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Artists will still get Pandora royalties from SoundExchange, but only on free streams

By | Published on Tuesday 17 January 2017


Pandora’s insights and analytics guy – aka Billboard contributor Glenn Peoples – has confirmed in a blog post that artists will continue to receive their royalties from the free version of the US personalised radio service via SoundExchange, even though the digital firm has shifted over to direct licensing arrangements with the labels. Though all the monies due on Pandora’s paid-for packages – both the existing ad-free personalised radio set up and the soon-to-launch fully on-demand option – will flow through the labels.

Pandora originally licensed its entire operation via the compulsory licence that exists under US copyright law for online radio. This meant that it could get a single licence from collecting society SoundExchange that covered all sound recordings, with no need to do individual deals with each record company. Which was handy, given that when Pandora was launching the labels were in the habit of saying “fuck no” to any digital business model that wasn’t an iTunes clone. The existence of the SoundExchange licence is why Pandora could be so early to market, and why it – and its personalised radio model – is so big Stateside.

It’s also why, for a number of years, Pandora was enemy number one for the American music community. With songwriters and publishers also legally obliged to license via the collective licensing system – where the rate courts ultimately set what royalties are due – Pandora didn’t have direct licensing relationships with any artists, writers or rights owners. And everyone on the music side of the fence reckoned the digital firm was investing way too much energy into trying to persuade the Copyright Royalty Board and the rate courts to cut what it had to pay for the music it played.

Though, actually, from a recording artist perspective, there was one advantage of Pandora paying royalties via SoundExchange. US copyright law says that whenever online radio pays money to the collecting society, that cash must be split 50/50, with half going to the record labels and the other half directly to performers, oblivious of what those performers’ record contracts say about how and when they share in money generated by their recordings.

This basically introduced the ‘performer equitable remuneration’ system from elsewhere in the world into the US. In most countries, income generated by the public performance or broadcast of recordings is generally split 50/50 between labels and artists, with the latter getting their cut directly from their collecting society. It means what an artist earns on that income isn’t subject to record contract terms.

Performer ER hadn’t really applied in the US before the rise of digital services, because there isn’t a general performing right associated with the American sound recording copyright, with only a digital performing right being added in the 1990s.

However, the SoundExchange licence utilised by Pandora to date only covers personalised radio, not fully on-demand streaming of the Spotify model. Which meant that when Pandora decided it wanted to move into fully on-demand streams, it had to start doing deals directly with the record companies like all the other streaming firms around the world.

Now, while the labels are obliged to license personalised radio services via SoundExchange, it’s a one-way obligation; the personalised radio services can opt to do direct deals if they so wish. Indeed, Pandora already had some of those deals in place, most notably with indie label-repping Merlin. Which means that, now Pandora has done direct deals with the labels for their fully on-demand service, the personalised radio element is also bundled into those arrangements, so that the digital firm no longer relies on a SoundExchange licence, and the labels will be paid all their royalties directly.

But what does that mean for how artists get paid? Whereas in other countries, copyright law says Performer ER is due when certain elements of the recording right are exploited – principally the ‘performance’ and ‘communication’ controls – in the US the law just says the 50/50 split happens whenever money flows through SoundExchange.

Which means in theory the labels could take 100% of the Pandora money and pay their artists subject to record contract, which would usually mean featured artists seeing less than 20% of any income, payments being subject to the featured artist having paid back some of the label’s upfront costs, and session musicians – who currently see 5% of SoundExchange income – would get nothing. So that’s no fun.

Such a sneaky move has generally been frowned upon within the US label community, so that when direct deals have been done with SoundExchange licensees, the artists have usually continued to get their half of the money through the collecting society. And in the main, according to Peoples, that will continue to happen with monies generated by the Pandora personalised radio platform.

Noting that the record companies’ new direct deals with Pandora “allow labels to receive royalties directly and eliminate SoundExchange from the royalty chain”, he stresses: “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”.

That said, to date the paid-for version of the Pandora personalised radio service has also been licensed by SoundExchange, with artists seeing 50% of that income direct from the collecting society too. That bit is going to change, so that Pandora will pay royalties from both its subscription services – the existing $5 a month set up and the new Spotify-style $10 a month option – to the labels, which will then pay artists the (usually) lower split subject to record contract.

Writes Peoples: “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”.

The vast majority of Pandora’s users to date have been on the free service, so artists are losing their direct 50% cut on the smaller of the existing revenue streams. The labels could argue that technically they aren’t obliged under law to keep paying Performer ER on the bigger ad-funded income either.

Though given that Pandora’s business plan relies on turning more freebie users into paying customers – whether on the $5 or $10 a month package – it does mean the revenue stream where artists get half the money directly could go into decline, while the revenue stream where payments are subject to record contract should grow.

It also means that – while for the music industry at large turning freemium users into paying customers is the absolute top priority – when it comes to Pandora, artists themselves might be better off with fans sticking to the free streams. Which probably brings us back to the good old digital pie debate, and how all streaming monies are shared between labels, artists and everyone else in the music community.