Pandora Wings Clipped (A Bit) As Internet Radio Royalties Decided

Fear not, Pandora lovers -- reports of the imminent death-by-fees of Internet radio stations have been greatly exaggerated.

Internet radio stations, such as the popular Pandora, on Tuesday reached a deal with music copyright holders, coming to terms on a new royalty fee structure. Although the royalty rates will significantly limit the amount of free content Pandora and other large stations like it can provide, the deal brings closure to a two-year struggle over how music copyright holders should be compensated for works being broadcast over Internet radio stations.

"The royalty crisis is over. Pandora is finally on safe ground with a long-term agreement for survivable royalty rates," wrote Tim Westergren, Pandora's founder, in a Tuesday blog post. "This ensures that Pandora will continue streaming music for many years to come."

The argument over Internet radio royalty fees goes back to March 2007, when the Copyright Royalty Board first stated that all Webcasters needed to pay a royalty fee of 19 cents every time they played a copyrighted song. Webcasters such as Pandora suggested that that type of fee scheduling would be crippling to their business, which depends mostly on online advertising for revenue.

The Webcasters Settlement Act of 2008 originally mandated that a decision on royalties be reached by Feb. 15, 2009, and a follow-up bill, the Webcasters Settlement Act of 2009, extended the deadline through July.

Under the new agreement -- according to Westergren's blog post and SoundExchange -- the royalty fee structure is prorated based on an Internet radio station's size and business model, and covers the period of 2006 through 2015.

All Internet radio stations are placed into one of three categories: large pureplay Webcasters; small pureplay Webcasters who earn $1.25 million or less in total revenues and are limited in the amount of music they can stream; and pureplay Webcasters that provide bundled, syndicated or subscription service packages.

The large pureplays, like Pandora, are hit up for either a pay-per-play rate of eight cents a song or must pay 25 percent of their total revenue, whichever figure is higher.

"The revised royalties are quite high -- higher in fact than any other form of radio," wrote Westergren. "As a consequence, we will have to make an adjustment that will affect about 10 percent of our users who are our heaviest listeners. Specifically, we are going to begin limiting listening to 40 hours per month on the free version of Pandora."

Westergren added that any listeners who hit that new 40-hour limit and want to continue to unlimited listening can do so for a monthly fee of 99 cents. Users can also opt to upgrade to Pandora One, the radio station's subscription-based premium package.

"In essence, we're asking our heaviest users to put a dollar in the tip jar in any month in which they listen over 40 hours," he said. "We hate the idea of limiting anyone's listening, but we have no choice but to react to the economic realities of the new rates."

The royalty fees are collected through SoundExchange, a nonprofit agency that distributes royalties on behalf of artists and record labels. Under the agreement, Internet radio broadcasters must also provide SoundExchange with more detailed information on music plays and listener demographics.

Small pureplay stations will have to pay a percentage of revenue or expenses, and if they choose to pay a proxy fee, they won't have to report as much information to SoundExchange.

Pureplay Webcasters will need to pay an annual flat fee of $25,000.

"Time will tell if revenue sharing is the right move for both the recording community and Webcasters, but we're willing to take the risk in the hope that artists, rights holders and Webcasters can all benefit," said John Simson, executive director of SoundExchange, in a statement.

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