Penny Fractions: Pandora’s Endless War Against Royalties

Hello, I hope people are doing well this week. Last Wednesday I spoke at a couple of classes at The New School! It’s the third university I’ve had the opportunity to speak at this spring, which I bring up to drop the massive hint that I’d love to do more speaking in the future. Three quick notes: I made a Twitter account for Penny Fractions for those interested, I added a brief introduction to myself in the newsletter’s signature for new readers, and I got some feedback about the newsletter ending up in the promotions tab in Gmail, so make sure you move it from there if that’s happening. Otherwise, let’s get into Pandora’s continuous battles over royalties.

Over the last month, Spotify has made headlines for its appeal of a recent ruling by the Copyright Royalty Board to increase streaming service payouts over the next five years—Amazon, Google, and Pandora also filed with an intent to appeal the ruling. The decision of these companies resulted in public letters of outrage by songwriter organizations, dodgy public relations statements, and contentious town halls. The tension between songwriters and the record industry is more than a century old so, instead, I wanted to examine another company caught up in the Copyright Royalty Board appeal: Pandora. The company is often left out of the current music streaming spotlight, but this recent case felt like a good excuse to reflect on the company’s early days of advocating to suppress royalty payouts, only years after systematic worker exploitation. Though rarely discussed, these situations point to deeper issues within the contemporary music streaming business.

Pandora, initially called Savage Beast Technologies, was founded in 1999 by Tim Westergren, a former musician. The company’s early years were a bit aimless when it arrived in the late 90s tech bubble, yet Westergren was able to amass $1.5 million in venture capital funding by March 2000. Originally, Westergren envisioned the company as an e-commerce site, then by 2002 shifted towards music recommendation software for retail stores like Barnes & Noble and Best Buy, and digital music platforms like AOL Music. Amid all of these shifts, the company blew through all of its funding and Westergren took on massive debt in an attempt to keep the company afloat. After a certain point, he held a meeting where he informed his employees that he would no longer be able to pay them, which continued on for a couple of years.

In 2015, at the Hustle Con in San Francisco, Westergren said: “We had no idea we were breaking the law,” in reference to his company not paying its workers. Obviously, some workers didn’t buy such an excuse and ended up suing for owed back pay, because it is rather obviously illegal in California to simply not pay one’s employees. The narrative of a plucky start-up founder who just wants to see his vision through is so ingrained in tech coverage that framing it in the reverse of a singular tyrant running a business sans providing compensation is barely considered in much of the early coverage of Pandora. I’d like to note that much of Pandora’s staff were part-time musicians, whose job was to help establish the musical guidelines that shaped the company’s recommendation algorithm. That this semi-employed creative class was effectively building the tool that would help reduce their own pay is certainly an irony hard to miss.

Only a couple of years later, Pandora would take that business model to Washington D.C. and lobby congress to limit artist payouts from online broadcasts. It isn’t surprising to see a tech company use incredibly fuzzy math and plead ignorance of basic worker rights laws to operate its business, while squeezing the most out of its venture capital funding. Still, the brazenness to put the existence of the company over those who provide the labor echoes how Pandora ultimately would treat the artists that provide music to its platform.

After a half-decade of pivots, in early 2005, Pandora finally launched in its current form where it suddenly was taking off in popularity. The company offered internet radio, where by searching an artist you could get an endless stream of music for free. This allowed for the company to grow rapidly and by early 2007 it had over six million users on the platform. However, after a couple of years of rapid growth, the United States government caught up to all of this musical content being shared online via streaming. To quote a 2007 Los Angeles City Beat article (emphasis is mine):

This single decision represented an existential threat for internet radio broadcasters across the spectrum. Non-profit stations feared that such an uptick in payment would effectively drive them out of a hobby, which gave them an odd partner in the venture capital-backed for-profit online radio: Pandora. The company had just spent nearly five years searching for a business model and now that it found one—advertisement-based music streaming—its costs were on the brink of skyrocketing, threatening to sink the company.

“Overnight our business was broken,” Westergren told the New York Times back in 2010. “We contemplated pulling the plug.” Just to linger for a second, if a company floated on years of unpaid labor, praying for venture capital welfare, and is suddenly on the brink of collapse under threat of a pay increase to its workers (the musicians that power the platform), then I’d question much of what, if anything, is salvageable about this business.

Pandora needed to not only show that it could survive this potential ruling, but also still push towards becoming a profitable company that its investors could eventually leave in order to hit their big payday. The company got aggressive and hired Qorvis Communications, a Washington D.C. based lobbying firm that worked with Amazon and AOL as well as with Halliburton and the Kingdom of Saudi Arabia—so only the highest quality of clients. The company pulled together AOL, Pandora, Yahoo, and a number of other web broadcasters to fight the Copyright Royalty Board ruling through a fairly aggressive public relations campaign to highlight smaller broadcasters who might’ve been hurt by the ruling. Its effort didn’t fall on deft ears, as Qorvis built up positive press coverage, got artists to lobby politicians on behalf of the company, and even got Pandora customers to flood thousands of emails towards congress members.

