Music Royalties in the Digital Age: Pandora Sues

Creative Commons

Creative Commons

Is Music an Art or a Property?

One of the main things that I learned when I worked for the world’s largest print music publisher is that business people view music differently than musicians do.

For musicians, music is an Art. Often it is our life’s work and to a great extent it gives our life its meaning. As performers we feel connected to other musicians ranging from Bach, to the Beatles and Adele.

If you are gifted enough to be a creative musician composing your own music, then music is an even more central part of your life. The music that you create today may, perhaps, make you and your work “immortal”.

Business people do not see music in this way (unless they also happen to be musicians). Traditionally, the music business has been dominated by people who know how to make a buck but not play a scale. To these people, music is not so much an Art as it is a piece of property just like real estate. Their goal is to develop or exploit their property to the fullest extent possible in order to monetize your investment.

ASCAP and BMI: The Global Music Industry

That has led to the creation over the 20th Century of the global Music Industry which includes everyone from the street musician playing for tips to giants like Apple.

Global recorded music sales totaled US$16.5 billion in 2012, an increase of 0.2 per cent on 2011. This represented the first time the industry had grown in value since 1999. ifpi

Well, the traditional world of the music business ending with the founding of Napster in 1999. After profiting handsomely for decades from selling grossly overpriced CDs, the music business was challenged by the concept of FREE music.

The music business consist of more than just selling recordings of music. However, for this discussion we will ignore print music, concerts and music education which are also part of the music business pie. The main source of revenue had been, pre-Napster, the main source of revenue for the music business.

Pandora's Box — once opened impossible to shut.

Pandora’s Box — once opened impossible to shut.

Internet Streaming: Pandora and Spotify give it away for FREE!

Now the music industry sued and successfully shut down Napster in 2001. But the genie had already been released in the mid-nineties when music pirating really took off. Closing Napster did not close Pandora’s box, however.

It is ironic — but not unintentionally — that Pandora Radio, one of the pioneering purveyors of free music on the internet chose for its name the Greek myth of Pandora:

“Pandora’s box is an artifact in Greek mythology, taken from the myth of Pandora’s creation in Hesiod‘s Works and Days.[1] The “box” was actually a large jar (πίθος pithos)[2] given to Pandora (Πανδώρα, “all-gifted”, “all-giving”),[3] which contained all the evils of the world.

Today the phrase “to open Pandora’s box” means to perform an action that may seem small or innocent, but that turns out to have severe and far-reaching consequences.” Wikipedia

I, like you, make use of “free” music. I prefer Spotify to Pandora. Users get a lot of “free” music for either nothing (if you don’t mind the ads) or a very nominal fee (Pandora = $36 per year and Spotify = $119.88 per year for “premium”). Both are real bargains when you consider how much I spent not too long ago buying CDs priced in the mid-teens each.

To a certain extent, iTunes is an extension of the old CD economy with the user actually purchasing a piece of music at price levels comparable to the old CD format.

Pandora Sues over Music Royalties

In the New York Times (February 14, 2014) there was an article of interest: Pandora Suit May Upend Century-Old Royalty Plan. The article, of course, was in the business section.

In 1941, ASCAP and BMI, the organizations that supervise nearly all music licensing in the world, began being governed in the US by a Justice Department consent decree which allowed their near monopoly in administering performance rights in exchange for providing artist with fair royalty rates.

With the availability of Pandora and other internet radio, there has rapid fall in CD sales and even on-line music stores like iTunes are showing weakness.

The problem is ASCAP and BMI has some control over the royalty rates for music purchased by users their control over streamed music which is merely listened to but not possessed by the end user, you and me.

The 73-year old system simply no longer works with streaming which is thought to be the area of greatest future growth (the movie industry is in much the same pickle with Netflix but that is another discussion!)

A Pittance for Music Royalties

Big money is involved. Last year Pandora paid $313 million to the record companies but only $26 million to the publishers. The publishers are the area of the business that funnels the royalties to the composers and lyricists. The record companies do the same for the performers, engineers, etc.

Those numbers can be rather abstract but according to the Times article:

“In 2012, for example, when Pandora’s former chief executive testified at a congressional hearing on music licensing, songwriters protested on Capitol Hill. Five writers of hits by stars like Beyoncé and Christina Aguilera showed that 33 million plays on their songs on Pandora yielded just $587.39 in royalties for them.”

If mega-stars like those two singers are being so grossly underpaid, you can imagine what is happening to artist with lower or no star power.

So to “solve” the problem, Pandora has naturally gone to court. Whether or not they win this case, I don’t think that they have a leg to stand on. It is reported that Pandora currently pays the music publishers a royalty rate of only 1.85%. Apple, when it set up iTunes Radio agreed to a royalty rate of about 10%. Remember, this royalty rate that either ASCAP or BMI collects from is divied up many times  — administration, publishers, lawyers, agents etc. — before the creators ever see a penny which in many cases is what they see.

The trial of Pandora’s suit ended last week. While the music anxiously industry awaits the verdict they are busy trying to get the Justice Department to modify the 1941 consent decree so that it is practical going forward into age of streaming.

Stay tuned.


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