Federal board raises key rate for music streaming services

by David McCabe - 12/16/15 6:41 PM ET

A small federal board raised the rates that Pandora and similar services pay to license music for many customers Wednesday, potentially increasing costs for the music streaming service but still falling short of the rate suggested by the music industry.

The three-judge Copyright Royalty Board, which is part of the Library of Congress, said that next year, non-subscription webcasting services like Pandora’s free option will pay 17 cents in fees for every 100 songs it plays. The rate is an increase from the 14 cents per 100 songs that the company currently pays for non-subscriber streams.

{mosads}Pandora had asked the board to lower the rate to 11 cents per 100 plays for non-subscribers. But the new rate is lower than the 25 cents per 100 plays requested by SoundExchange, the group representing the music industry.

The board also ruled that Pandora and other services pay 22 cents per 100 songs played for users who buy into their subscription services, a decrease from the current rate.

The vast majority of listeners use the service’s free tier that will be subject to the increased rate, according to the company, rather than the ad-free subscription service.

The rates for the four years following 2016 are subject to change based on shifts in the Consumer Price Index.

The reasoning of the three judges who determined the rates is not yet public. Both Pandora and SoundExchange can appeal the ruling.

Pandora had a lot riding on the proceeding. The company has struggled to turn a profit, and more than a third of its revenue is spent on licensing fees.

It is facing competition from Spotify and other streaming services that allow their users to choose what they want to play at any moment. Pandora, on the other hand, generates “stations” that are filled with songs the service predicts the user will like.

Services like Spotify negotiate directly with record labels to determine the licensing fees they pay for streaming. It remains to be seen whether the rates set by the board will influence negotiations between on-demand streaming services.

Pandora recently bought struggling service Rdio in what is seen as a play into Spotify’s territory. It also recently bought TicketFly, which it says will make it easier to connect listeners with live performances of their favorite bands.

Pandora’s stock price fluctuated widely after the release of the rates — ultimately rising significantly around 6:00 p.m.

“This is a balanced rate that we can work with and grow from,” Pandora CEO Brian McAndrews said in a statement. “The new rate structure will enable continued investment by Pandora to drive forward a thriving and vibrant future for music.”

SoundExchange on Wednesday night signaled it was displeased with the rates.

“We believe the rates set by the CRB do not reflect a market price for music and will erode the value of music in our economy,” the group said in a statement. “We will review the decision closely and consider all of our options.”

The last time the board set rates for webcasters, Pandora said they were too high for them to pay as a small service, and rallied its customer base to protest the decision.

Congress ultimately stepped in and pushed for a settlement that would provide smaller webcasters with a lower rate. Services that were not a part of the settlement will see their rate for non-subscribers fall as a result of the board’s decision.

—Updated at 7:12 p.m.

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