Pandora

Pandora is an innovative interactive internet radio service created by the Music Genome Project, which in turn was created by Tim Westergren and others in the year 2000. The MGP is a system of organizing music based on more than 400 attributes that describe a song. Those attributes are then used to compare songs to each other and recommend music similar to any given song.
This technology was then applied to a new music service called Pandora, which started as a subscription service before moving to a free, ad-supported model. The site, which falls somewhere between regular internet radio and music streaming sites like MySpace and Last.fm, allows users to create custom radio stations that tailor themselves to the person’s musical preferences.
A user simply types in the name of their favorite artist and song to create a new ‘station,’ and that song or artist then starts playing. There are also more general, genre-based stations provide on the home page. When the first track is over, another song similar to that starting track begins to play. The user can give that track a thumb’s up or down, providing Pandora with feedback its software will consider when selecting future tracks. One can even pause the music and skips songs (though there is a limit of 6 skips per hour, per station).
The effect is that Pandora is not only an internet radio station, but a music recommendation engine. By selecting tracks similar to the user’s existing tastes, it is bound to play music by bands the user is already a fan, as well as music they’ve never heard of, but may very well love. Pandora also provides lyrics and general information about a song alongside links to buy the music from iTunes, Amazon, and Amazon MP3. It also allows you to “bookmark” tracks to help you remember the songs you like. Pandora even provides a button to buy all tracks in your bookmarks all at once from Amazon or iTunes.
It doesn’t end there. Pandora is also available on mobile phones and in the home. The service offers apps for the iPhone and Blackberry, among others. The apps allow users to create stations and listen to music anywhere they get reception. Users can user their existing account, give thumb’s up and down, skip tracks, and more on the app’s streamlined player, just like on the service’s website. Of course, it also provides a link to the iTunes store to encourage impulse purchases of music discovered via the app. Pandora can also be used without a computer or iPhone, using a number of music players and home theater products that offer access to Pandora.
Pandora is considered to be an internet radio station, which is quite distinct from terrestrial and satellite radio stations from a licensing perspective. Traditional radio broadcasters do not have to pay any kind of royalty outside of the public performance blanket licenses provided by ASCAP, BMI, and SESAC. Satellite radio, for its part, has to pay a small percentage of its gross revenues in exchange for broadcasting copyrighted sound recordings (on top of blanket licensing fees it pays to the perform rights organizations).
Unfortunately for Pandora, this internet royalty rate has been the subject of much upheaval and controversy in the past few years. In March of 2007, the Copyright Royalty Board set rates for various licenses, including internet radio broadcasts. The rates applied retroactively to the beginning of 2006 and rose each year until 2010, starting at .08 cents per song and finally reaching .19 cents per play.
At a fraction of a penny per play, these royalties seem incredibly low. When extrapolated across the millions of individual songs broadcast over services like Pandora, the cost quickly becomes considerable. The important point is that the calculated number of plays is not based on how many times the song is actually played, but on how many individual listeners hear the music streamed over the internet.
As soon as the CRB made its decision, there was instant opposition to the ruling from all webcasters, from Pandora to public radio stations. Despite their appeals, the CRB refused to reconsider the rates it had set. SoundExchange, a nonprofit entity set up the RIAA to collect royalties for use of master recordings, had supported the royalty rates.
The royalty obligation for some radio stations went up by as much as 1200% as a result of the CRB’s ruling. For some webcasters, that meant their were expected to pay more than 100% of their total revenue just for performance royalties. Obviously, most webcasters saw this as a threat to their very existence and many have shut down. Pandora threatened to shut down if something wasn’t done to reverse this decision.
A major breakthrough came, however, in late 2008 when Congress passed a law called the Webcaster Settlement Act. The bill, later signed into law by the former President Bush, struck down the CRB’s royalty rate and cleared the way for private negotiations between internet broadcasters, terrestrial broadcasters that simulcast on the web, and SoundExchange. Interestingly, SoundExchange actually supported this bill, despite the fact that it had originally supported the CRB’s royalty rate.
In February 2009, those negotiations produced a major breakthrough when SoundExchange reached an agreement with the National Association of Broadcasters, an organization representing terrestrial radio stations. That agreement provided for the payment $1.50 for every song heard by 1,000 people. This rate will rise to $2.50 in 2015. It is very important to note that this agreement only applies to traditional stations that simulcast their programming over the internet, in parallel to their regular broadcast.
This means Pandora is still stuck in limbo. The successful repeal of the CRB’s royalty rates was a major victory for the company, but Pandora and other internet radio broadcasters have not yet reached an agreement with Sound Exchange. It is certain that negotiations are underway, but there is no certainty about what kind of agreement will be reached. To add intrigue to the whole thing, the deadline for a negotiated agreement set by Congress passed on February 15th. The parties have agreed to continue talks beyond this deadline. It seems sure that the growing popularity of Pandora will put the onus on SoundExchange to strike a mutually beneficial deal.
If the licensing complications Pandora has faced from the CRB and SoundExchange seem like a headache, it gets worse. Pandora is only licensed in the United States, disallowing use in major markets like Canada, Europe, Japan, and Australia. The website determines a user’s location based on IP address and people outside of the USA are simply greeted with a page apologizing for the inconvenience, but Pandora is not available outside of the United States. Though based in the U.S., the company is subject to the laws of the territory where the listener is located, requiring the company to block foreign users or risk running afoul of local laws.
The reason is that, of course, Pandora is obligated to secure permission from rights holders and pay royalties to them when they broadcast music over the internet. As we’ve seen, internet radio is a new entity and workable licensing schemes have not been arranged in many territories. For example, Pandora devotes a lot of time on the FAQ (frequently asked questions) section of its website to explaining why Pandora cannot be accessed outside the United States. It claims that they cannot operate in the United Kingdom because they “are being asked to pay per track/stream rates that equate to over 80% of our gross revenues.”
After all this complication, it almost seems amazing that Pandora hasn’t just thrown in the towel by now. They are currently paying excessive royalties and are only allowed to broadcast to a small fraction of their potential global audience. But, especially with the success of their iPhone application, Pandora’s popularity just keeps growing. And the larger they get, the harder it will be for the international music industry to resist bargaining with the company. So despite everything, expect Pandora to be around for a long time to come.

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