A panel of federal judges has ordered Pandora Media Inc. and other Internet radio stations to pay higher royalties for sound recordings in a ruling that could have broad ramifications for the music industry.
The Copyright Royalty Board on Wednesday ruled that online radio companies will have to pay 17 cents per 100 plays of songs through 2020. That's a notable increase over the current rate of 14 cents per 100 streams. The new rates take effect Jan. 1.
Wednesday's decision is a key development in a long series of disputes over how much music companies and artists make from online streaming services. It represents a partial victory for record labels and artists who have long grumbled about paltry payments from music streaming services. The higher payments mean that labels representing popular artists such as Beyonce and Taylor Swift will be able to collect more money for their music.
Nonetheless, some said the board didn't go far enough in raising royalty payments.
"We believe the rates set by the CRB do not reflect a market price for music and will erode the value of music in our economy," said a statement from SoundExchange, the music rights organization representing the record labels.
For Pandora, the ruling undoubtedly will add to its costs at a time when the company faces rising competition from rivals such as Spotify and Apple. Cupertino, Calif.-based Apple launched a streaming service this year and has siphoned off some of Pandora's audience.
That has hurt Pandora's earnings. The Oakland company, which went public in 2011 and has 80 million users, has never turned an annual profit. Last year it, paid more than $400 million, or 44% of its revenue, to play sound recordings.
"The fundamental challenge for Pandora is now they've got increasing royalty payments and slowing user growth driven by growing competition," said BTIG Research analyst Richard Greenfield, who follows the company.
Still, the long-anticipated ruling came as a relief to investors. Uncertainty over future royalties had weighed on Pandora's stock. Its shares soared more than 20% in after-hours trading following the announcement. The stock had closed Wednesday at $13.44, down about 40% from its 52-week high in October.
The decision appeared to mark a compromise between the wishes of the labels and the streaming service. SoundExchange was asking for 25 cents for every 100 songs, while Pandora was seeking a lower rate of 11 cents.
"This is a balanced rate that we can work with and grow from," Brian McAndrews, chief executive of Pandora, said in a statement. "This decision provides much-needed certainty for both Pandora and the music industry."
The board's decision also affects royalty payments from iHeartRadio, the online service run by the AM/FM radio giant iHeartMedia (formerly known as Clear Channel), and satellite radio company SiriusXM.
Because of a previous court decision, traditional broadcasters including iHeartMedia have paid a higher rate for their webcasts than Pandora. They will now have the same rate. IHeartMedia and other broadcasters had been paying 25 cents per 100 streams.
The ruling does not apply to on-demand services such as Apple Music and Spotify, which have direct deals with the record companies that determine royalty payments.
Pandora has been trying to move away from its reliance on the compulsory rates set by the government. The company wants to expand to more countries and it needs direct licensing deals with the record labels to do so.
The service is currently only available in the U.S., Australia and New Zealand.
The royalty board decision could set a benchmark for future licensing deals with the record labels that would enable Pandora to extend its reach, analysts said.
"Now Pandora has the option of making deals directly with the record labels," said entertainment lawyer and copyright law expert Uri Fleming of the Los Angeles firm Kleinberg Lange Cuddy & Carlo. "When the parties discuss directly, they can reach a number that's suitable for both of them."
The streaming giant last year entered a pact with the British digital music rights group Merlin Network, which handles royalties for independent labels and artists.
Pandora has also signed recent deals with music publishers, including Sony/ATV and Songs Music Publishing, which represent songwriters and composers. On Tuesday, Pandora announced another direct deal with Warner/Chappell Music.
The company has also taken steps to strengthen relationships with the music industry, and particularly artists who have been upset with the paltry returns from the service. Last year it launched a free program for artists to use data from the service to learn more about their audience.
In October, the company agreed to pay labels $90 million to settle a dispute over royalties for recordings made before 1972.
Pandora has also made a flurry of recent acquisitions. It bought data firm Next Big Sound in May, and paid $450 million for online concert ticket service Ticketfly in October. Just last month, it bought assets from now-defunct streaming rival Rdio to help it expand overseas and build more on-demand options.
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