Will This Action Cure Pandora’s Internet Radio Blues?

Pandora (NYSE:P) has long complained that the federal standard used to determine royalty rates for Internet radio is unfair. Now, the Internet Radio Fairness Act, introduced in the House of Representatives on Friday by Utah Republican Jason Chaffetz and Colorado Democrat Jared Polis, proposes changing to a legal standard that determines royalty rates for non-interactive online radio services like Pandora and Clear Channel Communications’ iHeartRadio app in a manner that should appeal to the former.

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While the royalty rates for most other uses of copyrighted sound recordings fall under section 801B of the Copyright Act, standards set for streaming radio providers like Pandora come as a result of the 1998 Digital Millennium Copyright Act, which made Internet radio an exception to the original act. The exception required judges to set rates according to what a hypothetical “willing buyer, willing seller” would agree to. According to that standard, Pandora, which has never turned an annual profit, spends 25 percent of its annual revenue on royalties. Satellite radio provider Sirius XM Radio (NASDAQ:SIRI), which falls under a different categorization, pays 8 percent.

However, the model proposed by the new congressional bill would allow a panel of federal judges to set rates based on the value of the music and the effect the royalty rate would have on the industry as a whole. Pandora believes that standard would produce lower rates for itself — and the music industry agrees, which is why record labels and artists are against the change. They claim the existing rates are fair and the new standard would deprive copyright holders of rightful income. Throughout the music industry, there is a belief that Pandora could become profitable if the Internet radio provider sold more advertising.

But Tim Westergren, Pandora’s founder wrote on the company’s blog, “The anti-Internet bias in federal law is nothing short of absurd.”

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