Analyst demonstrates how skipping songs quickly inflates Pandora's royalty past Apple's

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Issue Date: 
Jul 12 2013 - 7:00am

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Since the contractual terms of use for sound recordings by Apple for its forthcoming iTunes Radio became public (our coverage is here, and you can read the actual contract here), there's been a rush to determine how Apple royalties compare to those of other webcasters, like Pandora. Will song plays on iTunes Radio be more lucrative for copyright owners (and performers) than on a competitor paying the statutory rate? How do Apple's obligations truly compare to Pandora's under its "pureplay" rate?

The University of Virginia's David Touve (we've covered his analysis in RAIN before here) points out in the Rockonomic blog that these discussions fail to take into account two very important factors, both of which can significantly alter a webcaster's effective royalty rate.

Touve points out that (1) the proportion of a service's listening that comes from paying customers compared to free, ad-supported listening; and (2) how many songs listeners typically skip per hour will both impact the royalties services end up paying.

Touve's math shows that while Pandora's effective royalty is lower than Apple's for a listener who doesn't skip songs, it only takes two song skips per hour to bring them nearly equal. At just three skips per hour, Pandora is paying a higher effective rate than Apple.

Here's how. First, the "pureplay" royalty rate -- $0.0012 this year -- only covers free, ad-supported listening. Pandora pays a royalty nearly twice that -- $0.0022 in 2013 -- for songs streamed to Pandora One subscribers.

However, Apple's contract grants it either a discount, or a waiver on royalties altogether for iTunes Match subscribers! [Touve concedes he may "have misread the contract," but believes, "Apple will not owe royalties for iRadio streams to iTunes Match subscribers — even if you don’t own the track being played." It seems more likely that Apple would get an unlimited waiver only on streaming songs the iTunes Match subscribers owns in their cloud. -- Ed.] Whichever the case, Apple's obligations certainly don't go up, as Pandora's do, with subscription listening.

Taking these terms of Apple's agreement into account, Touve determines Apple will pay the contractual minimum of $0.00142 for each streamed song, or $1.42 per one thousand streams (what he calls RPM).

By proportioning paid- and free-listening, Touve calculates for Pandora an effective overall royalty rate of $0.00124 (slightly higher than the "pureplay" rate because of Pandora One listening), or $1.24 RPM. That's significantly lower than Apple's $1.42 RPM. But that's before song-skipping!

For most webcasters, the more a listener skips songs (that is, doesn't hear them, though the webcaster pays royalties for them), the higher the effective royalty rate for the songs that are played.

[Listener A hears six songs and skips two, while Listener B hears six songs and skips none. Both heard six songs, but the webcaster would have to pay for eight songs (6 + 2) for the first listener, but just six songs for the second. Thus, the effective royalty to deliver those six songs to A was higher.]

Apple, however, also gets a break on skipped songs. According to their contract, Apple won't owe for up to six songs per hour that are skipped within the first twenty seconds. (Apple also gets passes for "Listener Matched Content," "Complete-My-Album" plays, and promotional plays -- again, see the links above for our coverage of the specific terms and the contract itself).

So again, the calculations indicate that Pandora's effective royalty is lower than Apple's for a listener who doesn't skip songs. But when the song-skipping begins, Pandora's effective rate begins to climb, while Apple's holds steady. Just two song skips per hour later, they're roughly equal. At just three skips per hour, Pandora's effective rate is higher than Apple's (which, you'll remember, doesn't pay for the first six skips).

We recommend you take a look at the details in the blog and see Touve's math. It's at Rockonomic.com here.

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Other charges

But don't Apple pay royalties for their 'match' service. Shurley this should figure in the calculations.

"Apple won't owe for up to

"Apple won't owe for up to six songs per hour that are skipped within the first twenty seconds."

And -- at least in the iOS7 beta -- users are limited to six skips per hour. So a fast-trigger user skipping six songs (their max per hour) and each within 20 seconds of the song starting costs Apple nothing. Interesting!

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