Perhaps Pandora Must Be Our Sacrificial Lamb

Pandora made a bold political statement today, saying they’d likely shut down rather than continue to pay exorbitant fees to play music to listeners of its massively popular service.

Radio stations pay different rates depending on how they broadcast music. Terrestrial stations (normal FM/AM stations) pay nothing, a tribute to their powerful corporate parents with limitless lobbying budgets. Satellite stations pay approximately 1.6 cents per hour per listener. By 2010, Pandora and other Internet radio stations, which have few lobbying resources, must pay 2.91 cents.

Pandora says they’re alread paying 70% of their $25 million in yearly revenues in royalty fees, and it is driving them out of business. Other Internet radio stations are even worse off.

For their part, the music industry says Internet radio stations have no one but themselves to blame, and suggest they find more innovative revenue models.

The blatant discrimination between terrestrial, satellite and Internet radio stations is ridiculous. But little is likely to change – large scale protests last year over royalty increases were mostly ignored.

Pandora, Our Sacrificial Lamb

Perhaps Pandora, one of the first companies I profiled on TechCrunch, needs to be sacrificed before artists and labels to realize just how absurd their position is. In a free market it’s been proven that labels will actually pay to have their music played on radio stations, and payola almost certainly continues to occur in some form.

The fact is that Pandora and other Internet radio stations provide a valuable marketing service to artists and labels. As I wrote in March when Billy Bragg argued that Bebo should pay musicians a portion of their $850 million AOL payday, they are particularly valuable for unknown artists who just want more people to hear their music:

Recorded music is nothing but marketing material to drive awareness of an artist. Websites that bring that music to listeners are doing artists a favor. In fact, they’re doing them a favor that they should (and will) be paid for. Young artists and songwriters in particular benefit from these services – Until a few years ago they had almost no way to break into the mainstream without getting a label to promote them. Now those walls are being torn down, and Bragg has the audacity to complain about it.

For now the labels want to squeeze more revenue out of Pandora and others. But when these companies start to go under and the bird in the hand disappears, they may regret their overly aggressive negotiating stance. It’s time for the labels to die, and anything that cuts off another revenue stream is at least partially good. I’m reluctantly willing to sacrifice Pandora if it quickens the inevitable march of recorded music towards free. Let’s just hope it doesn’t come to that.