Whose Fingerprints are on IRFA? Is Pandora the Stalking Horse for Someone Else?

It’s a little inside baseball, but think about this: What took Spotify so long to get licenses to launch in the U.S.?  Particularly compared to Pandora who had a big negotiation about rates a few years ago, but did not have to negotiate licenses?

One reason is that Pandora gets the benefit of the compulsory license–meaning that the U.S. government compels artists and other copyright owners to accept a statutory deal passed by Congress.  So the artists can’t negotiate their ability to decline the license the way they can with a direct license that is not compulsory.  There’s no opt out and no opt in.  Artists can be part of the bargaining unit that negotiates rates, but they cannot say no.

“Direct licenses,” i.e., a voluntary license that is negotiated directly with the rights owner (and therefore is not compulsory) apply to interactive services, also called “on demand” services.  These services are like Spotify’s main streaming services (or Apple’s iTunes Music Store for downloads) where you decide what you want to hear and play it one at a time.  These licenses are negotiated with the sound recording copyright owner, so the royalties are paid to the sound recording owner and are accounted for under the artist contract–meaning, earnings are applied against unrecouped balances, unlike SoundExchange where artists get paid directly without regard to recoupment.

Confusing, I know–under the compulsory license Pandora pays SoundExchange and SoundExchange pays artists directly, but under the direct license Clear Channel (for example) pays the label directly and not the artist.  The compulsory license does not allow you to choose which tracks you want to hear, but you can get pretty close with Pandora’s music genome.   (Fair’s fair, the music genome is a great piece of technology.)

This is why it took Spotify a while to get launched in the US.  Spotify’s main service is “on demand” requiring a direct license.  Pandora’s is “noninteractive” or the mouthful “non on demand” so Pandora does not require a direct license.

This is a huge benefit to Pandora, and is reflected in their royalty rates.  In fact, Pandora highlights the benefit in their IPO documents (Form S-1 registered with the Securities and Exchange Commission) at page 16:

There is no guarantee that we will continue to be eligible to operate under these statutory licenses. For example, if a court were to determine that we operate an interactive streaming service or make reproductions of sound recordings outside the statutory license, we would have to negotiate license agreements with sound recording copyright owners individually, a time consuming and expensive undertaking that would jeopardize our ability to stream all music currently in our library and could result in royalty costs that are prohibitively expensive. In addition, if copyright owners object to the functionality or transmission methods of our service, we could lose our eligibility to operate under the statutory licenses.

So it looks like Pandora told its investors that it had no intention of going for direct licenses, which makes total sense.

However–the Internet Radio Fairness Act–the bill that Pandora is lobbying vigorously for and on which Tim Westergren is staking his credibility–has significant sections in it that don’t affect Pandora at all because these sections deal with direct licensing.  Direct licensing that Pandora told its stockholders would be bad for Pandora.

It also seems unlikely that the nasty and unduly aggressive way that Pandora is handling the public messaging on the IRFA is designed to result in favorable terms for direct licenses.

What’s more likely is that there is an unseen hand at work in the background.  This could explain the support of the Clear Channel, the National Association of Broadcasters and monopsonist Sirius Radio. (The Radio and Internet Newsletter (RAIN) reports that the NAB, as well as broadcast titans Salem and Clear Channel, all support the bill.)

Both Sirius and Clear Channel have been engaged in a process of negotiation of direct licensing for their respective services.  But strangely–or maybe not so strangely–they are all letting Tim Westergren be the public face of the IRFA.

Because–it certainly is easier to explain as “the little webcaster that could” pushing its way up the hill of innovation rather than the irony of the monopolists Sirius and Clear Channel trying to sneak a bill through Congress that would allow them to threaten antitrust violations against anyone who opposed them.  Using the very antitrust law that should be used against Sirius and Clear Channel rather than by them.

That’s a much more plausible explanation–as the Church Lady might say, “Could it be….Clear Channel?”