Why this week could cost (or gain) the record business a billion dollars

The US Copyright Royalty Board is set to decide the new webcasting rates this week – a moment which will cost Pandora, or the music business, hundreds of millions of dollars.

To understand why, we need to worth through some rather bamboozling maths. MBW will do our best.

But first, the background: unlike the world of publishing, the rates paid by digital ‘radio’ services to labels in the US are set by the Copyright Royalty Board, made up of three judges.

For the past year, they have been hearing evidence from both sides of this debate: the record labels and their rep/collection society SoundExchange, and the broadcasters, including Pandora and IHeartRadio. (SoundExchange also represents artists, of course.)

Their decision, due any day, will set in stone the per-stream rate paid by these services to recorded music rightsholders.

The most important party here for the music business is Pandora.

The current rate paid by the service to labels and artists is $0.0014 per ad-funded (free) stream – up from $0.0013 in 2014.

Pandora told the CRB last year that it wants to bring down this rate to $0.0011 per stream.

However, SoundExchange wants to almost double it to $0.0025.

There are a lot of decimals involved here, so bear with us, but it all adds up to big money – and a big decision – for the music business.

Pandora has never revealed the total number of streams happening on its service, but we can reverse engineer a good guess.

In FY 2014, the firm paid out $446.4m to music business rightsholders, according to its SEC filings. (From a total cost of sales of $508m.)

Pandora gives 4% of its total revenue to ASCAP and BMI each year, which amounted to $38.6m in 2014. (That’s from Pandora’s total income of $920.8m – you can see why songwriters are up in arms…)

Take one from the other, and we’re roughly left with what Pandora paid to labels in 2014: $407.8m.

Divide that by Pandora’s 2014 pre-stream rate of $0.0013, and we get 313,692,307,692 – or 313.7 billion annual streams.

(This doesn’t take into account Pandora’s premium tier, Pandora One, which pays out a slightly higher per-stream rate yet is only engaged by a small number of its 78m users – so the following should be taken as an approximate estimation.)

Now the more interesting bit. What will the CRB decide this week?

If they go with Pandora’s proposal, it will cost the record industry $0.0003 per stream.

Doesn’t sound like a lot, right?

But over those 313.7 billion streams… you’re talking an annual loss for recorded music rightsholders of $94.1m at current consumption levels.

Don’t forget, the CRB is setting a rate from 2016-2020. Five years. That would mean a total loss (or gain, from Pandora’s POV) of $470.5m from 2016-2020.

But wait… what if the CRB swings heavily to the record industry’s argument and gives SoundExchange exactly what it wants?

Brace yourself.

SoundExchange’s proposal would see record companies get $0.0011 more per stream than the current $0.0014 pay out from Pandora.

Across the current estimated rate of consumption – 313.7bn streams a year – that would equate to an annual extra windfall to recorded music rightsholders of $345.1m.

Over five years? A grand total of $1.73bn.

Now that’s what we call a Christmas bonus.Music Business Worldwide

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