Pandora Boxes for Its Life in Congress 

How Oakland's Internet radio king harnessed an army of fans to beat back the broadcast radio industry and stay alive.

Millions of global Internet radio fans should kick back and rejoice now that Oakland's Pandora.com appears saved from near-certain extinction. Listener calls, millions of dollars in political donations, and even the global economic meltdown contributed to the passage of eleventh-hour legislation that seems to have saved the company.

The eight-year-old, hundred-employee industry leader streams millions of songs to music-lovers worldwide through their computers and iPhones. But it was facing closure because court-ordered royalty guidelines were crippling its business model. Yet amid historic turmoil in the nation's capital, the lifesaving "Webcaster Settlement Act" passed Saturday, September 27 in the House and two nights later in the Senate. Now, the stunningly speedy bill is on its way to President Bush's likely signature.

Despite a last-minute lobbying push from representatives of conventional broadcast radio, members of Congress rallied to net radio's cause. "A lot of people bitch about the government, but thank god for what Washington's done with this issue," said company founder and chief strategy officer Tim Westergren, who is exhausted and sick from days without sleep. "They are the saviors of this thing. ... If we didn't get it passed, we were done, because you've lost Congress at that point. Thank god for the banking disaster, so they were around."

Passage of the act highlights not only the growing clout of web radio programmers and their millions of listeners, but also that of independent record labels and their community of recording artists. Since web radio is far more likely than conventional broadcast radio to support independent recording artists, the act suggests a possible sea change in the politics of copyright enforcement, which typically have favored the recording industry's major players.

The act itself won't bring down the royalty rates for Internet radio stations. But it buys Pandora and other webcasters time to negotiate with copyright holders. Webcasters were getting killed by royalty rates that had them paying anywhere from 50 to 1,000 percent of their annual grosses, compared to 2 to 5 percent for terrestrial radio and 3 to 7 percent in satellite radio. Pandora faced a stiff 70 percent levy on annual revenue of about $25 million.

Now, Westergren has reason to hope that those days of red ink may be coming to an end.

"It's a Dr. Jekyll and Mr. Hyde business, because the business is thriving in terms of growing fast," he said. "Ever since the iPhone too, we've been just growing like a weed and our revenue is doubling every year, so the fundamental economics of this are sound. It's just been under this dark cloud like, 'Oh it's great! And we're going out of business!' It's been a real nightmare."

This existing royalty structure was set by three interim copyright judges in 2007. In addition to the untold millions it would have extracted from webcasters like Pandora on behalf of recording artists and other copyright holders, the naively constructed arrangement also forced the companies to pay $1.3 billion a year in fees to administer SoundExchange, the tiny industry copyright board charged with collecting such royalty payments. The new deal would waive those fees, and may set a reasonable royalty floor as well as a ceiling.

"That make sense to us too," Westergren said. "It sets the bar so you can't just go willy-nilly broadcasting music without trying to monetize it, but it also caps it on one end because at some point you can't take all a company's revenue. ... We want some degree of parity. The glaring inequity of the rate across different forms of radio is indefensible and that needs to change because we're competing with satellite and terrestrial radio. It's like if you're a car company who's forced to put a one-ton brick in the back and get the same fuel efficiency as your competitors."

Web radio has around 72 million listeners a month and growing, compared to 280 million terrestrial listeners per month, which makes Pandora, as well as locals BAGeL Radio and SomaFM, a minor threat. Consequently, Westergren said, broadcast radio representatives at the National Association of Broadcasters tried to secretly scuttle the bill.

"It felt like a tactical maneuver to get in our way," he said. "The idea that they perceive us as a threat to their hegemony — that's a pretty reasonable assumption if you look at all the facts: The NAB was quiet the entire process. They were not involved at all. And all of a sudden, in the eleventh hour, they interfered in a bill that if anything was helpful to them."

The NAB did not respond to calls, but told CNET the legislation was being rushed and posted the following statement to its web site: "The NAB looks forward to sitting down quickly with SoundExchange to craft equitable streaming rates that enhance the online music experience and expose more artists to our listeners."

A year of negotiations had brought a truce within sight, and now talks should start again soon, ending the long stalemate that had muted Pandora and net radio's future. Missing this window would have meant a collapse of the negotiations. Neither side would have been legally able to forge a deal without the act, so both endorsed it.

"I don't think anyone is going to be walking away from this thing saying, 'Wow I think we got a good deal,'" Westergren said. "We've agreed and disagreed but it's been unlike previous chapters, when the parties said 'screw you' to each other. We've done some repairing of that relationship."

No timetable for the end of negotiations has been set, more work needs to be done, and net radio fans should stay tuned for any late-breaking threats to an armistice. But Westergren fans should pat themselves on the back for their millions of letters to Congress — part of a new voice in Washington.

The web's signal pierced through the noise of the bailout, thanks to the aggregate effect of in-show pleas to an enormous influential fan base, and a full social network press. Groups like SaveNetRadio created flashy advertisements for activist blogs, while lobbyists inundated congressional offices with letter boxes full of support. "It's not like we were lobbying for new oil derricks," Westergren said. "It was a righteous cause that people could get behind.

"Even within SoundExchange they have different constituents," he said. "SoundExchange is divided into three parts: one is major labels, one is indie labels, and one is the artist, and they don't agree with each other. And I think one of the things we're seeing is the growing voice of the indie music community. Even within SoundExchange, they got a voice at the table. They hold two-thirds of the board seats between indie labels and artists. They have a voice in these things and that's never been true before and that's the beauty of a federal statute."

San Francisco rock act Birdmonster, now on tour in the Midwest, said the band doesn't even want money for the priceless exposure net radio offers.

"Internet radio has tremendously helped us, and as a band we fully support it," said vocalist Peter Arcuni. "One of our earliest and still a big supporter is Ted Leibowitz over at BAGeL Radio in San Francisco. He has a great show where he plays a lot of new music and you hear stuff there that you wouldn't really hear until two or three months later. He's an activist working to preserve that right for people to spread music and give bands an opportunity to be heard when they normally wouldn't be. If royalties get too high, that puts Ted out of business. He's not playing bands getting a raw deal on royalties, he's playing bands like us that need to find an audience. As a band we support it and wouldn't necessarily need to be seeing money from it."

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