Pandora Is in a Rate Class By Itself: The Near Interactive Rate

If you’ve followed the history of Pandora in the webcasting rate setting proceedings, you will remember the extraordinary sanctimony with which they approached artists.  We were told, you have to save our business, you’re too greedy, etc.  Sound familiar?

The one aspect of Pandora’s functionality we were always steered away from was its interactivity.  Why?  Two reasons.

If Pandora were found to be interactive, the Copyright Act would require Pandora to negotiate direct licenses with copyright owners large and small.  That would be a real headache for Pandora compared to the ease of the statutory webcasting license. Imagine the savings in transaction costs conferred on Pandora through the statutory license.  Not to mention the fact that Pandora would have to pay advances, which they don’t have to pay under the statutory license, and Pandora would also probably be faced with some of the same demands that Spotify and YouTube saw with demands for equity from major labels and the Merlin group of labels.  (Although strangely enough, this was never an issue with Apple…gee, would that be?)

The other reason is that artists get paid directly by SoundExchange regardless of whether they are recouped under their record deals.  This is a big damn deal, because it keeps the record companies’ paws off of the artist share of statutory licensing revenue.  SoundExchange fights hard to keep this structure and we should all be grateful for it.  In this way, SoundExchange is very much like ASCAP, BMI and SESAC.

Not only does SoundExchange pay the artist’s share directly to the artists, there are other benefits of collective licensing such as the right to conduct a royalty examination of companies like Pandora that we get from the statutory license as administered by SoundExchange.  In fact, SoundExchange announced it is conducting an “audit” of Pandora right now.  Any recovery under those audits will also get paid to the artists based on their share of the recovery.  (And if you believe Pandora has accounted perfectly to artists and songwriters, surely you jest.)

Yet as David has shown, Pandora is pretty close to being interactive, which would take them out of the statute, but Pandora clearly is not truly interactive, or “on demand” the same way Spotify is.  On the other hand, Pandora is not really a “webcaster” either because of their thumbs–not the thumb of the nose they give to artists and songwriters, but the ones they use to create their “near interactive” service.

So what do do about this?  There is no way on earth that artists should give up their right to be paid through SoundExchange and there’s no reason to encourage direct deals.  Pandora would be more than happy to do more direct deals because those only weaken collective licensing which is at least Chris Harrison’s apparent motivation in life dating back nearly 10 years from his time at DMX.  (Harrison is Pandora’s lawyer who has taken point on destroying collective licensing for ASCAP and BMI songwriters.  See Billboard’s expose on Harrison’s anti-creator shenanigans at DMX, now Mood Music that he brought with him to Pandora.)

On the other hand, it seems to be a historical loophole that sustains the perception of Pandora as a non-interactive service.  It also shows what happens when you cut these Silicon Valley companies a break as we did years ago by looking the other way on the issue of interactivity with Pandora.  Not to mention a very questionable ruling in the Launchcast case that cherry picked law and facts as David has demonstrated.

We think that Pandora should get to keep the statutory license, not be encouraged to do direct deals, but pay more to artists (and to songwriters, for that matter).  This could be accomplished by establishing a “near interactive” tier of royalties for companies like Pandora that purposefully dance around the interactive threshold but don’t cross it, or at least don’t cross it all the time.

A “near interactive” tier is something akin to the “near video on demand” concept in the movie world–something that is almost a functionality requiring a higher royalty but with a nod to the fact that it’s not quite that higher priced thing, or isn’t quite yet.

Because if there is one thing we have learned from Silicon Valley companies it is that as soon as they give their word in an agreement they start backsliding to find a way around it while they pretend not to be doing that exact thing.  This is what you call the “near asshole” tier.

Pandora will no doubt bitch about this idea and will also no doubt spend more money on legal fees and lobbyists than it would ever cost them if they just paid the damn royalty–just like they’re doing on pre-72.  But as David’s research has shown, it’s clearly the right way to go.  A “near interactive” tier lets us avoid direct licensing like the plague, support collective licensing through SoundExchange as our best defense against efforts like the McCoalition, audit all these services early and often, and make Pandora pay for the real value we confer on them.

And then we can talk about the use of artists names to build channels–a practice their business is built on that is totally uncompensated.