Pandora's losses highlight DMCA's effect on Internet radio

Pandora, the popular Internet radio service, continues to grow at an amazing pace, so why is it they can't seem to turn a profit?

The answer lies in a fateful ruling from the Copyright Royalty Board. The CRB's existence is the result of a DMCA (Digital Millenium Copyright Act) provision mandating arbitration to determine fair Internet radio royalties in the event rights holders and webcasters couldn't reach their own agreement.

In theory this guaranteed that Internet radio providers would be on equal footing with the much larger music labels in royalgy negotiations. In practice it didn't work out that way.

In 2006 SoundExchange, a royalty collection agency created by the RIAA, entered into arbitration with a variety of webcasters entered into arbitration. The Copyright Royalty Board was created, under a 2004 law, to act as arbitrators, fulfilling the DMCA mandate.

The key point to understand is exactly what that mandate is:

In establishing rates and terms for transmissions by eligible nonsubscription services and new subscription services, the copyright arbitration royalty panel shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller

The problem with this wording lies in the definition of "a willing buyer and a willing seller." According to CRB judges, that means both sides must be assumed to have equal market power.

Obviously we know that assumption to be false. Even a relatively large operation like Pandora wouldn't be able to survive the loss of major label content for long, while the labels themselves would be relatively unaffected in the short term by the loss of Pandora's business.

The long term effects for the labels would certainly be dramatic, but that doesn't negate their current market power.

Thanks to the resulting CRB decision, setting royalty rates so high no webcaster could possibly afford them, the labels' superior negotiating position is even greater now than before.

Most webcasters including, eventually, Pandora were forced to negotiate lower rates with SoundExchange. Of course, by that time SoundExchange was holding all the cards.

The only alternative to whatever SoundExchange offered was the higher rates mandated by the CRB ruling. It was a choice between a long drawn out death or immediate execution.

Late last year the CRB set new webcaster royalty rates which more or less conform to the same standard as their 2007 ruling. This time around they didn't need to consider a hypothetical market, as they did the first time around.

Instead, they ruled primarily based on the rates webcasters were forced to accept following the original CRB decision.

Of course Pandora, and all the webcasters who struck long term deals with SoundExchange previously, are stuck with those royalty arrangements regardless. CRB rulings only apply to webcasters who haven't reached an agreement with SoundExchange.

Pandora had it's IPO earlier this year. Initially the stock seemed to be in trouble due to concerns about profitability

Despite reporting nothing but losses since going public, optimistic statements about the future have resulted in the stock price actually increasing.

But eventually they will have to turn a profit. It remains to be seen whether that will ever be possible without drastic reform to the royalty calculation process.

Given their current influence in Washington, as evidenced by the recent actions of Immigrations & Customs Enforcement and ongoing legislative efforts on their behalf, don't expect that to happen any time soon.Permalink | Comments

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