Will Royalties Kill The Streaming Rdio Star?

The ongoing tug-of-war between musicians, record labels and digital content providers inched a little more towards artists this week with the introduction of an innovative paid-referral plan from streaming provider Rdio. The new program pays artists a flat $10 fee for every user they refer, a rare form of direct-to-artist revenue in the music streaming business. But it's only the latest move to renegotiate the flow of money in the world of digital music - and now even Congress is weighing in.

Rdio’s artist program is trying to play to both artists’ vanity and their pocket books. Not only will musicians get an immediate benefit for any new subscriber that joins Rdio, if they can help boost Rdio's current 10-million-user subscriber base to challenge Spotify’s reported 33 million users, that should also increase overall payments to artists from royalties down the road.

Of course, other than that up-front fee, Rdio’s royalty payments won’t provide much padding for musicians’ wallets, primarily because Rdio, like competing services Spotify and MOG, pays royalties directly to the record labels, not to the artists.

Where The Streaming Music Money Goes

All three of these services essentially negotiate their royalty rates with the record labels in the same way – directly – which can take forever. Royalty arguments actually delayed Spotify’s entrance into the U.S. market by two years, and according to Casey Rae, co-director of the Future of Music Coalition, the three major U.S. labels ended up taking an equity stake in Spotify to make sure they could squeeze every last drop of juice from the service provider.

Since these deals are private, it is not known how much each service has to pay to individual labels. It is estimated that Spotify pays anywhere from 70% to 97% of its subscription-based revenue to music distributors, depending on who you ask.

Pandora, on the other hand, handles things differently, Rae emphasized in a recent interview. “Pandora can play anything it wants,” he explained. “Their license is a statutory license that pays the artist directly.” The royalty is split down the middle with a music label if the artist is signed with one.

That rate, as the law proscribes, amounts to over 50% of Pandora’s revenue. As a non-interactive music streaming service, Pandora has to pay the highest rate bracket within the statute, far higher than satellite or cable TV providers have to pay for their music streaming services. Broadcasters, meanwhile, don’t have to pay anything, unless they stream their content on the Internet, at which point they have to pay the same rates as a service like Pandora or Clear Channel.

The Laws of the Land

Two bills now in Congress are set to adjust the rate schedule for these services toward what could be more fair treatment of the streaming services.

First is the Internet Radio Fairness Act of 2012, which would adjust the royalty rate that music streaming services have to pay down to match the levels that cable/satellite providers pay. Broadcast stations still pay nothing.

Second is the Interim Fairness in Radio Starting Today Act , which takes the opposite approach and would increase the cable/satellite provider rate to match that of the streaming providers’ - and remove the exemption for broadcasters.

Needless to say, artists and record labels are much more excited about the latter bill. The music industry already complains about how little it receives from streaming broadcasters, and undoubtedly would express outrage at any reduction in royalty rates.

The Last Song

A service like Pandora, which has to scale up its royalty payments as more subscribers join, is already dealing with the clash between revenues it generates and the royalties it has to pay. Without a reduction in statutory payments, it is not clear how long Pandora will continue to operate.

Rdio, Spotify and MOG, since they have negotiated deals with the content providers separately, would be unaffected by either of these bills passing into law. But they can’t take on much more royalty payments either. Spotify alone lost $57 million in 2011, even as it pulled in $236 million in revenue.

It's a complex, contentious issue, but unless the the royalty issues get worked out, the future of Rdio and its streaming music competitors is in jeopardy. If it costs more for them to license the music they stream than the revenue they can generate from it, they won't stay in business long. But if they raise prices dramitically to cover royalty payments, they risk losing subscribers who can't justify the higher fees. And as usual, you can bet that the artists, not the music companies or streaming services, will be last in line to get paid.

 

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