Pandora says it will not enter Canada under proposed ‘per play’ royalty rate

OTTAWA—Pandora Media Inc. will not enter the Canadian market if the Copyright Board approves music royalties on a “per play rate” as proposed by copyright collective Re:Sound, said Joseph Kennedy, president and CEO of the online music company. “We have said explicitly that we will not enter a market on the basis of a per-play rate,” Kennedy said as a witness at a Copyright Board hearing Monday. “There is such a disconnect, as has been demonstrated by the U.S. ... between the per-play rate and the fundamental economics of the business.” The Copyright Board is holding hearings to consider a new Re:Sound proposal, called Tariff 8, to collect royalties from simulcasting, webcasting, and “semi-interactive” webcasting music services in Canada. Semi-interactive services are those in which users can influence or control the music played. Re:Sound has proposed royalties of 30 per cent of gross revenues or 0.22 cents per play of each copyrighted music file in Canada, whichever is greater. Oakland, Calif.-based Pandora operates an online web and mobile streaming radio service in which customers can use a free, advertising-supported version or pay a subscription fee for advertising-free, niche online radio. The company reported earning $240 million US from advertising revenues in its 2012 fiscal year ending Jan. 31, 2012, and $34.4 million US from subscriptions. Subscriptions cost $4 US per month or $36 US per year. Pandora reported that it had more than 100 million users in 2011, most of them non-paying, advertising-supported users, and in June 2012 the company expanded into Australia and New Zealand. Pandora is “prepared to launch quickly” in Canada if the royalty rate issue is resolved, according to a Pandora slide presentation to the Copyright Board Monday. Pandora launched in Canada in 2003, the same year it launched in the United States, according to its website, but withdrew the service from Canada in May 2007 due to uncertainty over royalty rates. The same year, in 2007, the company began geoblocking the service outside the United States due to a failure to reach licensing agreements. The company reported a net annual loss of $16.1 million US in fiscal 2012, partly as a result of royalty payments to U.S. copyright collective SoundExchange, Kennedy said. He said online music service royalty rates paid to SoundExchange are out of line with those paid by other radio services. “We continue to see losses primarily because of the extraordinarily high rates that we have to pay SoundExchange in the United States,” Kennedy said. According to the Pandora slide presentation, the company's music royalty expenses in the 2012 fiscal year amounted to 50 per cent of its revenues. Those payments were 65 per cent of its revenues for the first quarter of fiscal 2013 and 55 per cent of revenues for the second quarter. Pandora's 2013 fiscal year ends Jan. 31, 2013. “We paid $136 million to SoundExchange in the last fiscal year,” Kennedy said, adding that, partly as a consequence of high royalty rates, the company has an accumulated deficit of more than $127 million US. The U.S. Copyright Royalty Board published a set of high rates for online radio in 2007, Kennedy said, but due in part to an intervention from Congress, those rates were renegotiated. The rates are still "extraordinarily high," he said. When Pandora entered the Canadian market, it was originally told that no collective license was available for its service, and once a rate was offered, it was “equal to or even higher than the U.S. rate,” Pandora's slide presentation said. “We would love to have a service in Canada and it was very painful for us to start blocking it,” Kennedy said. “All subsequent discussions have been at or above the U.S. rate.” Pandora and the Canadian Association of Broadcasters argue that the Copyright Board should look at a revenue percentage model as used in the Society of Composers, Authors and Music Publishers of Canada's (SOCAN) Tariff 22 for online music. Kennedy said some of Pandora's costs involve its Music Genome Project, which has analysed more than one million songs for specific musical characteristics so that the service's users can turn on computer-programmed, niche radio stations based on their tastes or songs they like. Geoblocking of online music content from Pandora or Swedish company Spotify AB has pushed consumers to turn to IP-blocking “virtual private network” services to access music and video content outside their home jurisdictions. Several online music services are available in Canada from CBC/Radio-Canada, Rdio, AOL Inc., Quebecor Media Inc., Research in Motion Ltd., and others. Ian MacKay, president of the Re:Sound copyright collective, told the Copyright Board last week that its tariff proposal is necessary to support the music industry as music consumption turns to online services. The tariff will offset online music businesses' inevitable cannibalization of CD and download sales, he said. “There is no question that experience and that ability to customize and have portability is leading to consumers choosing to stream their music rather than download or buy it in other ways. As streaming gets more and more popular, it's going to inevitably have a substitution effect for sales of CDs and downloads and cannibalize those other forms of core music consumption,” MacKay said. Kennedy declined a request for comment, saying the matter is before the Copyright Board. sdoyle@thewirereport.ca

Pandora says it will not enter Canada under proposed ‘per play’ royalty rate

Broadcast | October 1, 2012

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