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When Pandora filed papers with the SEC earlier this year indicating its plans for an IPO, the company disclosed a variety of risks to invest…

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When Pandora filed papers with the SEC earlier this year indicating its plans for an IPO, the company disclosed a variety of risks to investors. That included the fact that copyright royalties eat up half its revenue, and the difficulty the company has had in its attempts to strike deals in other countries. Pandora abandoned its bid to expand to the U.K. in 2008. Speaking at the NARM music law conference in San Francisco on Wednesday, Pandora CEO Joe Kennedy elaborated on how he sees international copyright issues and the evolving relationship between online music companies and record labels.

The complexity of international copyright limits Pandora’s business. “I wish i had a dollar for every time I said this quote — the good news is the internet is global, but the bad news is that copyright law is country by country,” Kennedy said. “Pandora, to this day, is U.S. only–because of either flat-out inability to work licensing in other countries, or because the royalty asks are just not economic.”

A previous panelist had discussed Amazon’s recently launched cloud music service, which the company maintains it doesn’t need licenses for. But suppose Amazon (NSDQ: AMZN) gave in and did get licenses from record companies, Kennedy said. An Amazon user still might not be able to access their music, depending on what country they’re trying to access it from.

“This is the most intractable problem of all,” said Kennedy. “It might be there’s simply no chasm bigger than the fundamentally global nature of the internet, and copyright which is still terribly parochial. We’ll be tripping over that, potentially not just for years to come but for decades to come. I wish I could say something more hopeful on that topic.”

How huge damages in copyright law have skewed business relationships. “The statutory damages clause (of copyright law) creates a moral hazard… It’s too attractive to sue. It’s a better business model than saying, I’ll partner with you and build a business. The lawyers in the music industry spent too much time suing and fighting, in lieu of developing better business partners. They’ve come a long way and are much better business partners than they were five years ago, and certainly 10 years ago. In the early days of digital, [suing] was easier than the hard stuff of, how do you figure out this new world? Today every major label and independent label is doing that hard work. But they lost time.”

Our definition of “copies” might need to change for the digital age. “There is a really fundamental problem that’s going to keep coming up over and over again. Computers, in the digital world, work by making copies. I think that we’re going to continue to trip over this very fundamental issue. This is the frustration of a computer-science guy in a roomful of lawyers. Until there’s some conception of what a copy is in a digital world… there are going to be a whole bunch of cases that are going to be kind of a crap-shoot.”

That last point caused Kennedy’s interviewer, Winston & Strawn copyright lawyer Andrew Bridges, to chime in. “Since nothing happens digitally without copies being made, a lot of intellectual activity has stumbled into the domain of copyright,” noted Bridges, who has defended several technology companies in high-profile copyright battles. “If you’re talking about a physical book, you can read a book without implicating copyright law. But now in the digital world, anything you do involves copies. There’s no part of human intellectual activity that’s outside copyright regulation.”

  1. You say “That included the fact that copyright royalties eat up half its revenue”
    Copyright online does have huge problem but this is misrepresenting the situation. It is not eating up half Pandora’s revenue anymore than buying stock to resell it would be. It is a cost of running the service and without the rights there is no service. By all means argue the rates, complexities, international barriers and margins but don’t dismiss the rights as if they were an unnecessary cost.

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  2. The problem isn’t copyright.The problem is Pandora. The company has an advertising based business model but is poor at advertising. It has been poor at developing other revenues streams. They basically want a free ride on the back of other people’s intellectual property.

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  3. Gavin, thanks for your comment. I don’t think I implied copyright is an unncessary cost—it’s obviously an essential cost for Pandora. My point was that it is a high cost. Other business models that distribute and make money off music include terrestrial radio, which pays no royalties for the sound recording part of copyright; and satellite radio, where Sirius XM is paying between 6% and 8% of gross revenue for that copyright over the next several years.

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  4. Understand Joe and it is a minefield but much depends on the music use and the problem of being in the grey area between traditional radio (70%).
    The consumers are used to radio and expect it for free, the labels are trying to replace plummeting revenue and the music publishers are still trying to keep the mechanical and performing right separate. Meantime the ad revenues are not mature enough to cover proper licence rates. There is history here though… in the past when ‘trial’ licences at lower rates were issued to allow a new business to develop these rates were then used as a precedent and not raised; so the rights owners have to get as high as possible from day one. The litigation goes both ways.

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  5. Nanker Phelge Thursday, March 31, 2011

    >>>satellite radio, where Sirius XM is paying between 6% and 8% of gross revenue for that copyright over the next several years.

    This is a deceptive Pandora talking point. The reason it accounts for so much less of satellite radio revenue is that . . .satellite radio generates more revenue! What Pandora wants to do is build a business out of low-cost advertising – and have their supply costs come down to meet their revenue model. This is, quite frankly, absurd. If Pandora can make a profit based on their current costs, good for them. If not, that will be a shame. I wish Pandora well: It’s a good product that, in its current form, generates money for creators. But why should anyone change the laws to favor their particular business model?

    If Pandora spent as much time selling ads as they did complaining about their supply costs, they’d be rich already

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  6. Joe, you mention “terrestrial radio, which pays no royalties for the sound recording part of copyright; and satellite radio, where Sirius XM is paying between 6% and 8% of gross revenue”. Your original point seemed to be about the “complexity” of nation-by-nation licensing. But your “simpler system” is simply cherry-picking the cheapest (for you) options. I suggest if you can’t make your business pay outside the USA, don’t go there. Artists here (UK) certainly won’t thank you for trying to drive down their income.

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