Pandora: "Royalty Crisis Is Over" for Internet Radio Companies

pandoraAfter years of negotiations, Internet radio providers have reached a new royalty agreement that they say will keep them afloat. Streaming music providers including Pandora have struck a deal with negotiating organization SoundExchange that resolves a critical cost issue for Internet radio, allowing them to keep the music playing while putting profitability within reach — and potentially transforming a sector dogged by uncertainty since a prior Copyright Royalty Board decision threatened to put many companies out of business.

According to Pandora CTO Tom Conrad, the deal cuts minimum per-stream royalty rates for pure-play Internet radio providers by 40-50 percent. Companies in that category will pay the greater of two rates: either a per-stream rate that increases annually until 2015, or 25 percent of U.S. revenues.  (For now, Pandora itself will pay the per-stream rate.) Smaller radio providers that gross less than $1.25 million annually have a lower rate, 12-14 percent of revenues. The new agreement replaces a 2007 royalty decision that Pandora said threatened the livelihood of all Internet radio providers due to exorbitant costs. In its estimation, according to a Pandora blog post, “The royalty crisis is over.”

The resolution of the longstanding conflict portends further maturation of the Internet radio industry as well. With a legal and financial framework in place for the next half-decade, investors, advertisers and partners will surely feel more comfortable completing deals with Net radio companies now that their expenses are based on known quantities. Conrad agreed that 10-year-old Pandora could see increased competition from upstarts as well, although its strong brand name clearly gives it a head start on its peers.

The new rates range from eight hundredths of a cent for each song streamed in 2006, up to 15 hundredths of a cent in 2015 — substantially less than the 19 hundredths of a cent in 2010 under the prior CRB agreement. Although the rates are still higher than those paid by satellite or terrestrial radio providers, the agreement represents a path to sustainability for Net radio companies. Whereas the old, higher rates meant that a company such as Pandora would have to charge advertisers unreasonably high rates to cover the cost of royalties, the new deal will lead to more reasonable CPMs, placing profitability within sight. Pandora, for one, internally forecasts reaching profitability in 2010, with both audio and visual ad revenue supplemented by an ad-free premium service that costs $36 annually.

Pandora has also added another wrinkle: It will charge 99 cents to people who exceed 40 hours of play during any given month, roughly 10 percent of its user base. (Premium users who pay the annual fee are exempt from the 99-cent surcharge.) That seems like a very small price to pay for a great deal of music, although a Twitter search this afternoon turned up a surprising number of power users bellyaching about the fee, with some suggesting that they’d create multiple accounts or switch to another service rather than pony up their pennies.

Pandora weathered a round of layoffs last fall, although it said at the time that it would continue to add sales staff. The company has raised more than $21 million from investors including Crosslink Capital, WaldenVC, Selby Venture Partners and Labrador Ventures.