Royalties cost Pandora big bucks


PandoraThe annual 10-K which Pandora Media just filed with the SEC contains lots of the usual boiler plate about its business and the risks associated with it. But when it comes to the royalties that Pandora must pay for the music it streams, those risks are real.

The filing notes that copyright royalty payments for the fiscal year ended January 31, 2012 took 49.7% of the company’s total revenues for the 12 month period. About 4.1% went to ASCAP, BMI and SESAC, with the other 45.6% going to the record labels and artists in performance royalties, via SoundExchange.

Pandora would actually be paying much greater performance royalties if the rates set by the Copyright Royalty Board (CRB) were allowed to stand. Instead, the Webcaster Settlement Acts passed by Congress allowed online music companies such as Pandora to negotiate lower rates with SoundScan. Instead of the rate set by CRB for calendar 2011 of $0.00190 per song Pandora paid $0.00102 per song. In 2012 Pandora is paying $0.00110 versus the CRB rate of $0.00210. The current deal, with annual escalations, goes through 2015, when Pandora will be paying $0.00140 instead of the CRB rate of $0.00230.

What happens after 2015?

“We do not know what rates will be available to us following that period and there is no guarantee that the royalty structure that emerged from the negotiations with SoundExchange pursuant to the Webcaster Settlement Acts will be available after 2015. The CRB, which still has rate-making authority over us upon expiration of our agreement with SoundExchange, has consistently established royalty rates that would, if paid by us, consume an unsustainable percentage of our revenue. If we are unable to reach a new agreement with SoundExchange for the period after 2015, our operating costs may significantly increase, which could harm our financial condition and inhibit the implementation of our business plan,” Pandora told the SEC.

Yes, if it weren’t for Congress stepping in after the CRB gave the record labels the rates they wanted and ignored all of the data filed by everyone else, Pandora would be paying out well over 90% of its revenues in music royalties. That is, if the company were continuing to be in business, which would not be likely.

RBR-TVBR observation: Can you imagine an AM or FM station having to pay 49.7% of its revenues in music royalties? We recall a few years back that some American companies which invested in UK radio bailed out because the music royalties were so exorbitant that they couldn’t make a profit. Those exorbitant royalties were around 15%. It’s no wonder that Pandora can’t turn a profit, much less afford to produce any original content.

RBR-TVBR has more on how success in attracting users is making it tougher for Pandora to reach profitability. Click here to read this exclusive content in the RBR-TVBR Media Information Bureau.

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  1. Pandora gets a sweetheart deal from the CRB that’s 47.6% less than over-the-air broadcasters – and even that reduced rate is choking their business. Why is the Radio Industry just sitting there taking it? It’s time for Congress to take CRB to the woodshed for a good lesson in basic fairness!

  2. The music industry will never learn. In the last year I bought 97 singles from itunes based on music I heard on Pandora. The music industry should be paying Pandora.

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