Asking the obvious: Under proposed rates, would Pandora pay more for recorded music than the entire US radio industry?

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A few weeks ago, Clear Channel (radio) and Big Machine (record label) announced a licensing deal covering the public performance of musical recordings (aka, music) both over the airwaves and through the internets. While the details of this deal were not disclosed, the subtext of the deal combined with news from the past lead to one question:

Under the proposed rates for recorded music performance royalties, would Pandora pay a greater amount for recorded music than the entire US radio industry? As far as I can tell, the answer is: Too close to call.

By my guesstimate, Pandora paid $138,500,000 (+/- $3,500,000) in 2011 for performance royalties covering recorded music. This estimate is based on Pandora’s annual report, with total “content acquisition costs” reduced by estimates of those royalties (to be) paid to ASCAP/BMI/SESAC for musical works (not recordings). Another way to get to this number would be to estimate Pandora’s monthly streams and multiply by the present per-play license rate.

The “whisper” amount for US Radio royalties was $100,000,000 (whispers:  RollingStoneNew York Times, NAB). If this is the real number, then Pandora would indeed outpay big radio by $30-40 million.

Under terms that have been proposed by the NAB (combined with some instinct), however, US Radio might pay $$137,500,000 ($100 million for terrestrial broadcasts plus $37 million for webcasting) for performance royalties covering recorded music. This estimate is based upon a “whisper” rate of 1% of net revenue (or the magic $100 million) for terrestrial broadcasts and a “gut instinct” rate of no greater than 7.5% of webcasting net revenue. Were gross revenue the baseline, this guesstimate rises to $202,500,000 ($150,000,000 from terrestrial radio and $52,500,000 from their webcasting operations).

In the end, this race may be too close to call.

REASONING:

Ed Christman of Billboard reported that, according to sources, the NAB had previously been negotiating with labels/artists over the rate and terms for an agreement that might cover a broad range of stations.  The rumor in this market — which was backed by the NAB’s release of its own proposal (e.g., via NAB (PDF), RadioInk) — was that sound recording performance license fees for terrestrial radio stations would be no greater than 1% of radio net revenues. A Fitch Ratings analyst used a similar whisper for their analysis of the Clean Channel/Big Machine deal.

This rate discussion set in motion the repeated  “whisper” reference to $100 million in performance royalties as the tab on the table (e.g., via RollingStone, New York Times, and others), based upon gross radio revenus (minus online and off-air revenue) tipping the scales around $15 billion in 2011 (according to the Radio Advertising Bureau). Revenue from non-music radio would be deducted, along with other costs in order to get “net” revenue.

On the webcasting side, however, the rate for big radio has (apparently) suddenly changed.  Originally, the NAB proposed  (link to PDF) per-play rates similar to that paid by other webcasters.  In the Clear Channel / Big Machine announcement, however, Pittman was very direct in the hint that this deal was based on a percentage of revenue.  From Billboard:

“I can’t build a business space based on paying money for every time I play a song, but I can build a business by saying I will give a percentage of revenue that I bring in,” Pittman said. “What we are really trying to do is come up with a predictable model.”

So, if the deal on the table for webcasters (particularly those with a terrestrial base) is based upon a percentage of revenue, we have to do a little thinking.

Kurt Hanson crunched some numbers based on the early NAB proposal and estimated that under a per-play rate scheme, the webcasting operations of terrestrial radio might owe $80-120 million in royalties. That’s somewhere in the range of 15-20% of net online revenue from radio (using the $700 million gross revenue number from RAB).

I think many people would agree that it is highly unlikely that seriously big radio would agree to pay 20% of their revenue for music performance royalties, even though Pandora’s royalty payments hit 40-50% of revenue. The next closest big fish in the pond would be satellite broadcasters.

Satellite broadcaster pay around 7-8% (2010 through 2012 rates) of revenue for performing musical recordings.  I reckon this 7.5%(ish) rate becomes the ceiling for that rate to which something like a Clear Channel would agree, were it able to avoid the per-stream royalty rates set by the CRB.

Further evidence that big radio would like to avoid the CRB rates would be the NAB proposal, which includes the following:

CRB shall have no jurisdiction with respect to the terms of this agreement. In the event the parties cannot agree on future rates such rates shall be set by a legislatively mandated rate court.

S0 there you have it.