Digital Radio: Why Mumford & Sons' Paycheck From Pandora Matters

Mumford & Sons

Nominated for material from their debut album for a second year in a row, Brit folk rockers Mumford & Sons arrive in a variety of wools.

In an effort to push lawmakers to pass a new legislation called the "Internet Radio Fairness Act," Pandora founder Tim Westergren has unleashed a new weapon — blabbing about the paychecks the company is sending recording artists.

Pandora is disbursing nearly $3 million each to artists such as Drake and Lil Wayne (although the money is really shared with the collection agency and then the record label and others). The digital streaming service is forking over $1 million each to artists including Coldplay, Adele and Wiz Khalifa. More than 2,000 other artists will generate checks of at least $10,000, including such superstars as the Mexican group Grupo Bryndis and American gospel singer Donald McClurkin.

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These details were shared by Westergren in a blog post on Pandora's website on Tuesday. "We're talking here about the very real possibility of creating, for the first time ever, an actual musicians middle class," writes Westergren.

Of course, in sharing those numbers, he's angling for an artist pay cut. The Internet Radio Fairness Act would allow a panel of federal judges to set royalty rates in the same procedure used for cable and satellite radio. Most expect it would yield lower royalty rates for Internet streaming.

But here's another number -- $20 million.

Westergren owns 2,042,439 shares of Pandora as of Sept. 30, 2012. The company currently trades at about $9.50 per share, putting Westergren's stake at $19.4 million.

The company reported a $5.4 million net loss for the previous quarter, and if Pandora continues to pay 60 percent of its revenue in royalties (and 45 percent more in other operating costs), it will be impossible to get in the black. Nevertheless, Pandora's investors are shrugging off these facts, perhaps with optimism that the government will intervene. It's hard to say whether the investors have already built passage of the pending bill into their expectations for the company, but one analyst agency believes that Pandora's stock price could double if the Internet Radio Fairness Act passes.

In other words, Westergren owns almost $20 million of a company whose viability is in question and could stand to benefit as much as $20 million more if the new legislation comes to pass.

That fact hasn't been lost on some.

"It’s horseshit," said Live Nation chairman Irving Azoff at a media conference last week. "The market cap for Pandora is like $1.8 billion. That’s roughly the market cap of Live Nation, and they are whining about wanting to pay artists less."

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Welcome to the new world of establishing new laws -- where lawmakers examine the "fairness" of whose paycheck is too heavy and whose paycheck is too light.

Although the micro-attentiveness to the wallet of some gospel singer might be novel, in some respects, the larger arguments are at least a century old.

In the first decade of the 20th century, right when the piano roll was gaining popularity, President Theodore Roosevelt urged Congress to adopt major revisions to copyright laws. "They are imperfect in definition, confused and inconsistent in expression," he said. "They omit provisions for many articles which, under modern reproductive processes, are entitled to protection, they impose hardships upon the copyright proprietor which are not essential to the fair protection of the public."

In 1909, Congress responded with a major new copyright law, that among other things, established the first compulsory license royalty rate system where publishers would be paid a flat rate of 2 cents per copy of mechanical reproduction. The chosen path was made in large part to prevent a cartel of music publishers exercising monopoly power over the recording of music. Without it, the Beatles would arguably have never happened.

Since then, the fees have gone up, and the powers-that-be have had to deal with the emergence of phonographic records, terrestrial radio, satellite radio, things like ringtones, and now internet radio.

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A nonprofit performance rights organization called SoundExchange is now tasked with collecting digital and satellite royalties for copyright owners. Every few years, SoundExchange and others in the industry go through rate-making proceedings before the Copyright Royalty Board, a tribunal of judges.

The results have meant different things to different music services, depending on how they are distributing music.

For Sirius XM, the CRB last established that 8 percent of its revenues would be rendered in royalty fees, which might make Pandora jealous, although Sirius doesn't see it that way: Sirius is currently suing SoundExchange for alleged antitrust activity that prevents it from paying 5 to 7 percent.

Meanwhile, the amount that Pandora pays in royalties is based on the number of songs it streams. It pays a fraction of a cent each time a song is played. Pandora can point to enormous usage growth -- subscribers listened to 3.3 billion hours of music in the last financial quarter, up 86 percent from last year -- but all those billions of songs played each year adds up to significant cash pay-outs.

Hence, $523,902 for Mumford & Sons from Pandora, $135,223 for Bon Iver, and a $10,000-plus payday for the late jazz pianist Oscar Peterson, who Westergren calls one of his favorites.

The Internet Radio Fairness Act, according to its proponents, would level the playing field between services like Pandora and Sirius. But moving beyond a "willing buyer, willing seller" model like the one Pandora uses, would harm artists, say objectors like SoundExchange, the American Federation of Musicians and the musicFIRST Coalition.

What system yields, in Roosevelt's words, non-hardships upon the copyright proprietor and fair protection of the public? It might be a matter of taste. At very least, Pandora should appreciate that one.

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