Pandora Ordered to Pay Labels Higher Royalty Rate

The recording industry’s payments from Pandora, the Internet’s biggest streaming music service, are set to climb on a per-stream basis for the next five years

Pandora's app on an iPhone
Joan E. Solsman

Top internet radio company Pandora will face a greater burden on to its already hefty royalty costs over the next five years, after a government licensing board Wednesday raised per-stream rates through 2020.

The ruling has the potential to significantly affect how much money the recording industry makes from streaming, which is on track to become its primary business this year or next, based on sales reported by the Recording Industry Association of America. Pandora, as the biggest streaming-music service in number of listeners, is a major payer to labels and artists at a time when music fans are gravitating to streamed music instead of individually purchased track downloads or CDs.

Pandora, as a webcaster, differs from subscription rivals like Apple Music and Spotify. Pandora gives listeners less freedom over what songs they hear because Pandora uses a compulsory license created by Congress with royalty rates set by a three-judge government body known as the Copyright Royalty Board.

The board’s ruling Wednesday set those rates for the next five years.

Wednesday, the board said Pandora and webcasters like it are required to pay 17 cents per 100 streams this year, with the rate rising each year based on government measurements of inflation. Pandora’s current rate, set to expire this year, is 14 cents for every 100 streams of a song. The webcaster had asked the board to lower that rate to 11 cents, while SoundExchange — a nonprofit that collects and manages digital royalties for the recording industry — requested a hike to 25 cents.

However, Pandora could circumvent the ruling by sealing direct licensing deals with labels and other rights holders — a strategy it said last month that it would pursue when it purchased the assets of a struggling competitor, Rdio, for $75 million.

Pandora is the biggest streamer of music on the Internet, but its statutory music license crimps its growth. Because the license is applicable only in the US, Pandora hasn’t expanded widely abroad. Its Internet radio is also limited in what it can play: Listeners can never hear exactly the song they want on demand, and they can only skip so many songs every hour.

Those limitations have restrained Pandora, while rivals with direct, worldwide licenses are gaining momentum. Spotify’s 75 million listeners as of June are a stone’s throw from Pandora’s 78 million in September.