Irving Berlin lived at the right time. So did Doc Pomus. And Bernie Taupin. Harlan Howard, Ellie Greenwich, Jeff Barry, “Yip” Harburg were also lucky to be born when they were. In fact, practically the entire Songwriters Hall of Fame, pre rock and roll, should consider themselves lucky they were born when they were.
None of them had to worry about Pandora, Spotify or any other music streaming service.
“God Bless America”, “White Christmas” (Berlin); “Save the Last Dance for Me”,” Lonely Avenue” (Pomus); “Tiny Dancer”, “Candle in the Wind” (Taupin); “Streets of Baltimore”, “I Fall to Pieces” (Howard); “Leader of the Pack”, “River Deep, Mountain High” (Greenwich/Barry); “It’s Only a Paper Moon”, “Somewhere Over the Rainbow” (Harburg) – these are just a few examples of songs written by NON-performers. Those titles are amongst the most popular songs written in the past 100 years. Any of those – and hundreds more – have been successfully recorded by dozens, perhaps hundreds, of artists during that time. The songwriters received royalties based on the number of records sold and on the sales of sheet music and songbooks containing the fruits of their labors.
When the item sold is a physical item (LP’s, CD’s, cassettes) a pre-set mechanical royalty comes into play. The mechanical royalty is set by Congress and has been since 1909 when the rate was established at two cents. The current rate is set at 9.1 cents (a bit more if a song is over 5 minutes). Downloads are also subject to these rates. Sheet music is generally a % of the cost of the item.
While there are still myriad ways in which the songwriter was denied the full royalty rate, some legitimate and some not so much, most of these were front and center to the songwriter. That at least allowed the songwriter to make an informed decision or at least understand where they were taking a hit to the established royalty rate they were entitled to collect.
Collecting these royalties and distributing these monies are generally done by companies such as ASCAP (American Society of Composers, Authors and Publishers) and BMI (Broadcast Music , Inc) in the US and similar organizations outside the US.
Radio royalties are generally collected as a percentage of advertising revenue and songwriters receive their share based on formulas designed to impart some level of fairness. In addition bonus money is available for songs that are played over X amount of times in a designated period (typically a quarter) or that have established themselves as all-time perennials or standards (think “You’ve Lost that Loving Feeling” for a contemporary example). Whether or not these formulas truly properly distributed the collected fees to the songwriters is another discussion, but simply put the percentage used in calculating the gross amount was set across the entirety of the radio medium.
Radio stations derive their revenue from advertising sales. Stations are free to set their rates based on what the market will bear; free to decide how many minutes of ads per hour will be run and decide the mix of 60 seconds, 30 seconds, 15 seconds or even shorter lengths ads to make up the content. While the average today is around 9 minutes, stronger economic times have seen as much as 20 minutes per hour. The key here is that each station has the responsibility to understand their market.
That brings us to streaming services such as Pandora and Spotify. These types of outlets pay on a per 100 songs basis. Pandora pays 12 cents/100 and Spotify 35cents/100 (Spotify is an on demand service, hence the higher rate). Another way of looking at this is that you need to go to THREE spots to the right of the decimal to reach a number (.0012 for Pandora and .0035 Spotify ).
So, for the solo performer who pens the tune they sing, self-publish and releases on their own label ONE MILLION plays will yield $1200 in royalties from Pandora and $3500 from Spotify. Of course most music is not made by solo performers. Many songs are written in collaboration. Most artists do not set up their own publishing houses or recording labels. That means the the royalties are split amongst a number of involved parties.
Contrast that with the mechanical royalty rate of 9.1 cents. One million unit sales will yield $91000 in royalties for the songwriting copyright alone.
Now by now you may be wondering why all the songwriters listed at the start of this article were lucky they preceded Pandora and other streaming services? After all streaming services allow more music to be heard by more people for longer periods of time than ever before. One is no longer confined to hearing only what – and when – a radio station decides to play a specific song. Or any song for that matter. Isn’t the opportunity for more people to hear a singer or a band more often a great way for these performers to make themselves known to a wider listening audience? Doesn’t this promote their “brand”, allowing them to increase ticket sales, merchandise sales, performance royalties from their labels? Well, yes it does. EXCEPT the artists listed above – and so, so many more unnamed and unknown – are NOT performers. Their revenue is the song itself.
That is why Pandora’s request to Congress to reduce the amount of royalties they pay is so wrong.
Pandora, quite simply, is looking to maximize their profits on the backs of the very folks who create the music that gives Pandora the reason for their existence.
Pandora currently has two primary revenue streams – monthly subscriptions (that are ad free) and limited hourly ads that broadcast to non-subscribing listeners. Pandora is making the argument that their current schedule of royalty fees is costing them too much and preventing them from turning a profit.
There are two answers to that:
1) Increase your revenue streams (higher subscription fees and/or sell more ads)
2) Why is Pandora guaranteed a profit? That is, what makes Pandora different than any other business? If the business model does not work – change the business model.
Tim Westergren, Pandora’s founder, has recently posted on the Pandora website his rationale (justification?) for his company’s seeking a new royalty payment structure read it here: http://blog.pandora.com/2013/06/26/pandora-and-royalties/). The irony, of course, is that Pandora is now “player” – not an upstart – in the business world. Its IPO raised over $230 million just two years ago. The songwriters, who would suffer the most, are simply small entrepreneurs. The ultimate small businesses. If their songs don’t sell – they don’t eat.
Recall that mechanical royalties are currently set at 9.1 cents, yet from 1909 through 1976 the rate remained at the same 2 cents level. That’s right – the rate did not budget for over SIX decades. Is it any wonder that Pandora’s lobbying for paying reduced royalties would stick in the craw of any songwriter?
This is not just about Pandora, of course. Spotify would benefit from any adjustment in royalty rates as well. The founder of Spotify has gone on record, in a recent Wall Street Journal article (http://online.wsj.com/article/SB10001424127887323566804578553691334279504.html), as envisioning Spotify being able to customize your playlists based on your location(such as when your smart phone detects you are at your gym or in your home). He also spoke of other ways Spotify could deliver music to you – at a cost. Nowhere in the article are artists even mentioned. It’s as if all this music came fully formed and it is the delivery system that is the true reason for music. At least Pandora’s Wintergren pays lip service to the artists who make the music (if not the folks who initially create the music).
Spotify does appear to have a different business model than Pandora, focusing on more 3rd party apps that allow the consumer to have an enhanced listening experience. While many of these apps are currently free, it does not take a leap of imagination to envision a time where some charge is attached. That is another reason why Pandora’s lobbying for a change in what they pay for the use of songs is so frightening to songwriters – it would impact all such streaming services. Companies such as Spotify, who are aggressively developing a business model unlike Pandora, would reap what amounts to a windfall profit.
Despite Pandora’s protestations of the current drag on their profits due to the way their royalties are calculated, they are projecting to a breakeven point for Q2 2013. This simply underscores the point that they need to change their business model. The current subscriber base, as reported by Pandora (http://investor.pandora.com/phoenix.zhtml?c=227956&p=irol-newsArticle_print&ID=1823913&highlight=) is 2.5 million. The cost is $36/year. Is that modest annual cost the absolute upper limit that Pandora can charge? Fundamentally that is the question.
Ultimately it comes down to fairness. Do you support the delivery system or do you support the creators of the very music that is the reason for Pandora, Spotify and other such streaming services. Do you support David…or Goliath?