In August, Pandora founder Tim Westergren told the Washington Post that the future could be bleak for the Internet radio station due to high percentage of its revenue being forced to go to royalty fees. Now, one month later, Westergren is shooting down rumors and socialsphere speculation about why Pandora is facing potential extinction.
"One of the falacies that is floating around is that Internet radio is poorly monetized -- that is not true," Westergren said. "We're just being charged more than other forms of radio. At the current pace if we did our projected $23-$24 million this year we would be paying $17 million in royalty fees. That's 70 percent of our revenue. Someone explain to me how that is fair when satellite radio is charged only about 7.5 percent for its music. It's really ridiculous."
The other rumors? Some bloggers have written that in order to survive Pandora needs to get more social, more akin to competitor Last.fm, which has a more interactive quality. But this issue isn't about site traffic or a lack of reasons for advertisers to invest.
"Advertising is steady for us," Westergren said. "And the commentary around our needing to be more social shows the ignorance in understanding the economics of Internet radio. Anyone who does Webcasting has these exact problems. I think we're being more open about the challenge so people may think it's use, and we're also the largest pure play Internet radio station so we're going to get more attention on this subject."
Fired up about the issue but still holding steady ground, Westergren is deep in the trenches of leading Pandora's negotiation with Sound Exchange, the entity that represents artists and record labels, but is understandably quiet on the current details.
"We're currently still negotating and nothing material has changed, but we're hopeful that all will be resolved in the negotation," Westergren said.
The news of Pandora's potential demise sent a shock through music lovers on the Web. Some even went as far to create an "I Heart Pandora" widget for people to show solidarity through their blogs and social network pages and several bloggers have written urging their readers to take action and urge Sound Exchange to settle in favor of Pandora and Internet radio. It was just 18 months ago when Westergren himself put out a call to Pandora listeners sign a petition urging their Congressional representatives to act in favor of Internet radio. Are those actions needed again? Maybe, but now isn't the right time.
"There may be need for that, so people should stay tuned," he said. "Pandora is only still around because of public support. It was the public outcry that forced the Recording Industry Association of America (RIAA) to renegotiate in the first place. In terms of generating energy and opposition, the time for that will be after the negotiation, the outcome of which will determine how that energy is spent."
This doesn't mean that Westergren and his team of 130 Pandora employees don't appreciate the outcries from the radio station's fans.
"It's all very heartening and encouraging that people are out there ready to help when the time is right, but there's nothing they can do right now," he said. "We really want to give this negotiation a chance to work. If it doesn't then we'll cross that bridge when we get there. I know it's hard for people to sit tight but it's the best thing to do."
In the meantime, it's business as usual. The company recently released an application that fully integrates the Internet radio station with the iPhone. Westergren said that Pandora is also working on executing on its vision for "anytime, anywhere" radio for its users.
"We're plowing ahead. Our MO has always been to keep moving forward with the assumption that we can figure this out," Westergren said. "Stopping or not innovating or not improving a product is counter productive. We do not want to slow down.
"I've been at this for a while and we've faced numerous challenges," he said. "The company was bankrupt when we first started. If you want to be an entrepreneurship it's part of the bargain. You get accustomed to having to compartamentalize."
While Westergren is able to compartamentalize there's a fire in him regarding fighting for fairness for Internet radio stations, that goes far beyond the business side of him. He's a musician first, after all, and thinks all artists should be energized about how this effects them.
"These rates have to be resolved," he said. "If you look at the economics of business the way you make money is advertising and an optimized Internet radio site has the capacity for artists who want to make money in the long run."
For me, personally, I told Westergren that I have bought a significant amount of more music through both iTunes and Amazon since discovering Pandora six months ago. I seem to be part of the majority, according to Pandora's research.
"We are consistently one of the top affiliates on Amazon and iTunes. Forty percent of Pandora's listeners are buying more music and only 1 percent are buying less music."
Pandora has about 1 million listeners per day. While there are all kinds of economic calculations one can do, but if 40 percent of those 1 million listeners no longer have Pandora as an option, wouldn't it reason that near 400K will be spending less money on music? That has the potential to hit labels and artists a lot harder than what they are supposedly losing with Internet radio today.
"For a good percentage of the CDs we sell on Amazon, the sale rank is over 100,000. Which means we are providing a way for hard-to-find or less popular artists to be discovered and purchased," Westergren said. "One of the really important pieces of this story is the impact it's going to have on musicians. What Internet radio offers is an unprecedented level of access for musicians all the way down the scale."
"These musicians do not get played on regular radio and Internet radio gives them a chance. We have 60,000 artists and 500K songs and every day 98 percent of those songs play every day. This is only possible on Webcasting and not possible on regular broadcast radio; satellite is limited as well."
If only it were so simple to show the benefits to artists from Internet radio as it is to show the benefits of broadcast or satellite radio. According to Westergren, certain language within the Digital Millenium Copyright Act (DCMA) provides a verbal standard that Internet radio stations need to abide by that is much worse than other types of radio. It states that governing boards are not allowed to consider the benefits of Internet radio to artists or labels. In broadcast and satellite they ask what value the outlets provide the artist. In Internet radio you can't consider that.
"Whether or not we generate lots of sales is irrelevant," Westergren said. "This was all passed about 10 years ago during a very precarious time for Internet radio, so it got bullied. But eventually there has to be some parity. You can't create laws that discriminate against one technology versus another."
What are the chances of the DCMA being updated in fairness to Internet radio? Believe it or not, the upcoming presidential election might have an impact.
Democratic vice presidential hopeful and Barack Obama running mate Joe Biden, according to CNET's Declan McCullagh, is a good friend of the RIAA and a staunch proponent of rigid music copyright laws. McCullagh writes:
Now, it's true that few Americans will cast their votes in November based on what the vice presidential candidate thinks of copyright law. But these pro-copyright views don't exactly jibe with what Obama has promised; he's pledged to "update and reform our copyright and patent systems to promote civic discourse, innovation and investment while ensuring that intellectual property owners are fairly treated." These are code words for taking a more pro-EFF (Electronic Frontier Foundation) than pro-MPAA approach.
That said, while Pandora fans need to sit tight and wait for the company's negotiations with Sound Exchange to determine necessary direct action, they can educate themselves on the issue and how their upcoming decisions in November could impact their music experience.
Now, as McCullagh implied, there are bigger issues for the White House to tackle in terms of individual and ecological wellbeing and economics and what not. But listeners and Internet radio fans as a whole should use this time to educate themselves on the cause, find out who is involved from a legislative position and be ready to pounce when and if the time is right. If history is any indicator, and the RIAA's lobbyists and connections remain more powerful, Pandora very well may need to call its fans into action once again.