willing buyer willing seller

Pandora chief Kennedy will stay on until company finds his replacement

Friday, March 8, 2013 - 6:10pm

Longtime Pandora chairman, CEO, and president Joseph Kennedy will step down, the leading webcaster announced late yesterday.

Kennedy will stay on in his current capacities until his successor is named. Pandora's Board of Directors has formed a search committee and is hiring a search firm to identify likely replacements.

Kennedy, who has led Pandora since July 2004, said, "I am incredibly proud of the team and what we have accomplished in redefining radio."

Under Kennedy's leadership, Pandora became far-and-away the leader in Internet radio, with over 67 million monthly active listeners, and the largest radio presence in nearly every major U.S. market, with over 8% of total U.S. radio listening. Pandora now has a sales presence in over 28 major markets.

In fiscal 2013, the company earned $427.1 million in total revenue, and $255.9 million in mobile revenue.

RAIN Analysis: I believe that Joe has done a terrific job for Pandora over the past decade, building it to point where Pandora is the leading brand of radio in virtually every U.S. market -- including what I believe calculates out as a commanding lead in the P18-34 demo in each market.

On the other hand, the medium of Internet radio continues to be challenged by a difficult regulatory environment, due to a poorly-worded royalty rate-setting standard in 1998's DMCA, leading to Copyright Royalty Board judges continuing to set royalty rates, with every one of their decisions, that would bankrupt most of the industry (and require emergency Congressional action each time to fix. Fortunately, as you know, there's a movement underway in Congress -- with bills that were introduced last year in both the House and Senate -- that will hopefully fix that rate-setting standard).

Because Joe has had to compete with other forms of digital radio -- satellite and cable -- that pay only 8-15% of their revenues in royalties (while he's had to pay over 50%), he's been constrained in what he could spend on building his sales force and doing traditional advertising for his product. Given those constraints, I believe his performance has been extremely impressive.

By the time Joe retires from the company, Pandora will probably have close to a 10% share of radio listening in every U.S. market, and has almost single-handedly made "personalizable radio" the clear future of music radio in the U.S. and probably the world, with benefits for consumers, musicians, and advertisers. That's a pretty good accomplishment! -- KH

To illustrate Kurt's point regarding Pandora's royalties in relation to its revenue, take a look at the following chart. It's from Statista (here), and is based on Pandora's recently-announced fiscal 2013 earnings (h/t to Hypebot). It clearly shows that Pandora's content acquisition costs (royalties) are growing faster than its otherwise impressive revenue increases.

Oxenford reports CRB gave some consideration to SiriusXM marketplace deals in determining rates

Monday, January 7, 2013 - 11:15am

The recent CRB royalty decision for satellite and cable radio "for the first time, gives at least some weight to direct licensing deals," and "seems to reject some premises that had long been used to justify royalty rates in other proceedings – and thus may give some insights on approaches to be used in the webcasting royalty proceeding."

We're quoting industry legal expert David Oxenford, who has published some preliminary analysis of the Copyright Royalty Board's full determination of royalty rates to be paid to SoundExchange by Sirius XM and Music Choice from 2013 through 2017.

Last week the CRB released its full decision (actually, two separate decisions, resulting in the same determination, here and here). We reported the actual rates last month in RAIN (here).

We also reported (here) that in the proceedings, satellite radio provider SiriusXM revealed more than 60 direct licensing deals it had secured with record labels, which it argued should be used as benchmarks as the market value of digital sound recordings for noninteractive performance. The service says its direct deals are for 5%-7% of revenues.

Logically, the CRB agreed that directly-licensed sound recordings should be excluded from SiriusXM's royalty obligation to SoundExchange (services need pay SoundExchange only for copyright music for which they have not secured direct deals), Oxenford reports.

And while the CRB rejected SiriusXM's proposal to lower rates from 8% of revenue to 5%, it also rejected SoundExchange's proposal to raise rates -- starting at 12% of revenue in 2013 and ending at 20% in 2017. The Board decision -- 10% of revenue this year, rising to 11% next year, and 12% for each of the next three years -- might indeed indicate it took SiriusXM's market deals into consideration, as Oxenford suggests.

This is important to note as we approach CRB proceedings on Internet radio royalties. Broadcasters like Clear Channel and Entercom have struck streaming royalty deals with certain copyright owners. If the CRB is willing to consider marketplace deals in royalty determinations for satellite and cable radio, they may also be willing to do so in the upcoming webcasting proceedings.

The fact that webcasting royalty proceedings are governed by the controversial "willing buyer willing seller" standard, which by design attempts to replicate an "open market" value for copyright material, may be even more reason for royalty judges to consider these direct deals as benchmarks.

[Satellite radio and cable radio royalty proceedings are governed by the more traditional 801(b) standard. The main goal of the Internet Radio Fairness Act is to have Internet radio royalties to be moved to this same standard.]

The next royalty proceeding for noninteractive webcasting services begins in 2014 and should conclude in 2015.

