New Contracts, Same System

New licensing deals ensure Pandora still pays artists through SoundExchange.

By Glenn Peoples, Music Insights and Analytics at Pandora

Key takeaway:

· Royalties from Pandora’s ad-supported radio service will continue to be paid to artists through SoundExchange.

Same as it ever was,” sang David Byrne in the Talking Heads’ classic, “Once in a Lifetime,” an existential examination of suburban, middle-class life in America. The phrase takes on a different meaning in the context of digital performance royalties. Even as licensing agreements change, artists’ share of royalties from Pandora’s ad-supported radio service, the company’s greatest generator of royalties, and the way artists receive those royalties will remain the same as they ever were. What has changed is the legal structure underpinning those royalties.

As of late 2016, sound recordings are being licensed directly from record labels — a first in Pandora’s 11-year history. But Pandora and record labels have insisted on leaving unchanged the way artists are paid. Artists will still get their share of royalties for the performance of their sound recordings on ad-supported Pandora. And these royalties will continue to come from SoundExchange, the performance royalty organization tasked with collecting royalties from non-interactive digital services such as Pandora. As a result, over the next few years artists will get an equitable cut of a growing market worth many hundreds of millions of dollars annually.

As have many other digital radio companies, Pandora had operated using a statutory license that gives qualifying digital services the freedom to stream recordings without prior approval of rights holders. A partner to the statutory license is an important system for paying those royalties. Under the statutory license, SoundExchange pays each party directly. The Future of Music Coalition characterized this facet of the statutory license as “significant” because the royalties are not held against an artist’s debt by record labels. The musicFIRST Coalition, founded by a coalition of organizations representing the creative community, called the statutory license “a benefit to music creators and services” in its support of legislation that would have created a performance right for AM/FM radio.

Then came the direct licensing agreements with major labels and independent rights group Merlin. These deals are another step in Pandora’s changing relationship with artists and record labels. There are new artist-focused tools like AMP, marketing programs and better communication between the parties. Pandora hosts a new show by The Roots drummer Questlove, called Questlove Supreme, and has live-streamed such artists as Metallica and Jack White. Yet through these changes, the system for paying royalties required by statutory licenses has carried over, enabling artists to receive their share of royalties through SoundExchange.

However, royalties paid to record labels are now deviating from the course set by the statutory license. A recent Billboard article (click here) said direct deals could cause SoundExchange to lose up to $200 million in royalty collections this year. That’s true. Terms of these types of deals — there are many across the industry beyond Pandora — allow labels to receive royalties directly and eliminate SoundExchange from the royalty chain. But, again, artist royalties from Pandora’s ad-supported service will be continue to be paid directly through SoundExchange. Pandora and the record labels wanted to maintain the established system for payments.

Ad-supported royalties accounted for the vast majority of the $253 million Pandora sent to SoundExchange in the first half of 2016. Royalties such as these are reduced only by an operating administrative fee, a standard deduction PROs take from royalties prior to their distribution to artists and labels. This fee allows the PRO to cover its operating expenses. Of course, artists benefit from the lowest possible operating administrative rate applied to their royalty payments. SoundExchange’s operating administrative rate in 2015 was 4.6 percent (see 2015 fiscal report here) on royalty distributions of $803 million — “the lowest administrative fee of any major collective management organization in the world,” it has boasted. But Billboard suggests lower collections could result in a higher operating administrative fee passed on to labels and artists to cover the shortfall. In any case, whatever ad-supported artist royalties exist will be paid through SoundExchange.

The smaller source of Pandora’s royalties has undergone a change. The direct-to-label system of royalty payments that’s standard elsewhere in the digital music marketplace now applies to subscription streaming at Pandora. Under the terms of the new licensing agreements, royalties from Pandora’s ad-free radio service, Pandora Plus, are being paid to record labels, who then pay artists according to the terms of their recording contracts. This arrangement follows an industry norm. Royalties from Pandora’s upcoming premium subscription service, Pandora Premium, to be launched in March, will follow custom and pay all royalties directly to record labels. Premium royalties are unlike other royalties in the record business. Whereas royalties from non-interactive services rise with streaming activity—a person streams a song, a royalty is generated—premium royalties come from a pool of subscription revenue and divvied up according to streaming activity. Artists and labels get the same pool of revenue if people streamed often or seldom. As a simple example, a song with one-tenth of all streams would earn $10 from a revenue pool of $100.

Streaming royalties are a cornerstone of today’s music industry. The volume of U.S. audio streams tracked by BuzzAngle increased 82.6 percent last year. Streaming was also the engineer of last year’s 4.2-percent gain in total U.S. music consumption across all formats. The number of streams in a given day, week or month are staggering and consistently growing. Purchases are dwindling. It’s a streaming world.