Outside of the Box
When the Copyright Royalty Board increased the fees for webcasting music in May 2007, the move could have put internet radio station Pandora out of business. Doing the math for the cost per song per user, Tim Westergren, Pandora's founder, figured it would raise their fees by 300 percent—charging them more than satellite broadcasters and far more than AM/FM radio stations.
But Pandora's fans rallied, Westergren told students at a recent clinic sponsored by Berklee's Music Business/Management Department. He sent emails to Pandora customers, asking them to contact their Congressmen about the new rate. They and thousands of others responded, and Congress intervened. The rates were relaxed for a short period, and Pandora and other internet radio stations are still working to have them revised. "We'll do that again if we have to," said Westergren. "But if we do it again we'll be three times the size we were last time."
Today, according to Westergren, Pandora has 12 million registered listeners, with 25,000 more each day-all the more amazing because advertising has been almost entirely word of mouth. But, Westergren told Berklee students, "if you're interested in the business side of music, one of the things I'd encourage you to study is online marketing. . . . It's a space that a lot of traditional folks already in the business don't understand, and in some cases don't really want to understand."
Pandora's business model is based on ad revenue—not click-through, but impressionistic. Each time a user clicks on the site, whether to give a song a thumbs up or add an artist to a station, the ad changes. The interactivity shows that the ad isn't displaying to an empty seat. "One of the beauties of Pandora, from a business standpoint, is that people like to click on it. An average Pandora listener clicks between six and seven times an hour. The amount of meddling you can do encourages people to interact with it, and that creates our ad inventory."
Westergren got the idea for the company while composing film scores for independent movies and commercials. Before each project he'd sit down with the directors with piles of CDs to figure out what musical characteristics they liked. "Typically, they can't say, I like minor thirds," said Westergren. "What you do is extrapolate the musicology of what they want." The idea expanded, and now the Music Genome Project, which is at the heart of Pandora's service, matches song preferences based on close to 400 characteristics, such as minor key tonality, vocal-centric aesthetic, or rhythmic syncopation, to create as many stations based on those preferences as the user wants.
Despite record companies' assertions, Pandora isn't an enemy to the music industry, Westergren contends, but a boon to the "musicians' middle class"—the thousands of artists who aren't number one in Amazon sales rankings, but more like number 141,000: "My CD or your CD," Westergren said to the audience at Berklee. He encouraged them to send him their CDs, and one faculty member even handed him one on the spot. Westergren said he sees the site as giving musicians who might be overlooked in the traditional market a chance to reach new listeners, and he envisions Pandora in the future adding more services for musicians, such as statistics on their audience's demographic information, geographical location, and other favorite bands.
So, Westergren warns, the Copyright Royalty board decision doesn't only hurt Pandora, but the independent artists it gives exposure to. "If this rate is too high, and we can't take advantage of this statutory license, then all we can do is go straight to labels and get direct deals. What we would do in that situation is go to the big four, because that's the best place to get the largest amount of music with the fewest number of contracts. Small, independent artists know that in a direct deal world, Pandora's not going to play their music. We're not going to go across the country and sign 45,000 recording contracts. So they'd be left out, just like they're left out of broadcast radio."
"I think the RIAA would like the rate to get too high, so services like Pandora have to go to direct deals," Westergren opined.
Until then, Westergren encouraged musicians to make sure they receive the money that's being collected for them by these organizations. "Sound Exchange is actually on your side," he said. "It was started by the RIAA, but it's a nonprofit organization, so all you need to do is register. You should also register with one of the performing rights organizations, like ASCAP, because they're collecting a publishing fee that we're also paying."
With any luck, Pandora will still be around to pay that fee.