Streaming radio reached a major milestone last month: It's paid $1 billion and counting in royalty fees to musicians and record labels.
For Internet stations like Pandora, that's both a good thing (because it means lots of people are listening to Pandora) and a bad thing (because it means Pandora has to dish out huge fees to SoundExchange, the non-profit middleman between artists and non-interactive streaming music services).
Pandora co-founder Tim Westergren, himself a musician, took a few minutes before a recent town hall meeting with listeners in D.C. to talk about the Catch-22 of digital royalty fees, also called performance fees.
Q: SoundExchange has handed out a total of $1 billion, and has exceeded $100 million in payments in the first quarter of 2012 for the first time ever. Streaming music is clearly more popular now than ever before. What does that mean to you?
A: I think it's fantastic. To me, one of the most promising narratives in the music industry is this transition from broadcast radio to Internet radio. (However), we (Pandora) have issues within that. There's a disproportionate level of royalties that we pay (to performers and labels, while traditional radio pays only songwriters and publishers), but fundamentally, it's fantastic that musicians are getting real money from this industry.
Q: Pandora is huge — the No. 2 app in the country in downloadsand the biggest Internet radio service by far with 150 million listeners. Does the performance fee Pandora is required to pay to SoundExchange truly have an impact on the company?
A: The performance fee last year was over half of our revenue, which is a dramatically higher rate than other forms of radio pay. It is a huge burden for us, and it's affected the overall health of Internet radio, for sure. We're barely profitable. We're right on the borderline, and that's because of the royalties.
Q: What does Pandora do to counterbalance these fees? Sell more ads?
A: (Our ad space is) not sold out, and that's our goal. On mobile, we're working into that.
Q: Aside from paying out a lot of royalty fees this year, what's new with Pandora?
A: Well, there are new genres invented every day, so we're constantly playing catch-up. There's been a pretty dramatic increase in terms of the number of genres on Pandora. We're on a (Samsung) refrigerator now! We're looking to make Pandora as ubiquitous and as easy to use — maybe more so — as broadcast radio. Anywhere you have an audio output and a Web connection, we're interested in.
Q: Pandora plans to sell more ads and, hopefully, refrigerators. Are there any other ways to deal with the high performance fees?
A: The same topic (of high fees) that we're wrestling with now, a few years ago almost put us out of business. Then, we tried to mobilize listeners (and it worked). There are hearings coming up, so there's a good chance we'll be reaching out to listeners again to call Congress and voice your support for the issue.