There’s scarcely a more controversial brand working in music in 2015 than Pandora.
On the one hand, the US-based digital streaming radio station is a huge success story. Since launching in 2005, it has attracted around 200m registered users with 80m active listeners every month.
Its revenue continues to grow every year, and in 2015 it predicts that it will a major milestone, turning over in excess of $1bn.
But to music publishers and songwriters, Pandora has become an occasionally demeaning bête noire.
That’s largely because the platform pays out around 60% of its gross revenues to sound recording owners via SoundExchange, using a per-play rate (which causes enough uproar of its own).
Yet to ‘musical works’ owners – aka publishers and songwriters – it pays out just 4%.
Or to put it another way, a measly $40m of that $1bn in 2015 revenue will be shared amongst publishers and people who write the songs; songs that Pandora is entirely reliant upon to have a workable business.
Pandora pays this cash out via three collection societies: BMI, ASCAP and smaller rival SESAC.
And last month, the rights-holders hit back.
BMI scored a major victory against Pandora in a New York district court, with a judge decreeing that Pandora must up the compensatory money it pays to BMI – and subsequently its members – from 1.75% of gross revenues each year to 2.5%.
Overall, that would equate to a total rise of around $7.5m per year.
It’s not money that’s going to change the world, but it’ll no doubt be welcomed by creators like Rodney Jerkins (aka Darkchild), who’s sick of seeing “embarrassing cheques” come through his door from Pandora for megahits.
(As a producer/songwriter, Pharrell Williams famously received just $2,700 from 43 million plays of megahit Happy from Pandora last year.)
But the biggest revelation of the BMI vs. Pandora court case on May 28 wasn’t the verdict, MBW has learned.
We’ve trawled through the court documents to answer a more pertinent question: Why did the NY court decide to up BMI’s gross revenue percentage?
Because Judge Louis L. Stanton ruled that previous direct licences agreed between leading publishers and Pandora were fair benchmarks.
These days, most publishers – against their will, in a lot of cases – are forced by US law (‘consent decrees’) to negotiate with digital services through BMI, ASCAP and SESAC.
But between March 2012 and July 2014, Pandora entered into seven direct licences with publishers for the digital performance rights of musical compositions that had been withdrawn from the ASCAP and BMI repertories.
Those direct agreements between Pandora and the likes of Sony/ATV, Universal Music Publishing and BMG were never previously public knowledge.
But now, right here, they are.
Sony/ATV: 5.85% BMI-equivalent rate agreed on December 30, 2013
2012/2013
Sony/ATV acquired EMI Music Publishing in late 2011 for $2.2bn, in a deal that was confirmed by anti-trust bodies in 2012.
In October of that year, Sony/ATV began negotiating with Pandora, having notified BMI that it would be withdrawing its Sony/ATV and EMI catalogues from the PRO to take control of its own digital performance deals.
Pandora has already agreed a licence for EMI’s ASCAP works in March 2012, so the direct negotiation effectively took on two halves: a Pandora-EMI licence for songs whose digital rights were previously looked after by BMI, and a Pandora-Sony licence for songs whose digital rights were previously looked after by ASCAP and BMI.
The licence was negotiated by Peter Brodsky, Sony’s Executive Vice President of Business and Legal Affairs, and Robert Rosenbloum, Pandora’s outside counsel.
There was plenty of back-and-forth. In the recent BMI court case, Pandora argued that because Sony/ATV did not provide a list of songs covered by the agreement, it had a ‘gun to its head’ during these negotiations; ie. it did not know which 100% owned Sony/ATV songs that, should a deal not be reached, it could be sued for playing due to copyright infringement.
Regardless, on December 21, 2012, Pandora and Sony entered into a binding term sheet deal, at industry-wide rates of 5% of Pandora’s gross revenue.
Effective January 1, 2013, this agreement equated to 2.25% of revenue adjusted for BMI’s market share of EMI songs and also for the market share of BMI and ASCAP Sony songs.
