is no
    logical reason to give preferential rates to certain companies just because
    they arrived at the negotiation table first.

    When we treat similar services differently based on how long
    their owners have operated in the industry, we create perverse incentives that
    lead companies to make investments that don’t themselves produce more value for
    consumers. This also makes it even more difficult to accurately examine the
    economics of the market and predict which policies will most encourage
    competition and consumer benefits in the market.

    But most importantly, treating the same uses differently to
    give preference to older technologies and dominant companies will only ensure
    that upstarts and new competitors won’t be able to successfully enter the market. This
    means that the incumbent companies will feel no pressure to become more
    responsive to listeners or to artists, because neither group will have any
    other alternative path to reach each other. As a result, individual musicians and music fans will
    continue to be little more than an afterthought among the dominant rights
    holders and distributors.

    If we want a music distribution system that gives a better
    deal to listeners and artists alike, we must have a licensing system that
    creates a level playing field for new entrants.

    Image by flickr user Alan Levine.