Pandora’s purchase of a South Dakota radio station this week angered the music industry, which viewed the move as an attempt to pay lower fees to songwriters and composers who craft the music that the Internet radio service streams over the Web.

The radio buy has only turned up the heat on the music industry’s simmering battle with Pandora over royalty fees. The two main sides of the music industry—songwriters and composers on one end, and music labels and recording artists on the other—have argued in recent months that the Internet radio service is trying to lower the fees it pays to compensate artists and songwriters for streaming their music over the Web.

{mosads}The Oakland, Calif.-based company said it made the unprecedented move of purchasing a traditional over-the-air FM station, in large part, because of the “discriminatory treatment” it faced from the American Society of Composers, Authors and Publishers (ASCAP), a performing rights organization that represents songwriters and composers.

In particular, Pandora said the purchase would help them qualify for the same licensing terms with ASCAP as other Internet radio competitors, namely Clear Channel-owned iHeartRadio. ASCAP licenses access to the song catalogs of songwriters and composers, which are owned by major music publishers.

“ASCAP refused to provide Pandora a license under the same terms as the iHeartRadio service, for only one reason: iHeartRadio is owned by a terrestrial broadcaster,” Christopher Harrison, Pandora’s assistant general counsel, wrote in an op-ed published in The Hill this week.

Traditional radio broadcasters like Clear Channel have a blanket license that lets them play any music from ASCAP’s song catalog, unlike Pandora. For example, Pandora had to negotiate a licensing agreement directly with music publisher Sony/ATV when it withdrew its media rights out of ASCAP. As a result of the negotiations, Pandora had to pay higher fees to Sony/ATV to stream the music in its song catalog.

“Shortly thereafter, additional major publishers took steps to withdraw their catalogs from ASCAP, again with respect to Pandora,” Harrison added, a move that opens the door for the Internet radio station to pay higher royalty rates than they currently do for streaming the songs written by songwriters and composers on their service.

These publishers’ withdrawals from ASCAP also open Pandora up to paying significant damages for copyright infringement, since it needs to have the license to legally play songwriters’ music on its service, Harrison said. Pandora also filed a motion this week against ASCAP in a rate proceeding court for engaging in “discriminatory treatment” against Internet radio services and alleging that it had violated the terms of its consent decree.

ASCAP and others in the music industry, however, viewed Pandora’s move as a declaration of war on songwriters and composers, calling it a brazen attempt to pay creators less money for their work.

“Songwriters and composers are struggling in the digital economy to be paid fairly for their creative work,” said ASCAP President Paul Williams in a statement. “Pandora is trying every trick in the book to brazenly and unconscionably underpay and take advantage of the creative labor that produces the core offering of their business—music written by individual songwriters and composers.”

Just a few days after Pandora purchased the radio station, performing rights organization Broadcast Music, Inc. (BMI) filed suit against Pandora for attempting to pay lower licensing fees for its song catalog than it previously has. In its complaint, BMI asks the court to “set reasonable, market driven fees for Pandora,” saying negotiations did not result in an agreement.

BMI slammed Pandora’s purchase of the South Dakota radio station in its complaint to the court.

“Pandora’s stunt makes a mockery of performing rights licenses and the rate court process. The BMI Radio Station License governs terrestrial radio station broadcasts,” the complaint reads. “It does not cover performances by a primarily internet-based music streaming service that happens to own a single radio station in a city with a total population that is less than .0045 [percent] Pandora’s online membership.”

The National Association of Music Publishers (NMPA) has argued that songwriters are frustrated with Pandora because roughly four percent of the company’s revenue goes towards compensating them for their music, while over half of its revenue is allocated to paying recording labels and artists. The trade group contends Pandora underpays songwriters relative to the fees it pays to compensate artists and labels for the sound recordings of their songs.

Pandora argues that it just wants to compete on a level playing field with other digital radio services.

Songwriters weren’t the only ones upset with the radio buy. Organizations that represent music labels, recording artists and other entities in the music industry spoke out against Pandora ‘s purchase and sided with songwriters.

“While others negotiate with music creators as partners, Pandora has committed itself to a war on all fronts,” musicFIRST, which represents musicians and artists in the recording industry, said in a blog post.

Jonathan Lamy, a spokesman for the Recording Industry Association of America, called Pandora’s strategy “baffling” and said the company should focus its efforts on better monetizing its services.

“It’s further galvanizing the entire music community, which can’t help its cause with policymakers,” Lamy said in an email.

Separate from its battles with songwriters in the courts, Pandora has been pressing for legislation in Congress that would modify the royalty-setting rules for Internet stations.

Last fall, Pandora lobbied for the Internet Radio Fairness Act sponsored by Rep. Jason Chaffetz (R-Utah) and Sen. Ron Wyden (D-Ore.) that would have placed Internet radio stations on the same royalty-setting standard as cable and satellite radio services, like SiriusXM, which have traditionally paid lower royalty fees than Internet radio stations.

Pandora believes this change may lower the royalty fees it pays to recording artists and music labels so they’re level with the rates paid by other digital radio services.

The legislation is expected to be re-introduced sometime this year.

At an event in Washington this past fall, Pandora founder Tim Westergren said Pandora’s listener base has continued to rise, but the now-publicly traded company has struggled to maintain profitability. The more listeners Pandora gains, the more royalty checks it has to write out to labels and artists.
 
“It’s kind of a Jekyll-and-Hyde business. On the growth side, it’s been a wonderful story,” Westergren said. “Profitability is a different story for us. … We’re really struggling to make that happen.”

Critics of the IRFA, such as musicFIRST, have said that Pandora is more interested in its bottom line than fairly compensating artists, and they view the bill as a money grab.

Westergren, however, said Pandora is simply “asking for a standard parity.”