2013/2014
A year later, negotiations re-commenced, with Pandora once again demanding a list of Sony/ATV (and EMI) repertoire.
On December 9, 2013, Pandora offered Sony a quarterly, flat fee of $500,000 for the right to perform Sony/ATV and EMI music on Pandora.
Sony rejected this offer on December 12, 2013.
Sony counter-offered with a ‘covenant not to sue agreement’, which demanded four chunks of payment: (i) $2.25m in the first and second quarters of 2014; (ii) fees for the third and fourth quarters of 2014 adjusted, on a pro rata basis, to reflect increases in Pandora’s revenue for the most recent quarter, with a floor fee of $2.25 million each quarter.
Eventually, on December 26, 2013, Pandora legal counsel Chris Harrison sent an internal email with the subject line “Publisher Update” to Pandora management. It recommended that Pandora accept Sony’s proposal and pay a first quarter fee of $2.25 million.
On December 30, 2013, Harrison sent Brodsky an executed copy of a new agreement.
The NY court revealed last month that the figures in this agreement for the Sony and EMI catalogs amounted to a BMI-equivalent rate of 5.85% of Pandora’s gross revenue for the 2014 calendar year.
The court didn’t reveal an agreed percentage for the industry-wide rate, but it’s a fair estimate to put it at somewhere close to 10%.
UMPG: 8.5% of gross revenue – 3.83% BMI-equivalent rate – agreed on December 30, 2013
In February 2013, Pandora learned that UMPG was withdrawing its new media licensing rights from ASCAP effective July 1, 2013.
On March 22, 2013, Pandora’s then-CEO, Joseph Kennedy, met with Zach Horowitz, then-chairman and CEO of UMPG, to discuss a direct licence between Pandora and UMPG for the withdrawn ASCAP works.
In the ensuing negotiations, UMPG proposed an industry-wide rate of 8% of gross revenue, which would be pro-rated to reflect UMPG’s share of performances on Pandora.
Pandora requested a list of works affected by withdrawal, which UMPG provided, subject to a Non-Disclosure Agreement (“NDA”).
In a June 13, 2013 email to UMPG, Pandora’s Chris Harrison apologised for a delay in the negotiations, explaining that “we expect the ASCAP rate court to rule on our motion promptly, and we hope, before July. We also expect confirmation of our entitlement to the RMLC- ASCAP licence [because of its purchase of terrestrial radio station KXMZ-FM] before July 1.”
He continued: “In the unlikely event we don’t have a decision on either of these points by July 1, it is our preference to continue to perform works in the UMPG catalog.
“To help facilitate that, we propose accepting UMPG’s 7.5% of revenue offer on a provisional basis starting July 1, 2013, pending the Court’s rulings, with the understanding that if the ASCAP rate court subsequently rules in Pandora’s favor that Pandora will immediately thereafter – and on a retroactive basis back to July 1, 2013 – license the right to works in the UMPG repertory through ASCAP at whatever rate the rate court decides.”
Pandora and UMPG entered into a licence effective July 1, 2013 at an industry-wide rate of 7.5% of gross revenue – or 3.38% for BMI-affiliated songs – for a term of six months.
On November 20, 2013, David Kokakis – UMPG’s SVP, Head Of Business and Legal Affairs, emailed Harrison and proposed a new UMPG-Pandora licence with the following rates and terms:
- (i) 7.5% of Pandora’s UMPG-Adjusted Revenue base for 2015;
- (ii) 8.5% of UMPG’s Adjusted Revenue base for 2015;
- (iii) a Most Favored Nation clause that could increase to 15% the rate of UMPG’s Adjusted Revenue base if specified thresholds related to sound recording fees were met or exceeded;
- and (iv) that the licence would not be contingent on the outcome of any rate court proceeding.
In early December, Pandora ultimately rejected this proposal. Kokakis emailed Pandora on December 18, 2013, writing: “We are disappointed that Pandora has chosen not to engage in any negotiations with respect to our licence proposal and instead has decided to shut down all discussions rather than seek an amicable solution.”