Oxenford also reports that "the Board also explicitly agreed, for the first time in any decision of which we are aware, that pre-1972 sound recordings also are not to be included in the revenue base, as the Federal sound recording copyright only applies to songs created in 1972 and after (with certain exceptions...)." It will be interesting to see if webcasters are given a similar "pre-1972 carve-out."

Oxenford plans to follow up with more detailed analysis. Read his initial thoughts here.

Bookmark this reference: A Brief History of Webcaster Royalties

Monday, December 3, 2012 - 12:35pm

When reporting on copyright and licensing issues, we've often leaned on the clear explanations from industry attorney David Oxenford and the Broadcast Law Blog. Here's another resource to bookmark: Terry Hart's Copyhype blog and his A Brief History of Webcaster Royalties.

It's a great run-down of the laws that provide the framework for Internet radio sound recording royalties (the DPRA and the DMCA), the various webcasting rate determinations and settlements, and yet another clear and concise explanation of "801(b)" vs. "willing buyer willing seller."

Hart began the blog in August, 2010. He received his J.D. from our hometown Chicago-Kent College of Law and has a certificate in intellectual property law. He was also a media monitor and mobile disc jockey. The front page of Copyhype is here.

From today's early edition: Pandora CEO Kennedy, Hubbard CEO Reese, SoundExchange Pres. Huppe to speak on Capitol Hill

Wednesday, November 28, 2012 - 11:25am

The Internet Radio Fairness Act will get its first exposure in Congress today since its introduction, as the House Judiciary's Subcommittee on Intellectual Propery, Competition, and the Internet will hold a hearing called "Music Licensing Part One: Legislation in the 112th Congress" at 11:30am ET (10:30am CT). You can stream video here.  

IRFA backers contend the bill is necessary to allow Internet radio to more fairly compete against other forms of digital radio (more details here). Joseph Kennedy, Chairman/CEO of leading webcaster Pandora will speak in support of the bill, as will Hubbard Radio President/CEO Bruce Reese, who'll appear on behalf of the National Association of Broadcasters.

Former eMusic COO/CEO and Apple Music Group cofounder David Pakman will also appear. Pakman is now a partner at Internet and digital media investment firm Venrock, and writes the Disruption blog.

Critics of the IRFA say the bill would only result in lower payments to copyright owners and performers. Some support a draft of a bill called the Interim FIRST Act (more here), which may also be discussed in the hearing. Representing copyright owners and the music industry will be producer, songwriter, and recording artist Jimmy Jam (who's also The Recording Academy Chair Emeritus). He'll be joined by SoundExchange president Michael Huppe. Also speaking will be economist Dr. Jeffrey Eisenach, Managing Director/Principal of Navigant Economics.

To get the most out of today's hearing, it may help to have a handle on a couple key concepts:

801(b): That's the section of the Copyright Act (you can read it here) that sets out four important criteria Copyright Judges are required to follow when they decide royalty rates. Paraphrasing, they are:

  • Maximize the availability of creative works to the public;
  • Insure a fair return for copyright owners and a fair income for copyright users;
  • Reflect relative roles of capital investment, cost, and risk, and;
  • Minimize disruptive impact on the industries involved.

"Willing buyer willing seller": This is the standard upon which Internet radio royalties are currently based, as per the 1998 Digital Millennium Copyright Act. With that law, Congress decided the webcast royalty process should eliminate 801(b)'s concern for the public's access to creative works, minimizing disruption, and fairness -- and instead require judges to devise a rate solely on what they think reflects the "fair market value" of the licensed works. That is, what a hypothetical "buyer" would be willing to pay to a hypothetical "seller" (the "buyer" being the licensing service, the seller being the copyright owner) in a free market.

The Internet Radio Fairness Act: The focus of the bill is to move webcast royalty determinations from the "willing buyer willing seller" standard to 801(b), the standard used for determining the royalties paid by Internet radio's two most-similar competitors: satellite radio and cable television radio. (It also happens to be the standard used to determine what record labels pay for the use of copyright song compositions when manufacturing recordings.)

The Interim FIRST Act: Draft legislation that's main focus would be to make all three digital radio platforms (Internet, satellite, and cable radio) use the "willing buyer willing seller" standard in royalty determinations.

Performance royalty: One final note that what will (most likely) be discussed will be the royalties these services pay for the use of copyright sound recordings (as opposed to song compositions). The beneficiaries of this royalty are copyright owners (usually record companies), and recording artists and performers.

We'll have follow-up coverage and analysis of the hearing later today. Please check back.

AM/FM royalty exemption as prominent a topic as IRFA in today's hearing

Wednesday, November 28, 2012 - 11:25am

A House of Representatives Judiciary subcommittee today held a hearing on issues involving the use of copyright sound recordings and the compensation paid to copyright owners and recording artists by various radio platforms. While the focus of the hearing was the recently-introduced Internet Radio Fairness Act -- which concerns royalties webcasters pay -- subcommittee members and some witnesses spent at least as much time talking about broadcast radio's long-time exemption from paying royalties on sound recordings.

