Pandora, the online music streaming service, and SoundExchange, a royalty collection service, squared off Wednesday over royalty rates before a House subcommittee on intellectual property, competition and the Internet.
Pandora CEO Joe Kennedy backs legislation that would change how royalties are levied on companies that stream music on the Internet.
Kennedy said Pandora will pay almost $250 million to SoundExchange, even though his service accounts for only 7 percent of radio listening in the United States, a figure that is more than 50 percent of Pandora's revenue for the year. By comparison, satellite radio will pay 7.5 percent of its revenue in royalties, and cable radio, 15 percent.
"While Pandora and other Internet radio services compete directly with all of the other forms of radio for listeners in every place you find music -- the home, the car, the office, on the go -- we are subject to an astonishingly high royalty burden that is unique to Internet radio," he told the committee.
Over the years, Congress has contributed to the warped environment that has contributed to the onerous burden placed on providers of music over the Net, Kennedy contended. "This lack of a level playing field is fundamentally unfair and indefensible," he declared.
He continued: "The inequity arises from the fact that Congress has made decisions about radio and copyright law in a piecemeal and isolated manner; as each new form of radio transmission was invented, new legislation was passed but only to address the new form."
"The effect has been to penalize innovation when setting the rules for music royalties," he said. "The current rate setting structure is a clear case of discrimination against the Internet and innovative services."
SoundExchange president Michael Huppe defended the existing system for determining royalties. He told committee members that Pandora paid such a large proportion of its revenues from royalties because it's choosing not to maximize those revenues.
"The fact that Pandora may currently pay 50 percent of its revenues in performance royalties simply reflects Pandora's (deliberate) choice to focus on building its audience -- and thus its usage -- while keeping its advertising load and subscription fees low," he maintained.
"But," he added, "it is misleading and inappropriate to suggest that because Pandora has chosen a path which prioritizes growing its listener base over growing revenues, then musicians should therefore be forced to subsidize its choice."