However, all was not lost.
On December 26, 2013, Pandora’s Chris Harrison wrote to Kokakis to revive UMPG’s licensing proposal.
According to Harrison, the revised proposal included the following provisions: (i) a one year term, with a second year at UMPG’s option; (ii) a $5 million guaranteed minimum fee in years one and two, with “true ups” in both years if Pandora’s 2014 and 2015 gross revenue exceededspecific parameters; and (iii) a Most Favored Nation clause in respect of both PROs and publishers.
Harrison then emailed Pandora management later that day, recommending a UMPG agreement based on a “Headline rate of 8.5% (industry-wide) with an effective rate of 4.25% for just UMPG’s BMI repertoire.”
In a subsequent email dated December 27, 2013, Harrison elaborated: “I don’t see 8.5% as setting the rate Pandora is willing to pay to any publisher. Rather, it is a rate we are willing to pay for a major publisher.
“We would not be willing to pay 8.5% for smaller publishers (as evidenced by our refusal to do a deal with the smaller BMG for 10%).”
On December 30, 2013, Pandora entered into a licence agreement with UMPG for the 2014 calendar year, at an industry-wide rate of 8.5% of gross revenue for withdrawn BMI music, at a BMI-adjusted rate of 3.83%.
BMG: $1.15m/$1.9m every six months, paid via fees, agreed on July 28, 2014
During its negotiations with Sony and UMPG, Pandora was also exchanging licensing proposals with BMG.
Keith Hauprich, BMG’s Vice President of Business and Legal Affairs, told Chris Harrison in November, 2013 that BMG was interested in securing a direct licence at a 10% of revenue rate, and if BMG and Pandora were unable to come to terms, Pandora should remove BMG content from its service.
BMG sent its complete repertoire list to Pandora on December 12, 2013.
In his December 26, 2013 “Publisher Update” internal email, Harrison recommended to Pandora executives that Pandora “reject BMG’s proposal of 10% of revenue and take down BMG content.”
Harrison stated, “At this stage I don’t think BMG is ‘worth’ anything more than what we are currently paying BMI, so I wouldn’t want to offer them more than 1.75%.”
Pandora’s executives debated whether they should make a counter-offer at a lower percentage, but Pandora ultimately rejected BMG’s offer and decided to remove BMI works wholly controlled by BMG (i.e., not also licensed to BMI by others) from its service.
On December 27, 2013, Eric Bieschke, Pandora’s Chief Scientist, replied to the “Publisher Update” email and stated that spins solely by BMG were responsible for only 1% of all spins on Pandora – and thus dispensable – while a loss of both BMG and UMPG would be substantial.
Bieschke wrote: Removing BMG only spins will have a small impact on listening. Unless they own the entire catalog by a well known artist on just the BMI half, which we have not seen so far, the impact on listening will be negligible. If however we remove both UMPG and BMG we’re looking at an identified 12% of listening and another unidentified 6%.
That’s 18% of listening, half of which is BMI, or 9% of current listening. I’d expect to see a 1% to 3% drop in total listening hours within 28 days if we go that route.
A take-down of 100% BMG-owned tracks was executed by Pandora on December 30, 2013.
BMG withdrew from BMI on January 1, 2014.
Three months later, on March 31, 2014, BMG and BMI entered into an agreement effective January 1, 2014 suspending BMG’s withdrawal from BMI until December 31, 2014.
On March 20, 2014 – three months after BMG tracks were removed from Pandora – the pair held an in-person meeting at BMG’s offices to initiate discussions for a new licence.
The parties continued negotiations following BMG’s reaffiliation with BMI.
On July 16, 2014, Laurent Hubert, President of BMG North America, sent an email summary of a Pandora and BMG call to Mike Herring, Pandora’s CFO, Simon Fleming-Wood, Chief Marketing Officer, Harrison, and copied Steinthal. Hubert suggested a list of action points, including: Pandora and BMG to discuss ways to increase spins on BMG artists.
