A Deeper Dive Into Music Royalties and What’s At Stake for Every Music Fan

“The Royalty Crisis is Over!” So said Tim Westergren, co-founder of Pandora, in 2009. Why was he so happy? Because Pandora’s royalties (payments to artists and record labels) had been cut far below market value as the result of a special interest bill in Congress.

The idea was to give Pandora time to grow. And it has. More than 80 million monthly users and an IPO since that agreement. Since then artists and labels have received only around $5 per user for an entire year from Pandora. Clearly only one side got the benefit of that bargain.

Now that Pandora is a successful, public company surely it should pay market rates, right? Instead, Pandora is seeking to extend below market rates for another five years.

And it isn’t just Pandora. Earlier in 2009, the National Association of Broadcasters (NAB) had similarly declared that new rates “ensur[ed] the continued viability of Internet streaming for America’s radio stations.” (While AM/FM Radio stations pay nothing to artists and record companies when they play music “over the air,” they do pay royalties when they stream music on the Internet.)

So, if they had it so good on royalties just a few years ago, why are the biggest corporate AM/FM broadcast giants seeking a 80 percent cut from the rates they hailed a few years ago?

It’s a Streaming World

The way consumers find and listen to music has fundamentally changed in recent years. Consumers are moving to streaming models and away from purchasing music. Physical sales have plummeted nearly 33% the last six years and, after years of music fans downloading tracks, digital downloads have dropped as well:

But people are still listening — probably more than ever. They have simply shifted in droves to streaming services like Pandora.

As a result, streaming is becoming the economic heartbeat of the music business — artists depend on streaming royalties more and more for their livelihood, and record companies depend on it to fund their work finding new talent, helping them develop their style and sound, and spreading the word about new acts. Streaming royalties have nearly tripled in the last three years, and everyone expects the growth to continue:

We Have To Get This Right

Fair pay for streaming services like Pandora and iHeartRadio is critical for music to continue to be a vibrant part of our culture, for artists to be able to earn a fair living, and for record companies to carry out their mission nurturing that craft. If we don’t get this right, everyone who cares about music will miss out.

So, how do we decide what’s fair? It’s complicated.

Congress has established a board of judges (the “CRB”) that hears evidence from music services and music creators about what fair market value is. This economic evidence includes benchmarks and other real world measures.

Once the market rate is set, services like Pandora and iHeartRadio, including the smallest start-up, can stream all of the music in the world without asking anyone for permission. Labels and artists can’t negotiate in the marketplace. This ease of licensing is a boon to these services. If you don’t believe that, ask them if they want to replace this system with free market negotiations.

Gaming the System

Sadly, proposals by Pandora and the NAB would decimate music’s value. Under the guise of working with this system to establish rates that have a basis in reality, they are trying to game the system.

The NAB and iHeartRadio are already the biggest freeloaders in radio, paying nothing to performers and labels for AM/FM airplay. Now, they are asking the royalty judges for a jaw-dropping 80% cut in what they currently pay for Internet radio. 80%!

Just this year, NAB Member Clear Channel trumpeted its now 60 million (!) online users and exclaimed that this metric demonstrates “Accelerated Growth, Engagement and Strong Brand Awareness.” So the better these stations do, the less they should pay?

Thanks to the political deal it cut the last time, Pandora already pays 40% below market value for music. Now they want to dig even deeper into music creators’ pockets despite a growing business earning more than $1 billion a year in revenue.

It’s not respecting music to make more and more money from using it and ask to pay less and less for it.

In the end, everyone who loves music would lose. Lower pay for music means fewer artists signed and less music being made for fans. Demanding rate cuts of $500 million or $800 million below market value is no way to encourage the creation of great music or foster a fair music economy where everyone can thrive. These companies pay a lot of lip service to the idea that they care about music and support artists. But when push comes to shove, it’s clear where they really stand — for themselves and nobody else.

Music creators aren’t asking for any special deals. We don’t want subsidies, handouts, special treatment, or favors from the radio companies, from Congress, or the courts.

We want one thing — fair market value for our work.