Why Internet Radio Royalties Led Pandora to Buy an FM Radio Station


Pandora’s recent purchase of a South Dakota FM radio station to obtain lower rates for its webcasting service reminds us how inefficient and illogical our music licensing system can be today.

Sparked by an op-ed penned by Pandora employee Christopher Harrison, yesterday reports surfaced that Pandora has purchased a terrestrial radio station in South Dakota. At first glance, it seems downright bizarre to see an internet radio company invest in a single FM radio station in a relatively small market. But a closer look at the thicket of licensing rules surrounding internet radio reveals how our current music licensing system can create nonsensical incentives for companies on both sides of the negotiating table.

The real reason for Pandora’s purchase of an FM radio station is Pandora’s royalty rate for musical compositions on its internet radio service. Note: this is a separate legal issue from the licensing Pandora pays for its use of sound recordings. The underlying musical composition gets its own copyright, and must be licensed in addition to the sound recording rights.

Here, Pandora is focused on the music composition licenses it gets from the performing rights organization ASCAP. ASCAP itself long ago entered into an antitrust settlement with the federal government and now operates under special rules designed to prevent it from wielding its leverage anticompetitively against licensees. Now, Pandora has announced that it has filed a motion in federal court alleging that ASCAP has been discriminating against Pandora compared to similarly situated services like Clear Channel’s iHeartRadio in various ways.

One of Pandora’s complaints is that ASCAP refused to give Pandora the royalty rates it gives to fellow webcaster iHeartRadio because iHeartRadio is owned by Clear Channel, which also owns several hundred AM/FM broadcast stations. So, Pandora has now purchased an FM radio station so it can also be eligible for the lower rates that are only available to internet radio services owned by terrestrial broadcasters.

This is a perfect example of the twisted incentives and strange results we get from a music licensing system that is based on who wants a license instead of just what they want to do with the music they’re using. This makes no sense. The law should treat like uses alike. Regardless of how high or low you think performance royalty rates for webcasting should ultimately be, there is no logical reason to give preferential rates to certain companies just because they arrived at the negotiation table first.

When we treat similar services differently based on how long their owners have operated in the industry, we create perverse incentives that lead companies to make investments that don’t themselves produce more value for consumers. This also makes it even more difficult to accurately examine the economics of the market and predict which policies will most encourage competition and consumer benefits in the market.

But most importantly, treating the same uses differently to give preference to older technologies and dominant companies will only ensure that upstarts and new competitors won’t be able to successfully enter the market. This means that the incumbent companies will feel no pressure to become more responsive to listeners or to artists, because neither group will have any other alternative path to reach each other. As a result, individual musicians and music fans will continue to be little more than an afterthought among the dominant rights holders and distributors.

If we want a music distribution system that gives a better deal to listeners and artists alike, we must have a licensing system that creates a level playing field for new entrants.

Image by flickr user Alan Levine.

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