After Abandoning IRFA, Will Pandora Join the Fight Against Brand Sponsored Piracy?

Pandora has apparently abandoned its truly misguided lobbying efforts that decimated its stock price and undid years of PR campaigns to create the illusion–as it turned out–that Pandora was on the side of artists and songwriters.  According to Glenn Peoples writing in Billboard (see Pandora Stands Down on Legislative Push for Royalty Rate Reform: TKO or Split Decision for Recording Industry?):

Instead of pursuing legislation, Pandora will focus its efforts on lobby­ing the Copyright Royalty Board (CRB), the three-judge panel that sets statutory rates for webcasters like Pandora. The current rates run through 2015. Pandora believes there’s reason for confidence. “There are different members on the board than the last time around, and we like our odds better now,” the source says.  [That statement is more important than it would seem–recall that an often-overlooked section of the ill-fated Internet Radio Fairness Act would have fired all the current royalty judges, packed that court and mandated in Pandora’s favor the precedent that the court could apply.]

Pandora didn’t comment on the company’s specific strategy for addressing royalties. “Pandora will focus on other paths to resolution,” a representative says. One path could be direct deals with labels, which Apple has secured for iTunes Radio. “Direct deals are not something that we’re allergic to,” Pandora founder/chief strategy officer Tim Westergren told investors in September.

Legislation to change webcasting royalties is dead without ­Pandora’s support.

Let’s be clear–while Pandora may abandon its lobbying efforts at shortchanging recording artists through legislation, the company is still trying to jam lower rates down the throats of songwriters for songs in the same recordings in Pandora’s ASCAP and BMI rate court proceedings.  Pandora “won” its case against songwriters in the ASCAP rate court and is about to proceed to the rate negotiation against songwriters on December 4.

Glenn Peoples also made a key observation about Pandora’s most recent earnings report:

Thursday’s earnings release included two indications Pandora’s business model is on the right track. First, mobile advertising improved 58% to $104.9 million. Like Facebook and Twitter, Pandora’s success depends on its ability to monetize use of its mobile apps. Its advertising RPMs, or revenue per thousand listening hours, on mobile devices have grown to $36.00 in the last quarter from $25.59 a year earlier.

The other sign was a lower royalty burden, as a percent of revenue, from payments to artists and rights holders through SoundExchange. Royalties of $87 million accounted for 48.2% of revenue, the lowest mark since the company went public in 2011 and the first time under 50%. Royalties’ 32.4% year-over-year growth rate was lower than other expense categories and was also lower than the 50.3% increase in revenue.

So if Pandora increases their revenue, royalties as a percentage of revenue declines.  Pandora frequently complained of how much they paid in royalties as a percentage of revenue, and wanted to increase their own take home pay by reducing artists’ and songwriters’ take home through lobbying.  And are reducing songwriter revenue through litigation that songwriters can ill afford and which I seriously doubt Pandora will drop.  (Although evidence that Pandora’s new management rejects the stunningly bad advice of its lawyers and lobbyists such as withdrawing from the ASCAP and BMI rate court proceedings would be nice.)

What is the one thing that Pandora can do that will both demonstrate its new commitment to artists and songwriters and improve its performance for stockholders?

Join the fight against brand sponsored piracy.  It will cost them a fraction of the legal fees and lobbying fees and may well result in an increase in the company’s revenue.  Why?

Because just as Pandora has evidently realized that they make more money by growing their top line than they ever will by cutting their royalty expense, they could grow their top line further still if they got a fair price for their advertising.  That would mean not letting advertisers get away with buying advertising on the cheap from pirate sites that offer the exact same product as Pandora with no royalty expense at all that has an overall negative effect on the advertising market.

This problem is not unique to Pandora.  Spotify’s Will Page authored a company study with the whimsical title “Adventures in the Netherlands“:

A PRS for Music and Google study has shown that 2/3 of piracy sites have advertising, and 1/3 also include credit card logos. This competition is real: consider how ad-pricing is distorted by those unlicensed sites who offer more scale and no content costs. What’s more, these businesses will evolve to compete with legal services, just as legal services like Spotify have to keep evolving to compete with them. Legal services must stay ahead – because ex-pirates know how to switch back.

The “competition” that Mr. Page refers to is the competition with pirates by companies like Spotify–and Pandora.  The reason there is competition is that major, major brands and the advertising exchanges that serve their advertising do virtually nothing to stop the advertising dollars flowing to pirates.

That means that brands like McDonald’s, American Express, State Farm, United Airlines, Nissan, Chevrolet and many, many more are paying their stockholders money to these criminal enterprises, often associated with real bad guys.  Which sites?  Well, you could start with the top 500 on the Google Transparency Report as did the USC Annenberg School Innovation Lab.

While I’m still quite wary of Pandora’s intentions going forward, I’d be far happier to suspend judgement if the company joined the fight against brands that sponsor piracy.  Aside from helping the artists and songwriters, it would also help Pandora’s own stockholders.