Pandora’s Terrestrial Radio Station Purchase Could Reframe or Reanimate IRFA Debate

Pandora bought KXMZ(FM) Rapid City, S.D., to qualify for the same publishing royalty rates as one of its largest competitors, iHeartRadio, which is owned by the terrestrial broadcaster ClearChannel, Pandora said in an SEC filing Tuesday (http://bit.ly/16opHNc). The move is the latest in an ongoing fight over rates between Pandora and the American Society of Composers, Authors and Publishers, which sets the royalty rates for the compositions in its portfolio. Pandora sued the group in November when it was unable to reach its own deal with ASCAP, asking the U.S. District Court in Manhattan to set “reasonable fees and terms” through 2015, commensurate with ASCAP’s catalog and competitors’ deals.

Pandora’s fight to lower publishing royalty rates is distinct from its fight to lower sound recording performance royalties, which are typically paid to the label or artist who performed a song. To address that half of the royalty equation, Pandora backed IRFA, a bill sponsored by Rep. Jason Chaffetz, R-Utah, in the House last year. The bill would bring Internet radio royalties in line with the royalties paid by cable and satellite radio companies. IRFA does not address publishing royalties.

Though the two royalty issues are legally separate, Pandora’s move could bring publishing royalties into the IRFA debate, said Public Knowledge staff attorney Jodie Griffin, “especially since the publishers have been wanting to talk about composition royalty rates in the context of IRFA for some time.” Casey Rae, deputy director for the Future of Music Coalition, a musicians group, agreed. “My sense is that Congress very quickly realized there’s more to this parity argument than just what Pandora pays in webcasting rates. There is something to the exemption that allows terrestrial broadcasters to not pay,” he said. The move may be enough to broaden the debate to tackle fairness in radio, “to basically just once and for all deal with this glaring exception,” said Rae.

But Pandora’s purchase could also signal a decision to abandon legislative efforts to reduce its royalties, after IRFA was met with strong pushback, said Ted Kalo, executive director of the musicFIRST coalition, a record label group that was one of the most vocal opponents of IRFA. “I think this move is a signal that they are not optimistic about the prospects for a legislative fix and are looking to move on a number of other fronts,” he said. “Whether they pursue the legislation too, because why not, what do they have to lose, is another question. I don’t sense the introduction of the bill is imminent.”

A House aide familiar with the legislation said some in that chamber hoped to see the bill reintroduced as soon as this month. The aide also said Pandora’s terrestrial station buy isn’t likely to drastically alter the scope of IRFA, since the bill was intended to address only one slice of the royalty rate issue, and since the bill is not merely “a Pandora bill,” she said. Pandora’s moves “kind of demonstrate the broader point that music licensing is screwed up, and it needs an overhaul in general. The IRFA bill is taking slices at a time, because it is a huge monster that needs to be overhauled,” the aide said. IRFA doesn’t touch on terrestrial radio, either, said the official. A Pandora spokeswoman said the purchase is not related to any Washington, D.C., legislative efforts and that she had not heard of a timeline for the bill.

Pandora’s move sparked an outcry among publishing and performance rights’ groups that have opposed its efforts in the past. ASCAP President Paul Williams said “Pandora is trying every trick in the book to brazenly and unconscionably underpay and take advantage of the creative labor that produces the core offering of their business” (http://bit.ly/13LP2OG). The National Music Publishers’ Association President David Israelite called the move a “gimmick” (http://bit.ly/13LOW9R). MusicFIRST called it “a war on all fronts” (http://bit.ly/14Bjca2). Broadcast Music Inc. (BMI) said Thursday it filed suit in Manhattan federal court to set its rates with Pandora, citing failed negotiations with the webcaster -- the first time BMI has taken that step in the 18 years it has licensed Internet performances (http://bit.ly/11Zxhsv). BMI’s rates are subject to an antitrust consent decree with the Justice Department, under which it can seek court intervention when royalty negotiations fail.

To musicFIRST’s Kalo, the move could undermine Pandora’s chances to pass IRFA, if the group is suddenly seen as anti-artist, he said. Songwriter Josh Kear also penned an op-ed in The Hill saying the group is “stiffing artists,” and blasting its continued efforts to pay less in royalties (http://bit.ly/ZOYKAK). “It very much hurts efforts on the Hill to pass the Internet Radio Fairness Act, because it seems to reinforce an impression that they are not pro-artist, which is a brand that they had built for themselves several years ago,” Kalo told us. Pandora said in a statement it “values and respects those who create music and seeks to pay a rate that is fair to all artists, and fairness needs to account both for what artists receive and what Pandora’s competitors are asked to pay."

Griffin of Public Knowledge, which supported IRFA last fall, said Pandora’s FM purchase emphasizes how treating similar uses differently based on technology distorts market incentives. “When the licensing system arbitrarily assigns different royalty rates to two companies that run the same service simply based on who owns them, you can’t be surprised when you see licensees making equally arbitrary investments so they can qualify for the lower rate. But if buying an AM/FM station becomes the price for getting competitive webcasting royalty rates, Web-only radio services and upstarts without deep pockets will be at a significant disadvantage,” she said.

Rather than reduce royalties for terrestrial broadcasters, groups like Public Knowledge and the Future of Music Coalition want to see terrestrial broadcasters pay the same as their counterparts in satellite and Internet radio. “The National Association of Broadcasters is a very powerful lobbying group, they've been in D.C. since the seas were cooling, essentially,” Rae said. “They've traditionally had a lot of influence in Washington and on the Hill. And part of that is because they have first-mover advantage, and a lot of folks are just showing up to this.” NAB declined to comment.

Responding to comments about ASCAP, Pandora also said in a statement, “In a good faith attempt to avoid a protracted disagreement, Pandora offered to pay ASCAP higher rates than it currently pays, but ASCAP refused, choosing instead to enable the publishers to try to extort even higher rates through a scheme of ’selective withdrawals.’ ... This is not a case of Pandora trying to pay less. It is a case of publishers discriminating against Pandora.” Responding to the suit by BMI, Pandora said in a statement the case resulted from the process “required by the consent decrees both organizations agreed to after the Department of Justice sued them for anti-competitive behavior,” and that it looks forward to the court’s oversight.