Music streaming way up, as are Pandora's royalties

Music streaming is leading digital music sales past physical sales, but can streamers afford the royalties?

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Strategy Analytics

Physical albums are one step closer to joining wooly mammoths, phone booths and Britney Spears’ career on the list of extinct things. According to a study released last week by Strategy Analytics, digital music sales are expected to surpass physical music sales for the first time in the US in 2012, and globally in 2015.

While digital downloads have been leading the way on killing off physical music sales, it’s music streaming that will apparently soon deliver the coup de grace. Strategy Analytics finds that the growth in streaming music revenue is outpacing that of download revenue in 2012, 40% to 8.5% meaning it is now leading the growth in revenue for the music industry. Apparently, people value the ability to play their music when and where they want via streaming from the cloud on multiple devices more than they do actually owning their music.

So, should Pandora be popping the champagne corks right about now?

Well, not quite yet. The problem is, the more listeners they get, the more likely they are to not be in business much longer, at least in the U.S.

Come again?

It all has to do with music royalties. Right now, as currently constructed, U.S. copyright laws require that those who stream music, such as Pandora, pay performance royalties on a pay-for-play basis. That is, they pay the artists who perform on recordings they streamed and the labels that owns them, at a rate of anywhere between $.0002 and $.0014 per digital performance. One “performance” is defined as the transmission of one song to one listener. So, more listeners = more performances = higher royalty payments.

See the problem for Pandora and other Internet radio providers?

Terrestrial radio stations don’t pay these performance royalties for the music they broadcast; instead they pay much smaller royalties to songwriters and music publishers (as do Internet radio stations), though there is a movement to impose the performance royalties on broadcasters.

Services that offer music on-demand (or via download) such as Spotify and Rhapsody negotiate with and pay record companies directly for the rights to offer their music, and so aren’t subjected to these royalties in the same way.

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