Pandora's Box

News about Pandora seemed to explode this week as several artists wrote high-profile pieces expressing their dissatisfaction with the internet radio company's royalty rates as well as the company's attempts to lobby for what appear to be even lower rates.


On Sunday, members of Pink Floyd penned a well-annotated op-ed in USA Todayand on Monday, David Lowery (from Cracker) posted statements showing that he makes less from Pandora than from a t-shirt sale. These two pieces are in addition to the recent and well-publicized email exchange between Blake Morgan and Pandora founder Tim Westergren. On Wednesday, Westergren responded with a lengthy blog post.

While I think that the conversation that is starting to happen is very important for the entire streaming business, it represents the opening of a Pandora's box for Westergren. Over the past couple of months, Pandora's attempts to advocate for lower rates have increased, and with them, so has publicity about their efforts. For Pandora, what began with a letter inviting artists to have a conversation about the rates, has now backfired as these high-profile artists turn against them. Also, Pandoa's purchase of a terrestrial radio station in an attempt to become eligible for the lower rates paid by terrestrial broadcasters smacks of avoiding the conversation altogether.

There should be no mystery about my feelings toward streaming music services. While I'm not satisfied with the absolute value of current payouts to artists, I consider these services to be terrestrial radio replacements. As such, I would argue that the payouts are in line with the audience. (Or at the very least, we should be more clear about what each of these revenue streams represents in terms of audience and therefore potential revenue.) All of that said, I'm an optimist here—this is a new market, and a growing one—so my expectation is that these amounts will grow in the future.

Streaming music represents a new model that needs to be nurtured, if not wholly embraced. Consumers are less and less satisfied with a music consumption model based upon ownership. The tide is turning toward one of access. Streaming represents the future, and the money will come as listeners become more accustomed to the idea of streaming and sign up for particular services they like.

In may ways, opening Pandora's box could actually be the tipping point in the conversation about streaming royalty rates specifically—and public performance rates in general. While no terrestrial public performance rate for sound recordings even exists, the other rates form a confusing jumble that no longer makes sense for the music industry. Starting this conversation will go a long way toward fixing that. What might be bad for Pandora may actually be good for the industry as a whole.

Apple announces streaming service iTunes Radio.

At this week's WWDC, Apple announced iTunes Radio, its long-awaited entry into the streaming music space. The service is similar to Pandora in that it uses information gathered about a user's personal tastes (by iTunes Genius) to construct playlists, drawing music from the entire iTunes catalog. The service will be free and ad-supported, though iTunes Match subscribers won't see the ads. iTunes Radio will launch this Fall in conjunction with the rollout of iOS 7.

Some have suggested that it is terribly late for Apple to get into the streaming music game, that it indicates they are no longer innovating. While perhaps Apple is indeed going over well-trodden ground, I don't believe that it's too late. First, with Spotify's dominance in the interactive streaming space, it would make sense for Apple to enter the non-interactive space, taking on Pandora. Second, Apple has tremendous scale, and adding a service like this only helps their overall offerings. (Note too that the iPod wasn't the first mp3 player.)

An interesting side note here is that apparently Apple has obtained the streaming rights through direct licenses and not compulsory ones. As I described in a previous post, streaming services have a variety of royalties to pay, depending on whether the service is considered "interactive" or "non-interactive". Pandora has claimed that the government-mandated rates it pays are "too high", yet Apple has entered the space paying rates that are likely even higher. This is important, as it will make it more difficult for Pandora to compete.

Something to remember here is that companies compete not just for customers but also for market share. Apple's entry into this space is the result of that.

It's interesting to hear non-industry people describe their experiences with streaming services: some insist on the choice provided by interactive services and others are happy to have an algorithm choose their playlists for them. Access models are definitely the future of music consumption, but what is unclear still is what features the public will demand from their service of choice and how that will affect the overall model. The bottom line is that it is imperative for music companies (and artists) to get into this space. Apple is doing just that.