Pandora Faces Closure; SoundExchange Plays Tiny Violin

by Eric March on August 18, 2008 at 10:01 pm

There is no doubt that Pandora is a great service. I used to listen to it back in the day — back before they pulled the plug on international broadcasting. It was an excellent service, though; the concept of cataloging music genetically, linking songs to other songs not merely by artist or genre, but by attributes of the song itself, thus giving rise to the ability to link musical styles to similar musical styles that were more likely to be enjoyed by the listener than with other, similar Internet radio stations, was a great idea. It has spawned legions of loyal fans who rely on Pandora for their musical fix.

With the advent of their free iPhone application, even more people were able to enjoy Pandora, even on the go, over WiFi, EDGE or 3G connections. It was a boon to Pandora and listeners alike, and has been generating new Pandora members at a rate of 40,000 a day.

But last year, an obscure federal body of pandering politicos, doubtless preaching from the pockets of music industry evangelists RIAA and SoundExchange, ordered a doubling of the per-song performance royalty that webcasters pay to the performers and their record companies.

Internet radio differs from terrestrial radio, which itself differs from satellite radio, in one important area: Performance fees. Terrestrial radio stations do not pay performance fees, owing largely to the fact that they broadcast only one song at a time, so the order did not effect them. Satellite radio stations do pay performance fees, but their rates are, on the whole, not as severe as internet radio stations, and apparently the fact that they too broadcast only one song at a time has no bearing on why they do pay the fees when terrestrial radio does not. Internet radio stations however, who can multicast any number of songs simultaneously to any number of listeners (assuming they are the sort that allow users to create personalized radio stations, such as Pandora or Last.fm), are hit hardest of all.

This is because fees have been levied differently as new broadcast technologies emerged and the record industry struggled to adjust and figure out how best to derive compensation from these new mediums. As things stand right now, SoundExchange defends their financial trouncing of internet radio stations by claiming that their overhead is relatively low while their profit margins are high, so it is appropriate to set different royalty rates for webcasters. The also comlpain that internet radio stations haven’t had to work very hard to make their money. It all sounds just a little bit communistic, frankly.

Pandora founder Tim Westergreen doesn’t like any of it, either, nor should he, but while negotions are still continuing, they’re still far from a mutually acceptible agreement — and worse, he’s nearing the breaking point. “We’re approaching a pull-the-plug kind of decision. This is like a last stand for webcasting.” he said.

“We’re taking this challenge very seriously. When we have our board meetings, the central topic is the revenue trajectory, not how happy our users are,” Westergreen said of his struggle to come to some agreement while trying to come up with some way to stay alive. Pandora is funded by venture capitalists, and as such must answer to the board of directors, who aren’t going to wait around forever for this issue to be resolved. “They’re not going to chase a company whose business model has been broken. So if it doesn’t feel like its headed towards a solution, we’re done,” Westergreen said.

Pandora’s royalty fees this year will amount to 70% of its projected revenue of $25M — that’s $17.5M in royalty fees alone, leaving them with just $7.5M to cover operating costs, including their 120 employees. “We’re losing money as it is. The moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we’re doing is wasting money,” said Westergreen.

Rep. Howard L. Berman (D-Calif.) will be going to bat for Pandora to try and negotiate a deal that could lower the per-song rate they are currently paying, but while talks have been ongoing since last year, the gap between what Pandora wants and what SoundExchange is offering is still a yawning chasm, and neither side appears to be close to resolution.

All things considered, the prospects for Pandora shuttering its windows for good are materializing rapidly, and hope seems pretty thin on the ground. Last year, SaveNetRadio.org managed to collect 2,000,000 signatures and as a result managed to give webcasters a brief reprieve from the crippling rates, pushing back the effective date by months. Sadly, that time is now almost up, and internet radio faces the very real possibility of becoming either the domain of only the very largest of companies who can afford to pay the royalties, or disappearing altogether, and if Pandora can’t broker this last minute deal, SaveNetRadio may be the only way for the voices of dissent to be heard.

If online radio is important to you and you’d rather it didn’t become record in the fossil table of the internet, drop by SaveNetRadio and add your name to the pile, otherwise that oft-used Pandora icon on your springboard may cease to have any use.

(Washington Post, via The iPhone Blog)

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