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For Pandora, Plenty Of Royalty Rumbles Still


Ahead
By Bill Donahue

Law360, New York (May 07, 2015, 9:48 PM ET) -- Pandora Media Inc.'s courtroom
victory Wednesday was important, but the world's largest Internet radio service
isn't out of the woods just yet: It's still facing several major unresolved issues that
could significantly increase how much the company pays for content.
In the simplest terms, the ruling at the Second Circuit said that the major
publishers weren't allowed to broker direct licensing agreements with Pandora while
still using massive blanket licenses to deal with everyone else. Those big licenses,
managed by the American Society of Composers, Authors and Publishers, are
take-it-or-leave-it, the appeals court wrote.
That's a big deal for Pandora, and it's not hard to explain why: Publishers have
been able to extract far higher royalty rates from the webcaster in direct deals than
through ASCAP and the strict system of antitrust oversight that governs it. A few
years back, when Sony/ATV Music Publishing claimed it was allowed to make such a
partial withdrawal, it was able to win an immediate 25 percent increase in the
royalty rates.
The appeals court also affirmed that Pandora should pay a royalty rate of 1.85
percent of its yearly revenue for the period between 2011 and 2015 a bit higher
than the 1.7 percent that Pandora wanted but significantly lower than the
escalating rates the publishers wanted, which would have reached 3 percent by
2016.
All told, a good day for Pandora which has long claimed its content costs are
untenable for a sustainable business and has seldom turned a quarterly profit. But,
with several big challenges left unresolved, it's hardly time for a victory lap.
The Second Circuit's ruling for Pandora really isn't much of a surprise, said Ross
Charap, a partner at Akerman LLP and a longtime in-house counsel at ASCAP. "The
problem is figuring out what's going to follow it.
Changes to the Consent Decrees
For starters, ASCAP and the publishers are actively lobbying the federal
government to change the rules that formed the basis of the Second Circuit's
decision Wednesday and it seems the government might be listening.
Remember, the ruling Wednesday didn't say that publishers couldn't strike direct
deals with Pandora, but rather that they weren't allowed to do so under a decadesold antitrust consent decree that governs how ASCAP operates. The decree, which
is designed to prevent ASCAP from exercising its monopoly power to harm
particular licensees, couldn't possibly allow publishers to selectively withdraw rights

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from certain companies, the appeals court said.
The current iteration of the consent decree, that is.
Announced last summer, the U.S. Department of Justice is nearly a year into an
investigation into whether to make major changes to the consent decree, including
allowing publishers to make the so-called partial withdrawals that the Second
Circuit shot down. Pandora and others have urged the agency to maintain the
current system, but recent media reports indicate the agency is leaning toward
making the switch the publishers want.
What the music industry would like the DOJ to do is in effect overturn what we
just heard from the Second Circuit and say that publishers should have much more
freedom to negotiate licenses for their catalog, Corey Field, an entertainment
attorney with Ballard Spahr LLP, said.
Higher Rates for Sound Recording Royalties
Even if the DOJ maintains the current system and Pandora avoids having to directly
negotiate with publishers, it could still see a big increase by the end of the year in
royalties it owes to record labels.
After all, the royalty fees being argued over before the Second Circuit those
Pandora pays to songwriters and publishers for the underlying musical composition
pale in comparison to what the company pays to musicians and record labels for
access to the separate sound recording copyright in each song.
To put this in context, Pandora paid 4 percent of its 2014 revenue to publishers and
musicians through ASCAP and similar blanket licenses; it paid 44 percent of its
revenue over the same period to record labels and artists.
The question of exactly how much Pandora will pay for those far-more-expensive
recording copyrights over the next half decade is currently hanging in the balance.
The Copyright Royalty Board, the D.C. panel that sets the rate for Pandora and
other digital music services, is holding hearings on the question over the next few
months, and filings show that the two sides are far apart on an appropriate figure.
SoundExchange, which collects royalties for the labels, is pushing for a higher rate
of $.0025 per stream in 2016, climbing up to $.0029 per stream in 2020. Pandora
wants a far lower rate of $.00110 per stream, rising to $.00118 by 2020.
The board is expected to rule by the end of the year.
New Royalties for Pre-1972 Records
Another big new cost that could be on the horizon for Pandora? Royalties for songs
recorded before 1972.
They're not covered by federal copyright, so companies like Pandora and SiriusXM
hadn't been paying for them. But they are covered by a strange patchwork of
copyright-like state statutes and common law, and musicians and record labels
have sued both companies in courts around the country to force them start
paying up.
The scary part for Pandora is that the companies and the musicians led by 1960s
rock band the Turtles have won every ruling that's come down thus far. Though
paying for pre-1972s was an afterthought for many years, two California judges
and one in New York have said those states' laws requires it.
When it was sued last year, Pandora said that adverse rulings in the pre-1972

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cases might force it to simply pull the songs, leaving the platform without Bob
Dylan, without the Beatles and without countless other classic tracks.
The Wednesday ruling is Pandora Media Inc. v. The American Society of
Composers, Authors and Publishers et al., case number 14-1158, in the U.S. Court
of Appeals for the Second Circuit.
--Editing by Jeremy Barker and Chris Yates.
All Content 2003-2015, Portfolio Media, Inc.

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