Closing Pandora's Box Could Hurt Music Industry

Innovative online music site Pandora appears to be on the brink of shutting its doors after failing to find a solution to increased royalty costs. The site's appeal, a 'personalised radio station' service by which users could list some of their favourite songs and performers, may no longer be marketable after recent demands the site pay more cash for the music it uses.

How does Pandora work?

Users rate songs and the Pandora system (looking at more than 400 attributes including tone, pitch, style, speed, instruments used and so on) would then play similar styles of music. The technology was provided by the Music Genome Project, a long-running project to build a database of songs analysed in this way. (Source: efluxmedia.com)

Users could then give Tivo-style thumbs up and down to each song, which further refined future playlists. And each time a song was played, users were given links to the relevant album pages on Amazon and iTunes.

However, licensing restrictions meant that from May 2007, the free service had to be limited to users in the United States and United Kingdom. As we reported in January, access to UK users was dropped after an independent panel set royalty rates too high for the site to find it financially viable to continue 'broadcasting' in the country. Canadians were unlucky from the start.

In the U.S., the relevant licensing is covered by the Digital Millennium Copyright Act. However, the fixed royalty rate for Internet radio stations more than doubled last year to just under a fifth of a cent each time one listener hears one song.

That may not sound like much, but it means Pandora will now have to spend 70% of its revenues on royalty payments, putting it in financial peril. The firm told the Washington Post it is considering experimenting with audio commercials played between songs (at the moment it only displays visual ads on the site itself), but isn't confident this will be enough. (Source: arstechnica.com)

Internet radio bosses are particularly outraged at the rate hike because satellite radio stations pay a much lower rate, while traditional over-the-air stations pay nothing.

Personally speaking, the rise seems counter-productive. I don't buy many CDs in store, but as somebody registered for Amazon's 1-Click I could -- and regularly did -- hear a new song or band and order the relevant album in just two mouse clicks. If Pandora goes out of business, record labels won't be earning anything at all from either sales or royalties.