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W&L Professor Examines the Economics of Streaming Music Services

Remember when your ability to hear your favorite song on the radio depended on either the disc jockey’s decision to play that tune or your ability to reach the request line?

For the millions who use such pure-play radio sites as Pandora, the DJ has been replaced by an algorithm and the request line has been replaced by a thumbs up or a thumbs down. But, as Washington and Lee University business administration professor David Touve notes, the business models facing Pandora are becoming more challenging as they gain users, and as those users shift from listening on desktop computers to mobile devices.

On the one hand, the increase in mobile listening has an impact on Pandora’s ability to sell advertising. “Advertisers consider ads heard on mobile devices like smartphones as somehow different from ads heard on ‘terrestrial’ radios,” Touve said. “Time will tell whether such a difference truly exists, as far as the impact of such advertising on brands and consumer action.”

On the other hand, the cost structure for music differs as far as the rates Pandora pays for music and the rates traditional radio pays.

Research and blog posts released by Touve on the subject have been quoted extensively in industry publications, including Billboard, and the CEO of Pandora referred to Touve’s research during a Congressional hearing on music licensing last month.

“Webcasters such as Pandora pay for certain uses of music for which broadcast radio does not presently pay,” explained Touve. “In fact, Pandora pays record labels, featured artists and performing musicians for its use of sound recordings — the music you hear — while traditional radio broadcasters in the U.S. do not pay for such use. Both ‘casters, however do pay publishers, composers and lyricists for their use of musical works — the ‘song’ expressed in the recording.”

Then there are the satellite broadcasters such as Sirius/XM, which pay for their use of sound recordings as well. But Pandora faces a different cost structure than these broadcasters, too.

“While satellite and cable music broadcasters pay for their use of recordings according to a percentage of revenue (approximately 8 percent of gross revenue), Pandora pays per stream per listener,” said Touve.

The current rate Pandora pays as a pure-play webcaster is $0.0011 per stream per listener. That, Touve said, would appear to be quite small until it is applied to the billions of streams Pandora will serve. “The total dollar amount becomes significant: potentially in excess of $240 million for the most recent fiscal year,” he said.

Touve’s comparison to the terrestrial radio industry’s royalty bill is what had gained considerable attention.

“That $240 million in royalties Pandora will pay in the current fiscal year is greater than any entire radio industry pays to sound recording owners in any country where such payments are made,” Touve said, such as the United Kingdom, France, Spain and Germany.

“My estimate of the per-play, per-listener costs for radio in the United Kingdom, for example, is approximately £0.000841, or $0.000134,” he said. “Given that estimate, Pandora pays eight times more for its use of sound recordings than this estimated effective rate paid by radio broadcasters — both commercial and BBC — in the UK.”

Or, as Touve put it on his blog, “If Big Radio were treated like a Default Webcaster, at 12 songs per hour given an average radio listening audience throughout the day of 8.8% of the population age 12 and higher, then Big Radio would owe $4,714,107,000 in royalties for the performance of sound recordings.”

Besides being a really big number, that $4.7 billion attracted attention for reasons related to an ongoing debate in Washington over how rates are set for these uses of music across the range of “‘casters.”  Two competing versions of legislation are now being proposed across the House and the Senate, and each proposal deals with the settlement of royalty rates in a very different way.

Earlier this year, the National Association of Broadcasters proposed a payment of one percent of its net revenues, or approximately $100 million dollars, were the industry required to pay for the performance of sound recordings on broadcast radio.

In that context, Touve’s research quantified, in big dollar terms, the scale of the difference in these methods being applied to determine the rates paid by different ‘casters — webcasters and broadcasters — for their quite similar uses of music.

News Contact:
Jeffery G. Hanna
Executive Director of Communications and Public Affairs
(540) 458-8459

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