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Music Licensing Issues Threaten Pandora’s Business Model

Pandora Media, the popular music streaming site, has nearly eighty-one million users worldwide, and continues to generate over one billion dollars in revenue annually.1 However, Pandora is reportedly looking to sell, given the difficulties it faces in generating revenue and paying substantial licensing and royalty costs.2 Pandora is faced with increasing costs on two fronts. First, Pandora is litigating, and paying settlements, for the right to use music made before 1972, which they argue is not copyrighted. Second, Pandora will have to pay more in royalties to copyright holders and artists as of December 2015.3 In addition, the music streaming industry is highly competitive. Sites such as Spotify, Apple Music, and Tidal threaten to weaken Pandora’s market hold, as these sites are not subject to the same royalty and streaming fees. On-demand streaming services such as Spotify and Apple Music are able to negotiate directly with record companies for licensing rights, and thus license on more favorable terms.4 In this two-part blog I will discuss the difficulties that Pandora is facing and how they plan to adapt to deal with these difficulties. In this first blog, I will explain how Pandora’s decision to explore selling is based on an inability to raise revenue, recurring litigation costs, and increasing royalty fees. In the second blog, I will discuss on-demand streaming competitors, and the advantages they have over Pandora, which could drive Pandora’s decision to change business models.

Pandora has seen its shares drop to a market value of $1.8 billion, which is down from the $7 billion market value in 2013.5 Pandora is spending heavily to both acquire content, as well as to attract new users. In 2015, Pandora generated $1.16 billion in revenue, but still reported a net loss on the year of $169.7 million.6 These results are concerning given that Pandora has the largest number of users for a music streaming site, and is consistently stealing “total radio listening time.”7 Pandora is struggling to turn these users into revenue, which does not bode well for the future prospects of their business, as it currently stands. In the next two sections I will cover the high costs Pandora faces, which explain in part their struggle to generate profit.

Recordings made before February 15, 1972 are not subject to federal copyright protection, and therefore do not see the millions of dollars in royalty fees that newer, copyrighted songs do.8 Pandora is thus able to provide this content to its users without paying for licensing rights. However, recent litigation has threatened this practice. In a 2015 settlement, Pandora agreed to pay out ninety million dollars to music labels for prior use of these songs.9 Pandora contends that this settlement was amenable, and that their goal is to “grow the music industry and support artists” in coordination with music label.10 However, it is clear that increasing litigation and royalty payments will continue to hurt Pandora’s bottom line. It is unclear how Pandora will navigate these costs. Presumably, the settlement in this lawsuit will encourage other artists to pursue litigation to settle any claims they may have.

In addition to settlements for prior use, Pandora is facing increasingly expensive royalty payments for music licensing rights. Licensing costs for music streaming are the single biggest expense Pandora pays.11 Music streaming sites like Pandora pay royalties to both the artists who perform the songs, as well as the composers and publishers of those songs. In contrast, traditional radio companies only pay royalties to the publishers, not the performers themselves.12 In December of this past year, the Copyright Royalty Board (CRB) ruled that Pandora (and other Internet radio broadcasters) will have to pay a twenty percent increase in royalties to both copyright holders and artists.13 Beginning in 2016, Pandora will pay $0.0017 per song streamed, up from $0.0014 previously.14 Pandora sells this hike as a workable compromise, and suggests that they have a plan in place to adapt. However, given their struggle for profitability, any increase in costs cannot be helpful. Pandora has been anticipating this ruling for years, and was previously petitioning for a rate cut.15 Recent Pandora acquisitions suggest that the company may be planning a shift into the on-demand streaming market, much like Spotify and Apple Music. In the next blog, I will discuss the benefits and costs of such a shift from an economic and legal standpoint.

  1. Leslie Picker & Ben Sisario, Pandora is Said to Have Held Talks About Selling Itself, N.Y. Times (Feb. 11, 2016), 

  2. Id

  3. John Paul Titlow, Why Pandora Isn’t Panicked About its 20% Royalty Rate Hike, Fast Company (Dec. 17, 2015, 7:30 AM), 

  4. Ben Sisario, Big Labels Take Aim at Pandora on Royalties, N.Y. Times (Apr. 17, 2014), 

  5. Picker & Sisario, supra note 1. 

  6. Id. 

  7. Id. 

  8. Sisario, supra note 4. 

  9. Marilyn Malara, Pandora to Pay $90M in Settlement Fees After Royalties Lawsuit, United Press Int’l (Oct. 23, 2015, 2:27 PM), 

  10. Id. 

  11. Titlow, supra note 3. 

  12. Id. 

  13. Id. 

  14. Id. 

  15. Id.