Exclusive: $4 Billion Pandora Hardly Needs a Government Subsidy

Mike Flynn’s recent screed takes aim against the music industry for opposing the so-called “Internet Radio Fairness Act” (IRFA), a bill that would effectively have the government set a reduced price (up to 85% less) for music used by Internet radio services. In other words, Congress would establish a forced government subsidy for publicly traded Internet radio companies by transferring wealth from the pockets of property owners and creators to these companies.

Flynn states that the industry “trotted out artists from Pink Floyd to Cee Lo Green and relentlessly attacked IRFA and Pandora…” We would like to note a line from the Pink Floyd classic “Another Brick in the Wall”: “We don’t need no thought control.” After all, it takes some serious mind games to convince us that a decidedly liberal sentiment – that the government can appropriately regulate costs and pick winners and losers in the marketplace – is a conservative ideal. Think Solyndra.

Like most of the readers of Big Government, we believe the best way to determine the cost of goods is to leave it to the free marketplace. If the government must set the rates for music on Internet radio, at the very least it should have to look at real marketplace deals as a benchmark and set the price based on the real market. This “willing buyer/willing seller” is current law. Large Internet radio companies like Pandora want to change this market-based standard to “minimize any disruptive impact” on Pandora. In other words, they want to create disincentives for new start-ups to enter the market and disrupt Pandora’s hold on it.

It is important to remind your readers that Pandora freely negotiated the royalty rates in 2009. Pandora’s executives, who became millionaires from a $235 million IPO and now preside over a company that is valued at over $4 billion, are crying poor and want Congress to change the rates to give their business model an advantage.

Flynn then attacks the Free Market Royalties Act which seeks to bring real parity between all music platforms instead of maintaining the century-old performance right royalties loophole exemption for over-air broadcast radio stations. Flynn cites a “generations-old social compact where radio stations get to play artists’ music and artists in turn become rich selling records off of the exposure radio stations give them.” Flynn ignores the generations-old fight for the performance right led by yesterday’s icons such as Bing Crosby and Frank Sinatra that has been fought tenaciously by the broadcasters for just as long. As it stands, the United States joins Communist China, Iran and North Korea among the only countries where radio does not compensate artists for their music. Some company. Some social compact.

What is most troubling is that Flynn ignores the fact that Pandora supported a separate agreement on royalty rate standards with the music community that was incorporated into the Performance Rights Act (PRA), legislation passed by both the House and Senate Judiciary Committees in 2009. Importantly, that agreement on standards was struck in tandem with the elements of the PRA that advanced true parity: the obligation for AM and FM radio broadcasters to finally compensate performers for music played on terrestrial radio, a “parity” policy objective that Pandora executives have repeatedly said they support. 

The fact that Internet radio companies like Pandora pay under a different standard than other platforms, such as broadcast radio, cable and satellite radio, is true. This should be corrected. All platforms should pay, and all should pay fair market value. Just like everyone else in America.  

The fact that Pandora, a music service, is “paying a majority of their revenues in royalty fees” for music is not surprising. Cable distributors pay a majority of their revenues for the programming they are in the business of distributing. Other services, such as Spotify, Vevo, and iTunes pay roughly two thirds of their revenue in content costs – more than Pandora. Ironically, the rate Pandora pays now was not set by the government, but rather was part of an agreement in 2009 Pandora negotiated directly with content owners after Pandora ran to Congress to put pressure on the marketplace – twice (are you seeing a pattern?). The agreement established royalties of 25% of revenue or a per-play fee, whichever was higher. As Pandora’s Tim Westergren said immediately afterward, “The royalty crisis is over!” Unfortunately, Pandora has failed to attempt to properly monetize its business – in some cases running a fraction of the ads traditional radio stations do. Thus, by their own choosing (which they have a right to do), they pay the higher per-play fee (and incur the losses inaccurately pinned on market-based rates for royalty payments).

It is a fact that the music industry is moving toward an access (rather than purchase) model and labels seem fully on board, given the market deals they have struck with Spotify, Rhapsody, Google All Access Music, iTunes Radio, Beats and hundreds of others worldwide for tens of millions of tracks. Because this access model is quickly replacing sales of music, who can blame property owners for wanting adequate payment for their creative products and a return on their investment?

We agree with Flynn that the “copyright system is schizophrenic.” There is no denying that music licensing is difficult and messy. The law is convoluted and there are a myriad of interests involved. But in our conservative view, the bottom line is surprisingly simple and timeless: fair prices are best established by the free market. IRFA fails this basic tenet.