SCOTT SIMON, HOST:
Oh, well, moving on. This week, the Internet radio broadcaster Pandora made what seems like a backward move - technologically, at least. It purchased a local - let's call that a terrestrial - radio station in Rapid City, S.D. The purchase is part of an effort by Pandora to get the more favorable royalty rates that are given to terrestrial broadcasters. But as NPR's Laura Sydell reports, the move has songwriters and composers up in arms.
(SOUNDBITE OF GUITAR CHORDS)
LAURA SYDELL, BYLINE: This is Blake Morgan.
(SOUNDBITE OF SONG, "BETTER ANGELS")
BLAKE MORGAN: (Singing) It's not like I haven't tried and tried...
SYDELL: Morgan's an independent musician ,and his song "Better Angels" was among a number of his tunes that got some 28,000 plays on Pandora.
MORGAN: The song earned $1.62 in royalties over a 90-day period on Pandora, which is a very typical rate.
SYDELL: In case you missed that, I'll repeat it. Morgan says he got $1.62 in royalties as a songwriter. If his song was played over iHeart Radio, a streaming service owned by Clear Channel, he'd get paid even less. That's because Clear Channel, which owns hundreds of terrestrial radio stations, pays the same amount in royalties for online streaming that it does for broadcasting the same songs. Pandora attorney Christopher Harrison says that's not fair.
CHRISTOPHER HARRISON: Pandora shouldn't be discriminated against simply because we don't own a radio station.
SYDELL: So this week, Pandora purchased KXMZ, a small, adult contemporary station on the main street in Rapid City, S.D. - population 70,000 - in an effort to get the same royalty rate as broadcasters. Those rates are negotiated mostly with rights organizations like ASCAP and BMI, which represent hundreds of thousands of songwriters and music publishers. Back when royalty rates were established, playing a song on the radio was considered a free advertisement for a record. Songwriters and publishers were getting paid from record sales; hence, the lower radio rate. Paul Williams, the president of ASCAP, says broadcasters pay the same in royalties for radio and streaming because those streams account for only a tiny portion of their audience.
PAUL WILLIAMS: The fact is, they're very, very different models. Internet radio and terrestrial radio use music, and generate revenue, in very different ways.
SYDELL: Williams says Pandora's purchase of a small station in South Dakota isn't going to reduce its rates.
WILLIAMS: This is what I would refer to as a stunt - a way to do an end-run, to reduce the price of what they pay just one more, little notch.
SYDELL: It should be said that ASCAP and Pandora are already in court, battling over what the Internet radio service claims are unfair business practices. Pandora, which is the No. 1 Internet radio service, saw over $125 million in revenue last quarter, 55 percent more than the year before. But the company still isn't profitable, in part because it pays over 60 percent of its revenues to acquire music. Pandora attorney Christopher Harrison says if Pandora gets into the radio business, it should pay the same rate as Clear Channel does for iHeart Radio.
HARRISON: From our perspective, what we're trying to do is make sure that we operate at parity with our biggest competitors. And if iHeart Radio's personalized Internet radio service pays a particular rate, we think we're entitled to operate under that same rate.
SYDELL: But the future is clearly in Internet radio services like Pandora. According to a survey by the NPD Group, people under 35 spent a quarter of their time listening on the Internet, in 2012. That's up 17 percent from the year before. Time spent listening to radio went down 2 percent. At the same time, people are purchasing less music. Blake Morgan says the only way for him to make a living, in the future, is for streaming services to pay a fair rate.
MORGAN: I have a new record coming out. Most people have new records coming out. These are things that we've worked on for months - if not years - and we're simply looking for a fair working wage for the music that we make.
SYDELL: Morgan had a rather public exchange with Pandora co-founder Tim Westergren. Westergren sent out emails to musicians, trying to get them behind Pandora's attempts to even the rates between terrestrial and Internet radio. Morgan wrote back to Westergren, furious.
MORGAN: He cashes in a million dollars of stock every month, on the first of the month; and he's done so over the same 14-month period that recording artists like me earned $15.75.
SYDELL: That's not likely to change anytime soon. The issue of Internet radio royalty rates will most certainly wind up in court.
Laura Sydell, NPR News, San Francisco.