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Pandora’s Positive Performance: Pandora Royalty Costs for Music Online Same or Lower than Other Online Retailers: Lower than Competition

18 June 2013

For IMMEDIATE RELEASE: June 18, 2013
CONTACT: Kristen Hainen 202-334-1115
Vicki Christner 202-334-1118

Washington, D.C. – A new economic study of the market for Internet radio royalties finds that existing royalty rates are not a barrier to growth and innovation.

Dr. Jeffrey Eisenach presents data that shows Pandora’s royalty payments are neither surprising nor unusual for a retailer, which is what Pandora is, and that there is a booming Internet radio market. Among his findings:

• Other Retailers Pay as Much or More Than Pandora: Measured as a proportion of revenues, several major “online” retailers, including 1-800 Flowers, Netflix, and Overstock.com, and “brick-and-mortar” retailers, like Best Buy and WalMart, pay about as much as or more than Pandora for the products they purchase from others and resell to consumers.

• Two of Pandora’s Major Online Music Competitors Pay More: “Pandora has made much of the high proportion of revenues it pays out in royalties, but there is nothing surprising or uneconomic about a retailer passing through a high proportion of its gross revenues to the ultimate producers of the products it sells – indeed, at least two of Pandora’s major competitors, Spotify and iTunes, pay out higher proportions of their revenues (70 percent) in royalties than does Pandora.”

• Pandora Has Realized Hundreds of Millions in Profits for Investors: “Pandora’s initial investors, including venture capital firms and Pandora’s executives, have already realized hundreds of millions of dollars in profits since the company’s 2011 Initial Public Offering.” In addition, “Company founder Tim Westergren sold shares totaling nearly $15 million between January 2012 and June 2013”

• Pandora’s Growing Profitability: “Pandora’s gross margin (revenues in excess of content acquisition costs) has grown steadily since 2009, increasing by 33 percent (to $168 million) in the last year alone.”

• Pandora Executives/Industry Analysts Agree After a Concerted Strategy to Grow Listeners, Pandora Now Prepared to Make Even More Money: “Both Pandora’s leadership and industry analysts agree that Pandora has ‘reached a critical mass’ of listeners, and is now prepared to ‘monetize’ its dominant market position in Internet radio.”

• Internet Radio is Booming with New Entrants, Not Faltering: According to Dr. Eisenach, “new firms (including Apple and Google) and new business models continue to enter the market for Internet radio.” There is no lack of investment, entry, or competition in Internet radio as there are over 30 “major” providers.

Ultimately, Dr. Eisenach concludes, “there is simply no valid public policy argument for Congressional intervention in the statutory copyright royalty process.”

Dr. Eisenach, a managing director at the independent consulting firm of Navigant Economics, is a Visiting Scholar at the American Enterprise Institute and an Adjunct Professor at the George Mason University Law School. His work has received support from the musicFIRST coalition.

Some webcasters, led by Pandora Media, are arguing for the so-called Internet Radio Fairness Act in the media and on Capitol Hill under the rationale that they pay 50% of revenues in royalty payments. Pandora argues these royalties are exorbitant and the legislation is needed to foster a growing Internet radio market.

Dr. Eisenach’s paper “Understanding Webcaster Royalties” is available here.

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