While the Pandora-backed Internet Radio Equality Act (that would’ve reversed the initial 2007 CRB ruling) never passed through congress, after a couple years of lobbying Pandora were successful in reducing the royalty increase. The royalty increase could’ve been dire from the point of view of smaller web broadcasters, but it speaks to a larger issue wherein non-profit broadcasters work with venture capital-backed for-profit corporations against the interest of record labels, which then impacts the artists that are employed by those companies. A decade later, artists remain even further atomized within their business, while Pandora has gone on to IPO at $2.6 billion, all off of the backs of underpaid employees, musicians, and aggressive political lobbying against the best interests of musicians. 

However, joy could never last too long for Pandora. Rather quickly, the company started to see the real issue of too much of its revenue getting pushed back towards record labels. The catch-22 situation was that with increases in listening hours Pandora would be forced to pay out more money to record labels, and its growth in users wasn’t matching how much revenue they were making on users. This struggle continued throughout much of the 2010s and with an additional increase in competition from Apple Music, Spotify, YouTube, and other platforms entering the market. The company floated in constant precarity with stagnating growth and eventually ended up being sold in 2018.

SiriusXM’s purchase of Pandora last year certainly made sense from a business perspective. Pandora is in the twilight of its relevance with the 2010s rise of on-demand streaming platforms, while Liberty Media, the majority owner in SiriusXM, owns part of LiveNation and is rumored to want to purchase iHeartRadio, formally known as Clear Channel. There is a reason why Rolling Stone ran with the headline “Is Liberty Media About to Become the Most Powerful Company in Music?”; such consolidation shows the comically absurd lack of American governmental regulation in the space. Yet, there is a core DNA that Pandora and SiriusXM both share: An unwillingness to pay anyone an extra dime.

That can apply to songwriters, publishers, record labels, or whoever is involved with the labor of the music industry. In late 2007, the Copyright Royalty Board, our old friend, established that SiriusXM would pay 15.5% of revenue from 2018 to 2022, an increase from the previous 11%, but markedly less than the 23% pushed by SoundExchange, an independent non-profit that collects royalties for internet and satellite radio. And it’s a quote from SoundExchange that sums up a lot of this history: “As a result of that rate standard, SiriusXM has paid below-market rates for years, and the recording artists and rights owners SoundExchange represents have subsidized the company’s growth.” Right there is the tension that runs underneath much of the chill excitement around music streaming: the understanding that it’s these tech companies, broadcasters, and more importantly their investors who are pocketing the money of those on stage and in the recording studio.

India-based music streaming firm Gaana hits 100m Monthly Active Users, expects to top 200m in 2 years - Music Business Worldwide / Spotify Reaches 100 Million Subscribers, but Not Without Some Dissonance - The New York Times

Experts! Say! Something! May! Happen! Okay, jokes aside, Gaana continues to grow even as competition in the Indian streaming market also increases. Spotify also hit its own 100 million user number. Big week for numbers and computer putin’.

Spotify loses catalog of India’s oldest label after copyright infringement lawsuit - Music Business Worldwide

Spotify’s Indian adventures continue this week with another lawsuit over improper usage of its musical catalog. When will this scrappy start-up get out of these self-inflicted messes? Tune in next week to find out!

Amazon is readying a hi-def music streaming service - Music Business Worldwide

Jeff Bezos, the world’s richest man and chief exploiter of human labor, continues to see his company expand into more and more music markets. I should probably spend a bit more time in the Amazon Music ecosystem soon.

CSO management, musicians have five-year deal to end strike - Chicago Sun-Times

The longest strike in Chicago Symphony Orchestra history just came to an end with what looks like a victory for union in protecting their pensions and seeing wage increases. Happy to see them avoid falling into the two-tier trap that effectively rips apart unions between current members with better benefits to the detriment of new workers.

‘It’s not play if you’re making money’: how Instagram and YouTube disrupted child labor laws - The Guardian

I know that on its surface this has nothing to do with music, but the exploitation and praying on young people is something the music industry is fairly adept at doing, and I’d love for there to be more pushback and regulation to help these children.

Customer happiness isn’t enough - Wendy Liu

This newsletter is low key now a Wendy Liu Stan Account, which is to say this piece on conceiving of tech regulation outside of consumer happiness is welcome reprieve from those who think the ultimate purpose of life is for happy customers. Also, Liu just turned 27! My age!

My name is David Turner and I started Penny Fractions back in November 2017, as a way to think through various topics within the world of music streaming. Since then, the newsletter, which is delivered every Wednesday morning (EST), has grown to reach over two thousand subscribers with an archive that can be found right here. I’m currently a contractor at SoundCloud; you can read about some of the work I do in Billboard. Prior to this career shift, I wrote for Music Business Worldwide, Pitchfork (who just unionized!), the New Yorker, Noisey, Rolling Stone, and Spin. I also create content on Patreon to help cover email billing costs and to compensate my copy editors, Mariana Carvalho and Taylor Curry. The artwork is by graphic designer Kurt Woerpel whose work can be found here. My personal website is davidturner.work.  Follow Penny Fractions on Twitter here, and direct any comments or concerns to pennyfractions@gmail.com.