Mr. Pandora Goes to K Street: It’s all about the lobbying bucks

Digital Music News has an interesting story about the op-ed by Ray Hair, president of the American Federation of Musicians, calling out Tim Westergren’s latest lobbying trip to Washington (this week).  For the benefit of the Valley Boys, the AFM is a union, you remember those?  Those are the things you don’t have in Silicon Valley.  Unions do this thing called collective bargaining–and no, that’s not VCs setting a valuation.

Here’s the money quote (so to speak) from Tim:

“The current system for establishing royalty rates is astonishingly unfair. Fairness demands that all music related rate settings utilize the same 801(b) standard.”

Ah, I see.  “Fairness demands”.  Love how they switch into the passive voice when they don’t want you to know who is actually doing the demanding.  Could it be….Wall Street?

So what Tim is really saying is that “fairness demands” that Pandora make more money.  And the quickest way to do that is to cut its royalty obligations.  Of course–Pandora could come up with an innovative business model and actually make more money.

And maybe that is exactly the rub.  If you take Sirius XM as an example, Mel Karmazin’s recent interview with Jim Kramer on Mad Money tells the tale.  In its darkest hours a few years ago, Sirius came to the artists and asked for a rate reduction–a 50% rate reduction which they got.

Now–just a few years later–Karmazin expects to be sitting on over $1 billion in cash by the end of this year.

MEL KARMAZIN: Free cash flow is what enables you to buy back your stock, make acquisitions, pay down debt. And I believe free cash flow is an important metric. Our free cash flow now, is growing– it’s extraordinary. Before the merger we had negative free cash flow of $500 million. Negative free cash flow. This year we will have $700 million of free cash flow. We haven’t given guidance for next year. Analysts have us at a billion of free cash flow and continuing to grow. So it’s a great start.

Kramer asked him what he would do with it.  And of course, the top of the list was a bonus payment to the artists who cooperated with Sirius to help it through the bad times.

Actually–not.

Acquisitions, paying down debt, stock buy back, dividends.  All those were mentioned.

Nothing for the artists.

So while Pandora may not be “profitable” now, I’m sure that was no more a concern for Pandora’s IPO underwriters than it has ever been for any other Internet company, including Facebook and Zynga.  The point is that Mr. Pandora is going to K Street now because these are 5 year deals on rates and the current one expires in 2015.

And Pandora anticipates being profitable sometime between now and 2020.

So they will–of course–be standing in line right behind Mel Karmazin to bonus the artists who invested in their company in the bad times, right?

Fairness demands no less.