By Jennifer Martinez - 09/27/12 10:00 AM EDT
In its push for changes to the music royalty system, the popular online radio service Pandora is aiming to ride the same wave of Internet activism that sank the Stop Online Piracy Act (SOPA).
Pandora is trying to mobilize its more than 150 million listeners behind the Internet Radio Fairness Act, a bill that would lower the royalty fees paid by online radio stations for playing a song.
The bill — introduced last week by Sen. Ron Wyden (D-Ore.) and Reps. Jason Chaffetz (R-Utah) and Jared Polis (D-Colo.) — proposes putting Internet radio on the same royalty-setting standard as cable and satellite radio providers such as SiriusXM.
Pandora argues the bill would level the playing field among radio platforms and is urging listeners to contact their local representatives about supporting it.
The music industry, however, strongly opposes the legislation and says Pandora is trying to renege on a royalty agreement from 2009 because it is now a public company that has to answer to shareholders about disappointing revenue.
In its lobbying effort, Pandora is mirroring the tactics used by Web companies during the fight against SOPA and another online piracy bill, the Protect IP Act (PIPA). Reddit and Wikipedia blacked out their sites on Jan. 18 to protest SOPA and PIPA, while Google blocked out its iconic logo on the search engine site.
Pandora is using similar tactics to try and generate grassroots pressure on Washington.
Under a banner that reads, "Stop discrimination against Internet radio,” Pandora’s smartphone app is showing ads in between songs that encourage listeners to call their representatives in Congress. The message is tailored to listeners' location and allows them to call their local representative by simply tapping the screen.
The company also has a dedicated webpage in support of the bill that features an online video of its founder, Tim Westergren, urging listeners to ask their representatives to support it. The webpage provides links where people can find the contact information for their senator or representative.
Additionally, the company recently sent out an email message from Westergren to some of its listeners about the royalty issue. Pandora declined to provide additional information about it.
"I think Washington is coming to understand that there's a whole huge world on the Web that's paying attention and ready and willing to get involved, and be communicated with effectively, and that mobilizes," Westergren told The Hill.
He argued that the bill would encourage new Internet radio services to enter the market, including stations that play music from independent artists who don't usually get mainstream radio airtime.
"There's a much larger industry waiting to be born here," Westergren said. "The problem is the rates."
It's not the first time Pandora has tapped its listener base to lobby Congress. When the Copyright Royalty Board decided on new royalty rates for Internet radio in 2007, Westergren urged listeners to contact Congress in a blog post that said the new rates would "kill online radio."
The music industry and Internet radio services settled on a deal in 2009 that set royalty rates for streaming music online. The Copyright Royalty Board resets the rates every five years; the terms of the 2009 settlement are set to expire in 2015.
The negotiations for the new terms are set to begin within the next year.
Pandora is a far bigger force this time around. The company went public in 2011, and its streaming service has mushroomed as smartphones have grown in popularity. Around 54.9 million registered users requested music from Pandora servers in July, and the service accounted for 6.3 percent of all U.S. radio listening in August.
The Internet radio station is playing the traditional Washington power game by hiring K Street firms to build support for the lowered royalty rates. Seth Greenstein from Constantine Cannon registered to lobby for Pandora in August on copyright, patent and trademark issues, according to lobbying disclosure forms.
The company already had TwinLogic Strategies lobbying on its behalf, and has enlisted the D.C.-based public affairs firm Story Partners to help manage its press on the issue.
The Internet Radio Fairness Act proposes to put online radio under the 801(b) standard of the Copyright Act, which is the same standard used by the Copyright Royalty Board when setting royalty rates for cable and satellite radio. Pandora argues that this would stop discrimination against Internet radio services, noting that it paid over 50 percent of its revenues in royalties in 2011. SiriusXM, on the other hand, paid less than 10 percent, according to Pandora.
The music industry counters that the real issue is Pandora’s bottom line, not fairness. The MusicFIRST Coalition, which includes recording artists, musicians and businesses that advocate for performance rights, blasted the bill as a money grab.
“There’s nothing fair about pampering Pandora, with its $1.8 billion market cap, at the expense of music creators,” Ted Kalo, executive director of musicFIRST, said in a statement last week.
Financial analysts say Pandora is struggling to meet its online advertising goals despite a growing base of loyal listeners.
"Pandora aspires to sell one minute of advertising per hour and they haven't been doing that," said Michael Pachter, an analyst at Wedbush Morgan.
Pandora could make more advertising time available on its service to ensure "the percentage of revenues paid out as royalties would be dramatically lower," argued BTIG analyst Richard Greenfield in a recent blog post. Greenfield says Pandora is choosing to offer limited advertising to maintain its growing user base and stay competitive with other over-the-air and digital radio stations.
"So Pandora is effectively asking the government to intervene and reduce its cost structure, helping it remain a viable business because it knows its business model only works while running limited advertising," Greenfield wrote. "Why should the U.S. government allow musicians to be harmed simply to help Pandora and its investors generate enhanced returns?"
But Westergren isn't buying that argument.
"Even if Pandora monetized its service as well as broadcast radio with its 13 minutes of advertising, its glut of advertising, we'd still be paying north of 25 percent of our revenue, which is still multiples higher than our competition," he said.