Pandora Buys Terrestrial Radio Station in South Dakota, Aims for Lower ASCAP Royalties
Internet radio giant Pandora is taking an innovative route to lower
ASCAP fees: The purchase of a small-market terrestrial radio station.
The company announced Tuesday it has purchased KXMZ-FM in Rapid City,
South Dakota. Terms of the deal, which closed last Wednesday, were not
disclosed.
KXMZ gives Pandora few listeners. The station is in
the country's 255th largest radio market in the spring, according to
Arbitron. Its radio market had a population of 108,000 in the spring.
Rapid City itself has a population of roughly 70,000. Over 70 million
people listen to Pandora's Internet radio service every month.
But
the purchase is a strategic move for the leading Internet radio service
in the United States. Pandora acquired the station in an attempt to
take advantage of the performance royalty fees available to broadcast
radio stations and Internet radio services operated by owners of
broadcast radio stations.
In
an op-ed
published Tuesday and shared with Billboard in advance, Christopher
Harrison, assistant general counsel at Pandora, says a motion filed
Tuesday provides examples of how ASCAP has violated the terms of its
antitrust consent decree. He says the performing rights organization has
allowed publishers to withdraw their catalogs from ASCAP's license for
Pandora while making them available to other Internet radio services.
Harrison
mentions one episode related to EMI Music Publishing's withdrawal of
new media rights last year. He claims ASCAP and EMI "increased pressure"
during Pandora's direct negotiations with EMI "by refusing to provide
Pandora with the list of tracks that were being withdrawn," which
exposed Pandora to a huge copyright infringement liability.
In
November, Pandora filed a complaint in federal district court that
sought an adjustable-fee blanket license with terms available to
Internet radio services under the settlement between the Radio Music
Licensing Committee (RMLC) and ASCAP in 2012. That settlement covers
both broadcast and Internet performance royalties and sets a blanket
license fee of 1.7% of a licensee's gross revenue less standard
deductions (12% of revenue for broadcast stations, 25% for Internet
services). The RMLC represents the majority of radio stations in the
U.S.
A broadcaster covered by the RMLC is able to also offer a
standalone, non-interactive Internet radio service that is covered by
the RMLC rates and deductions. The motion notes that Clear Channel is
able to pay the RMLC rates for iHeartRadio, Pandora's biggest Internet
radio competitor.
A shift to RMLC rates would represent big
savings. Performance royalties for BMI, SESAC, ASCAP, EMI and Sony/ATV
repertoire accounted for 4.3% of revenue in the fiscal year ended
January 31.
But November's petition states that ASCAP has not
given Pandora either the RMLC's percent-of-revenue royalty rate or the
25% standard deduction available to Internet radio services. Instead,
according to the motion, ASCAP believes Pandora should receive a 15%
deduction applicable to agency sales commissions. Pandora generates
advertising primarily through an in-house sales team.
Pandora
also seeks rates that take into account any direct licenses with
publishers who have withdrawn new media rights from ASCAP.
BMG/Chrysalis, Universal Music Publishing and Warner/Chappell Music
Publishing have
notified ASCAP
they intend to withdraw new media rights on July 1. Kobalt Music
Publishing and Ruminating Music plan to withdraw on October 1. Sea Gayle
Music Publishing will follow on January 1, 2014.
Through 2010,
Pandora had operated under ASCAP's Experimental License Agreement for
Internet Sites and Services from 2005. November’s complaint calls the
Experimental License a "non-negotiable" license that became "ill-suited"
as the company grew. It terminated that license in December 2010 and
applied for an ASCAP license in January 2011.
ASCAP's refusal
to offer RMLC terms "flies in the face of recent ASCAP Rate Court
jurisprudence," the petition reads. "This Court and the Second Circuit
have made clear there is no basis for discriminating among licensees
offering the same or substantially similar programming based on the
manner by which licensees distribute their product to end users."
Industry
reaction to Pandora's November lawsuit was harsh. David Israelite,
president and CEO of the National Music Publishers' Association, said it
was "outrageous" for Pandora to attempt to "reduce the already nominal
amount they pay songwriters and music publishers" for the performance of
their works.
Pandora has also pursued lower royalty rates for
sound recordings. Last year it supported the Internet Radio Fairness
Act (IRFA), legislation that would change the standard by which the
Copyright Royalty Board sets statutory royalty rates. IRFA expired in
January at the end of the last Congress. A similar bill is expected to
be introduced this year.
The acquisition of KXMZ was rooted in
royalties, but the deal effectively begins an experiment in radio
programming. Pandora already has 42,000 listeners amongst Rapid City's
population of roughly 70,000. Harrison writes that KXMZ "will apply
Pandora's insights and listening habits to program music that accurately
reflects local listeners' evolving tastes." KXMZ has an adult hits
format. Pandora tells Billboard the station's format will not be changed
as a result of the acquisition.
