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Radio webcaster may have to pull the plug

Pandora says a hike in royalty fees is eating away at its revenue.

August 19, 2008|Peter Whoriskey | The Washington Post

OAKLAND — Pandora is one of the nation's most popular Web radio services, with about 1 million listeners daily. Its Music Genome Project allows customers to create stations tailored to their own tastes. It is one of the 10 most popular applications for Apple Inc.'s iPhone and attracts 40,000 new customers a day.

Yet the burgeoning company may be on the verge of collapse, according to its founder, and so may others like it.

"We're approaching a pull-the-plug kind of decision," said Tim Westergren, who founded Oakland-based Pandora. "This is like a last stand for webcasting."

The transformation of words, songs and movies to digital media has provoked a number of high-stakes fights between the owners of copyrighted works and the companies that can now easily distribute those works via the Internet.

The doomsday rhetoric these days around the fledgling medium of Web radio springs from just such tensions.

Last year, an obscure federal panel ordered a doubling of the per-song performance royalty that Web radio stations pay to performers and record companies.

Traditional radio, by contrast, pays no such fee. Satellite radio pays a fee but at a less expensive rate, at least by some measures.

As for Pandora, its royalty fees this year will amount to 70% of its projected revenue of $25 million, Westergren said, a level that could doom it and other Web radio outfits.

Rep. Howard L. Berman (D-Valley Village) has been trying to broker a deal between webcasters and SoundExchange, the organization that represents artists and record companies.

The negotiations could reduce the per-song rate set by the federal panel last year.

The two sides appear to be far apart, however, with Berman frustrated.

"Most of the rate issues have not been resolved," Berman said. "If it doesn't get much more dramatic quickly, I will extricate myself from the process."

"We're losing money as it is," said Westergren, a former acoustic rock musician. "The moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we're doing is wasting money."

The digital reproduction of works in print, audio and video has provoked waves of lawsuits over who should benefit from copyrighted works distributed over the Internet.

Media company Viacom Inc. sued YouTube for running clips. Record companies have sought to punish file sharers. And in radio, the digital transformation has recharged long-standing disputes over how much performers and their record companies ought to be paid when a song gets played.

In contrast to traditional radio, which broadcasts only one song at any given time, Pandora's technology allows listeners to create their own stations, through which hundreds of thousands of songs are played simultaneously.

For example, if a Pandora listener expresses a preference for "Debaser" by the Pixies, Pandora will search its catalog for songs that have similar musical qualities and create a station accordingly.

Soon after its launch, Pandora drew raves and listeners. Revenue at the growing company, which is supported by venture capital investors, was slated to rise above costs for the first time in 2009, Westergren said.

Then came the decision by the Copyright Royalty Board.

"I was on the bus when I get this message on my Treo," Westergren said.

"I thought, 'We're dead.' "

SoundExchange said it supported the higher royalties for Internet radio because musicians deserve a bigger cut of Internet radio profits.

"Our artists and copyright owners deserve to be fairly compensated for the blood and sweat that forms the core product of these businesses," said Mike Huppe, general counsel for SoundExchange.

The Copyright Royalty Board last year decided that the fee to play a music recording on Web radio should step up from eight-hundredths of a cent per song per listener in 2006 to nineteen-hundredths of a cent per song per listener in 2010.

Multiplied by the millions of songs and thousands of listeners Pandora serves, that means the company will have to pay about $17 million this year, Westergren said.

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