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Pandora and musicians to discuss royalty settlement as war of words heats up

Pandora and musicians to discuss royalty settlement as war of words heats up

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Talks are preliminary, but sources say formal negotiations are expected soon

By Greg Sandoval

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Pandora Windows Phone 8 EMBARGOED 3/21 830 EST
Pandora Windows Phone 8 EMBARGOED 3/21 830 EST

Pandora, the web's top radio service, has held preliminary discussions with groups representing music artists as well as indie and major labels about ending an increasingly aggressive feud over music royalties, multiple sources familiar with the talks told The Verge.

Formal negotiations are expected to start soon, the sources said. This is the first indication that the parties are interested in amicably resolving the issue of how much to charge web radio services for music. The two sides began waging a public relations war against each other when Pandora went to Capitol Hill with legislation that would lower future music royalties.

Pandora's royalty rate rises next year from 0.11 cents to 0.13 cents per stream Since then, the dispute between Pandora and much of the music industry has only intensified. Over the weekend, members of the British rock band Pink Floyd published an editorial in USA Today that was critical of a petition circulated by Pandora as part of its attempt to reduce royalty payments. "The petition doesn't mention," wrote members of the group, "that Pandora is pushing the growth of its business directly at the expense of artists' paychecks."

On the other side, Pandora acquired a traditional FM radio station in South Dakota earlier this month in what it said was an attempt to lower its content costs, but was likely meant to draw attention to the fact that web radio services are required to pay more for songs than traditional or satellite radio.

Pandora is required to pay either a fraction of a penny for each song play, or 25 percent of overall revenues, whichever is the higher amount. Because of a law created by Congress decades ago, a three-member panel sets the amount that web radio stations pay to play music. In 2012, Pandora paid 0.11 cents per stream. Next year, the cost goes up to 0.13 cents, and 0.14 cents the following year. These costs add up fast.

Pandora said that for the last fiscal year, the company's music costs were equal to more than 60 percent of total revenue. For the quarter ending April 30, Pandora reported sales of $125.5 million and a net loss of $28 million. By comparison, satellite radio stations, such as Sirius XM Radio, pay about 7.5 percent of revenue and cable TV pays about 15 percent.

Music industry says it's not the fault of artists that Pandora has failed to monetize the service The music industry counters that it's not the fault of artists that Pandora has failed to monetize the service. If it had, it might be paying 25 percent of total revenues instead of 60 percent. Critics from the music side note that Pandora is only now starting to branch into local radio advertising and capping the amount of free mobile listening, the latter of which prods fans to sign up to Pandora's paid subscription service. Pandora has said that it now has more than 2.5 million paid subscribers. As for why satellite and traditional radio stations pay less than webcasters, music publishing and label execs have said that they favor parity but that the rate shouldn't be a "race to the bottom."

What each side is asking for in the negotiations isn't clear. What is certain is that reaching a settlement is likely to take awhile. In the meantime, neither side appears to be standing down from the PR war. The Verge has learned that Pandora has begun to gauge what kind of Capitol Hill support it might have for a new bill designed to lower web radio's royalties.

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