Blurred Lines–Pandora Litigation Shines Light on IP in the Age of the Internet

When you hear a song on the radio or see one sung on TV, you are seeing the results of someone’s intellectual property (IP), no question there.  The author(s) are paid royalties. For years, ASCAP and BMI have been the clearinghouses for the license fees radio stations paid for “plays.”  But the Internet is changing all that–first in the 2000s when A&M Records sued Napster against their free file-sharing and now with online radio streaming devices like Pandora and Spotify.

The losers in this litigation may be the middlemen, people MicroStrategy CEO Michael Saylor says are at greatest risk from smartphones and the Internet of Things.

The disruptive technology at hand is the streaming capability of Internet radio services such as Pandora to stream upwards of over 14 billion hours of music over the course of the year.

The rub comes from the fact that royalty fees negotiated with terrestrial radio were based on the fact that a song played went out to potentially thousands of users and therefore potentially thousands of CD buyers.  By contrast, a single play or “spin” of a song on Pandora reaches just a single user.  Add to that the fact that the increased availability of online streaming has reduced the consumer appeal of retail products like CDs and you have a new winner (Pandora) and a new loser (the songwriter or publisher) in the Internet radio era.  The upshot is that the songwriters want higher royalties from the online streamers.

Five writers complained in 2012 to a congressional committee hearing on music licensing that hits by stars like Beyonce and Christina Aguilera showed that 33 million plays of their songs on Pandora yielded just $587.309 while record companies are raking it in.  Pandora paid $313 million to record companies but only $26 million to music publishers.

Why is that?  First of all, because the fee structures are different for songwriters and record companies.  As a result, music publishers think ASCAP and BMI are not fighting hard enough for their royalty fees.  And second, music publishers want to therefore negotiate directly with the Internet radio services, like Pandora. 

The litigation underway now is very confusing and difficult to follow (at least for me), but the gist seems to be that online streaming is changing the way we listen to and pay for music with huge consequences for the artists, the songwriters, the publishing rights organizations such as ASCAP and BMI, that serve as the industry’s royalties infrastructure as well as terrestrial radio itself.  The Internet and smartphone continue to reconfigure traditional business models as Saylor and others predicted they would.

Stay tuned (or not).

Here’s a NY Times article by Ben Sesario on the most recent litigation:

http://www.nytimes.com/2014/02/14/business/media/pandora-suit-may-upend-century-old-royalty-plan.html

A clearer and more contextual picture of the issue and its relevance is offered by Pierce Greenberg of the Nashville City Paper: http://nashvillecitypaper.com/content/city-news/what-will-latest-music-legal-battle-bmi-v-pandora-mean-music-row

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