Two weeks later, on July 28, 2014, Pandora entered into a two-year flat fee agreement with BMG, which set fees at: (i) $1.15 million, payable on or before July 2014; (ii) $1.15 million, payable on or before January 5, 2015; (iii) $1.9 million, payable on or before July 15, 2015; and (iv) $1.9 million, payable on or before January 15, 2016.
According to the NY courtroom last month, this amounted to an implied equivalent headline rate of 1.81% of Pandora’s gross revenue.
What does all of this mean?
The judge in the BMI/Pandora case ruled that: “The evidence presented at trial shows that BMI’s proposed licence fee of 2.5% of Pandora’s gross revenue is reasonable, and indeed at the low end of the range of fees of recent licences.
“The direct licences between Pandora and Sony and UMPG for the 2014 calendar year are the best benchmarks because they are the most recent indices of competitive market rates.”
Despite no longer being able to partially withdraw their digital rights from BMI and ASCAP, direct deal-making by these major companies in the past has, at least, helped push up the compensatory payments they’re receiving via BMI today.
However, let’s look properly at UMPG: the publisher who, according to the court’s evidence, secured the highest confirmed industry-wide rate for its music direct with Pandora – 8.5%.
(Sony/ATV’s was likely higher, but we only know for sure that it agreed a 5.85% rate for BMI-affiliated repertoire. Again, that could mean an industry-wide rate as high as 10%, but it’s an estimate.)
If Judge Stanton’s statement that Pandora is paying out around 4% of its gross revenue in total to publishers each year (through BMI, ASCAP and SESAC) is accurate, then with an 8.5% rate, UMPG would have secured a 4.5% hike.
To a single publisher and its writers, this isn’t small change: if Pandora turned over a billion dollars this year, that’s the difference between $40m and $85m.
More than double.
The comments of the bosses of the publishers during the period of withdrawal and direct negotiations with Pandora is telling.
Sony CEO Marty Bandier stated at the time: “By withdrawing certain limited categories of digital performance rights from the societies, we believe that Sony/ATV and EMI will be on a level playing field with prospective licensees. This will allow both parties to engage in free market negotiations, while taking into account the value of the songs to be licensed.”
And then-UMPG CEO Zach Horowitz echoed: “With the consent decree constraints that apply to both ASCAP and BMI, in our view it’s especially challenging for either society to achieve market rates in negotiations with digital services . In order to ensure that our songwriters are fairly compensated, we believe the best approach is for us to negotiate directly with these services.”
These companies are now fiercely fighting the US Consent Decrees which have forced them to only negotiate with Pandora through collection societies.
Let’s not forget the email from Pandora legal chief Chris Harrison to UMPG in late 2013, though.
That tells us something about what smaller publishers may face if the majors get their way and withdraw digital rights once again from ASCAP/BMI.
“8.5% is a rate we are willing to pay for a major publisher. We would not be willing to pay 8.5% for smaller publishers.”
An interesting side-note: also revealed in the case was BMI’s up-to-date licence agreements with Pandora competitors:
- The BMI-Apple iTunes Radio licence was signed in 2013 and is set at 2.53% of revenue through 2014 and 2.76% of revenue through 2015. The licence includes a Most Favored Nation clause which was triggered when Apple and the publishers entered into direct licensing agreements at an industry-wide rate of 10% of revenue. Apple agreed to pay BMI the same rate, which is equivalent to a BMI-adjusted rate of 4.6% of revenue.
- The BMI-Spotify licence was signed in 2011 with a fee equal to the greater of either 2.5% of revenue or 6.25% of label costs.
- The BMI-Rdio licence was entered into in 2010 and has a stipulated rate of 2.5% of revenue.
- The Rhapsody-BMI licence was entered into in November 2012 and reflects an early approach that differentiates rates based on user interactivity, which Dr. Pierre Cremieux, BMI’s economic expert, calculated yielded a net blended rate based on Rhapsody’s on-demand and non-interactive services of 2.48%.
Music Business Worldwide
