Apr 28, 2015 · 9 minutes

It's no mystery that streaming music companies and major constituents within the record industry are at odds. Many musicians, whether they're songwriters, performing artists, or both, feel they are not compensated fairly for their work -- and a lot of them aren't.

Meanwhile, companies like Pandora and Spotify already pay massive portions of their revenue to music rights holders but have yet to achieve sustained profitability and are therefore reluctant to increase these payments. Spotify continually claims that it pays around 70 percent of its revenue to various stakeholders in the music industry, including publishers, record labels, and performance right organizations, who then funnel this cash to musicians and performers. Pandora's earnings reports over the last 12 months show that the company consistently pays around half of its revenue to rights holders, and in its most recent earnings report the company said it paid $126 million over the past 3 months in these "content acquisition costs."

So now many in the record industry are looking to Congress and the Department of Justice to pull higher royalties out of Pandora in particular, which as a radio station is more beholden to the federal government than on-demand services like Spotify. And among these efforts is the Songwriter Equity Act, which was the focus of an op-ed published last week at Roll Call by the R&B singer and songwriter Ne-Yo. And as is often the case in such polemics, the article said less about the piece of legislation and more about Pandora's apparent unwillingness to give songwriters a fair deal.

It's obviously not the responsibility of musicians nor record executives to figure out Pandora's and Spotify's business models for them. And this is no apologia on behalf of Silicon Valley's streaming giants -- they should be held as accountable as anybody for the very real inequities in how streaming revenues are distributed. But when musicians like Ne-Yo make claims that songwriters "subsidize the billion-dollar streaming industry," it's important to contextualize who's screwing whom over and why, before laying all the blame on tech platforms and before evaluating whether or not a law like the Songwriters Equity Act is an appropriate answer to these grievances.

A "nonsensical disparity"

Ne-Yo's beef is that the royalties songwriters receive when their songs are played on Pandora are extremely low when compared to the payments performing artists receive -- and he's right.

"It takes about 1 million streams for a songwriter to see $90, and multiple writers often split that share," Ne-Yo writes. By any measure, that sounds like a pretty outrageous sum, but first it's important to point out what that royalty represents and how that payment is calculated.

Pandora pays out two types of royalties: Royalties to songwriters and royalties to performing artists. The royalties Pandora pays to songwriters are determined by federal rate courts, and that rate is currently 1.85 percent of Pandora's annual revenue. Because Pandora made $920 million in revenue in 2014, it would have paid songwriters around $17 million in royalties. And with over 20 billion listening hours last year and -- assuming an average song length of three and a half minutes -- around 342 billion songs played, that's just about $0.00005 (or five-thousandths of a penny) per song that goes toward songwriter royalties. The performing rights organizations that collect these royalties -- BMI and ASCAP -- also take a cut, which is how the band Cracker, in a highly-publicized case, only received $42.25 in songwriter royalties for a million plays on Pandora, which is about $0.000042 per song. Whether you measure Pandora's songwriter royalty payments per-stream ($0.00005) or in aggregate yearly ($17 million of its total $905 million in annual revenue), it is indeed very low.

But why is it such a small percentage? It's because when it comes to songwriter royalties, the rate courts currently treat digital radio stations like Pandora not much differently than terrestrial radio stations. That 1.85 percentage is just a hair higher than what terrestrial radio stations pay to songwriters, which is 1.7 percent of a station's annual revenue. Critics of Pandora are quick to point out that the company argued, unsuccessfully, in 2014 that its songwriter payments should be even lower, but its requested rate was simply the 1.7 percent terrestrial radio stations pay -- a plea that the courts rejected.

But if Pandora only pays 1.85 percent of its revenue to songwriters, why is it still struggling to achieve profitability? Certainly its operating costs can't be that high.

That's because Pandora also pays royalties to performing artists. These payments are made under an entirely different system of federally-mandated rates than the royalties paid to songwriters. The rates to performing artists are determined by a separate organization called SoundExchange. Meanwhile, terrestrial radio stations do not pay performing artists at all, because it's considered promotion for the artist.

But thanks to the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998 -- two laws that passed prior to Pandora's existence -- a performance royalty was invented for so-called "webcasters" or online radio stations like Pandora. These made of the bulk of the royalties Pandora pays, and in 2014 the company paid $508 million in "content acquisition costs" -- or over half of its revenue. And after paying an additional $442 million in operating costs plus income taxes, the company ended up losing $30 million on the year.