(The written testimony of the six hearing witnesses (see today's early story) is available on the Judiciary Committee's website here (the witnesses' names link to pdf files). Follow-up questions from subcommittee members and discussion followed the witnesses' testimonials.)

The Internet Radio Fairness Act (IRFA), among other measures, would require Copyright Royalty Judges, when determining royalties for web radio, to use the same legal standard (known as 801(b)) they use for satellite radio and cable radio royalties. Under current law, CRB judges are instructed to try to set royalties at a "fair market value," using a legal standard known as "willing buyer willing seller."

Many committee members, most notably Rep. John Conyers (D-MI) and Rep. Howard Berman (D-CA), seemed unwilling to consider the terms of the IRFA while broadcasters enjoyed an exemption from paying labels and performers for music. Witnesses Michael Huppe (SoundExchange president) and renowned producer  Jimmy Jam themselves willingly encouraged this line of discussion.

Conyers hoped the discussion would be a "catalyst for formulating" an AM/FM obligation. The outgoing Berman went as far as calling testimony from Hubbard Radio President/CEO Bruce Reese (who also represented the National Association of Broadcasters) "disingenuous" -- for asking for "fairness" for webcast royalties yet not acknowledging an "obligation" to pay labels and performers for over-the-air play.

Venrock investment partner David Pakman (pictured above) testified to the difficult economic climate for standalone webcasters. "We've resisted investing" in digital music "solely because of the state of music licensing," he said, calling it "perilous" and "overburdensome." He said his firm is "skeptical of the profitability of a standalone digital music service," being unable to point to a single profitable standalone Internet radio service. This point returned later, when Rep. Jason Chaffetz (R-UT, who introduced the bill in the House) somewhat heatedly challenged witness Huppe to try to name another successful webcaster.

In regards to IRFA, witness Dr. Jeffrey Eisenach (an economist and principal of Navigant Economics, pictured left) attacked the 801(b) standard as "harmful" to the public since it doens't "maximize the resources" of the marketplace. He testified that 801(b)'s objective to minimize disruption "guarantees webcasters a profit," and that he could find no valid basis in his research for forcing content creators to "subsidize digital music." His solution for Pandora's profitability is simply "to sell more ads."

Pakman, however, challenged the "open market" ideal of the "willing buyer willing seller" standard, in that "we don't have a market." He described the reality of three major record labels as "concentrated" sellers, while Pandora exists largely as one standalone buyer. "Rightsholders should encourage healthy competitive market -- which demands an ecosystem of hundreds or even thousands of licensees."

Joseph Kennedy, Pandora CEO, was pressed -- by both Rep. Sensenbrenner (R-WI) and Rep. Jerrold Nadler (D-NY, who is drafting legislation in opposition to the IRFA, called the Interim FIRST Act) -- as to why Congress has been repeatedly called by webcasters to settle the royalty issue, when it should be handled by the marketplace. Kennedy stressed his company's willingness to live with the deals it willingly entered for past and current rate terms. "But there's unfinished business here," he added. In regards to the upcoming rate-setting for the next term, Kennedy said, "the process is still broken."

Scholar calculates b'dcast radio would owe $2.5 billion annually if they paid Pandora's rates for aired recordings

Monday, November 26, 2012 - 11:05am

If U.S. radio broadcasters were subject to the same royalty terms as webcasters for over-the-air use of copyright music, they'd owe the record industry $2.5 billion annually. That's according to calculations done by David Touve, Assistant Professor of Business Administration at Washington and Lee University, and published in his blog.

And that $2.5 billion is at the rate at which Pandora and SoundExchange settled (details here). If terrestrial broadcasters owed at the statutory rate determined by the U.S. Copyright Royalty Board (using the "willing buyer willing seller" standard), its bill would be about $4.7 billion.

U.S. radio broadcasting total revenue last year was about $17.4 billion, according to the RAB.

The key assumptions in Touve's calculations are (1) music radio plays about 12 songs per hour, and (2) radio's estimated listening audience (from Arbitron) of 8.8% of the country's 12+ population. (To account for error, Touve also makes his calculations by expanding and reducing both the number of songs per hour (by 3 each way), and the estimated audience -- by 33% each way.)

So, at the webcaster settlement rate of $0.0011 "per performance" (a "performance," in this instance, means one listener hearing one song) for 2012, 12 songs per hour played to 8.8% of the 12+ population would have radio owe $2,469,294,195 in royalties for sound recordings (that's what you can see in the chart above). Using the actual statutory rate (keeping other numbers the same) yields a bill of $4,714,107,000 in royalties (that's the rate used in the chart below).

Billboard columnist Glenn Peoples commented (here), "Touve did not take into account the 17% of radio listening that goes toward non-music formats such as talk, sports and news (source: Arbitron "Radio Today 2011" report). Had Touve reduced his numbers to adjust for non-music listening, the estimate for Big Radio's royalty bill would be $2.05 billion rather than $2.47 billion, according to my calculations."

Read Touve's blog here.

Syndicate content