Back in 2014, internet-radio service Pandora and independent music label rights agency Merlin signed a licensing deal to expand the exposure for independent music on Pandora's streaming services. Now, reports are coming in that that deal is having previously unforeseen consequences.
According to report by Billboard, Merlin had negotiated a deal with Pandora that would give the artists on the independent labels it represents greater exposure in exchange for a lower royalty rate per stream. The decision has had industry-wide implications—after deliberating in December, the Copyright Royalty Board (CRB), who sets industry-wide standards for royalty and streaming rate, ruled on a "benchmark" (standard) rate of 0.17 cents.
This means that if a label or distributor wants more money for the streaming rights to its artists, it has to use 0.17 cents as the standard to negotiate from. Merlin is saying that that's simply too low a default.
To obtain its decision, the CRB examined the highest and lowest points on the royalty bar, an already bloodied battleground between labels, licensing agents, and streaming services. As Ben Sisario reported in the New York Times back in December, Merlin was joined in its fight by the nonprofit music licensing agency SoundExchange, which had "asked the board to raise the rate that Pandora and similar [services] pay record labels by almost 80 percent, to 25 cents per 100 plays, while Pandora want[ed] it lowered to 11 cents." Until last year, Pandora paid 14 cents per 100 streams.
"These royalties are Pandora's single biggest expense, wrote Sisario, "they amounted to 44 percent of the company's revenue last year—as well as its biggest hurdle to profitability."
In this so-called "micro-currency" even a penny can have a massive financial implications. As Billboard puts it into context, the difference between a 0.17 and 0.18 royalty rate would be around $60 million. Though Pandora now pays a greater rate than it previously did, representatives for Merlin are claiming that the CRB undercut the median favoring Pandora. "[The CRB] fundamentally misread the context of our agreement" Merlin CEO Charles Caldas said to the Billboard, referring to the original negotiated deal of a lower pay for higher exposure.
The board rebuked: ""It strains credulity to think Merlin was oblivious to the potential promotional and substitutional effects of the Pandora/Merlin Agreement, yet still proceeded with the deal on unaltered terms."
"Merlin should've understood what they were signing." Richard Tullo, an analyst at the firm Albert Fried and Company, told THUMP. "They should've had this figured out a year ago before they struck a deal with Pandora that was subject to outside negotiation by the CRB."
Tullo said that the objective of internet radio is to act as a disruptor between labels and artists, where the latter can actually benefit directly from being directly exposed to new audiences. "The more exposure, the more plays, and the more plays, the more revenue." He added: "I think the technology is great, but it's not equitable. An artist who gets 30 to 40 million plays and only to receive a check for $3,000? That's just not equitable. But these platforms need to be able to sustain themselves financial if they're going to exist."
When asked if Tullo favored Merlin or Pandora, he said: "I side with the artists."