And so while Aloe Blacc makes the oft-repeated claim that he only received $4,000 for a song he co-wrote that was played 168 million times on Pandora, he fails to mention the amount the company paid in performance royalties on this track, which according to many sources was over $200,000.

So yes, again, Ne-Yo is right that songwriter royalties are low on Pandora, particularly when compared to performing artist royalties. But the primary reason for that -- unless you get caught up on the company's attempt to lower the songwriter royalty rate a whole 0.15 percent -- is not so much greed on the part of Pandora. It's because the federal government treats the company very much like a terrestrial radio station when it comes to paying songwriter royalties but treats it like something entirely different when it comes to paying performing artist royalties. And while Ne-Yo does mention the "nonsensical disparity" between songwriter incomes and performing artist incomes, he lays the blame for this inequity squarely on Pandora's shoulders. Even if Pandora had been successfuly in arguing that the rates should be 1.7 percent instead of 1.85 percent to put them more in line with terrestrial radio royalties, that .15 percent would hardly make a meaningful difference to songwriters' bottom lines.

So is the Songwriter Equity Act the answer?

Ne-Yo echoes performance rights organizations like ASCAP and BMI in proposing that the solution to this problem is for Congress to pass the Songwriter Equity Act. In short, the legislation would allow rate courts to look to those higher performing artist royalties set by SoundExchange as evidence when determining the royalty rates paid to songwriters. Current legislation bars this activity. And because SoundExchange's rates are much higher, the rates Pandora pays to songwriters would therefore likely increase.

How high would they reach? Would they be as high as the royalties Pandora pays to performing artists? After all, the law allows for those performance royalties to be used as benchmarks. If so, that would threaten to double the amount of royalties Pandora pays and effectively put it out of business. And while, again, songwriters and labels aren't responsible for Pandora's business model, most of them do recognize that online streaming, whether through radio services like or on-demand services like Spotify, is the future of consumption, and it behooves the entire music industry to determine a system that works.

But that begs another question: Should songwriters be paid as much as performing artists for online radio streams?

It's not an easy to question to answer. On one hand, the disparity that Ne-Yo and others note between the nearly half-billion dollars Pandora paid to performers last year and the $17 million it paid to songwriters is undeniable. But in examining the royalty picture across platforms, songwriters also receive royalties when songs are played in films, television shows, and commercials, as well as through digital downloads -- which have been supplanted less by Pandora and more by on-demand streaming services like Spotify. As for Spotify, songwriters receive about 50 percent more than performers from on-demand streaming services like Spotify and Rdio, with 10 percent of the total streaming revenue going to songwriters and 6.8 percent going to performing artists.

But guess who gets over twice that amount combined? The record labels, which take home 45.6 percent of the streaming revenue from on-demand sites. Meanwhile, Spotify takes 20.8 percent, which is indeed higher than the amount songwriters and performing artists receive combined -- but is still less than a half of what the labels take home.

No similar study has been put out for the revenue shares collected from Pandora's streams, but through contractual agreements with musicians it stands to reason that labels could pay songwriters a more equitable share of revenue compared to performing artists if they wished. But the sad truth is, this is an industry that values performers over songwriters. Fair or not, there are thousands of people in America or more who could write a Lady Gaga or Katy Perry song. But only Lady Gaga or Katy Perry could make it a hit.

While Ne-Yo blames Pandora for paying songwriters a pittance compared to performers, he ignores the fact that these royalties are the result of a series of outdated copyright laws, some of which were put into place as early as 1941 while the most recent ones were passed in the 1990s before Pandora even existed. Meanwhile, songwriters and performers alike collect royalties from a variety of sources, all of which are at rates determined through wildly different mechanisms: some by the judiciaries, some by federal legislation, and others by proprietary agreements with record labels. And finally, while Pandora, a major player in the music industry, should be held accountable for inequities in payments made to artists, op-eds like Ne-Yo's place the entirety of the blame on Pandora when record labels not only take the lion's share of payments that should rightly go to artists and songwriters through a number of channels, but some of these incumbents argued for the very restrictions the Songwriter Equity Act seeks to remove.

America's royalty situation in the digital age is a mess. But this piece of legislation -- while it won't likely pose an existential threat to Pandora, which many artists view as an indispensable form of promotion if not always meaningful revenue -- only attacks the mess from one angle, as opposed to proposing something more comprehensive. And finally, as this op-ed shows, the primary function of the proposed Songwriter Equity Act right now is in the music industry's propaganda war against Silicon Valley tech platforms, even though the industry's incumbents are as much to blame for this mess as anybody.

[illustration by Hallie Bateman]