Pandora's 40-Hour Box

Companies that used licensed music need to figure out how they're going to pay for the use of it, and different companies have worked out different ways of doing it.

MediaMemo reported that Pandora has hit upon a new strategy:

Web radio darling Pandora has good news for its users: We’re saved! And a slightly different message for its heaviest users: Pay up.

Both messages are a result of long and tortured negotiations with record labels that have finally come to a close with a deal Pandora says it can live with, though it’s different than the one founder Tim Westergren said the site had nailed down in November. The flip side is that the service will now require users who listen to the service for 40 hours a month to pay 99 cents if they want to hear any more tunes that month.

The New York Times reported on the specifics of the deal with Pandora, and other services:

Webcasters with significant advertising revenue, like Pandora or Slacker, will pay the greater of 25 percent of revenue or a fee each time a listener hears a song, starting at .08 cent for songs streamed in 2006 and increasing to .14 cent in 2015. Pandora had $19 million in revenue last year and expects that to rise to $40 million this year.

Small sites with less than $1.25 million in revenue, like AccuRadio, Digitally Imported and RadioIO, will pay 12 to 14 percent of it in royalties. All stations will be required to pay an annual minimum fee of $25,000, which they can apply to their royalty payments.

That $25,000 minimum bugs Duncan Riley of the Inquisitr, who believes that this will establish a non-innovative online radio industry:

$25,000 may not sound a lot for bigger online radio stations, or similar services such as Pandora, but for the small indie online radio market, it will be a killer because many would be fortunate enough to make $25,000 a year to begin with, but even if they did make more, $25,000 out of a profit of $30,000 or even $50,000 (profit before the royalty payment) is a massive burden.

Existing players aside, the imposition is even greater on new internet radio stations. Innovation often comes from below, and new stations (not unlike blogs) take time to establish an audience, and even longer to earn money.

Riley went on to argue that online radio stations still get a raw deal, something that BusinessWeek also noted:

In its heyday, broadcast radio was the only game in town to connect an artist with listeners. As a result, radio stations didn't compensate artists, since it was believed that radio exposure lead to increased album sales for the performers.

That premise has been basically true over the course of radio's history, but now that new forms of radio are developing, traditional radio is on the decline. But still the old business model persists. Now, a movement called musicFIRST is trying to change that model, but their success is still in doubt.