Written by Ben Sisario — A panel of federal judges on Wednesday increased the royalty that free Internet radio services like Pandora will pay record companies for the next five years, a decision that has been closely watched in the music industry and on Wall Street.
According to a summary of the decision posted by the panel, the Copyright Royalty Board, Pandora and other webcasters like it will have to pay record companies 17 cents for every 100 times they play a song when they stream music to listeners who do not pay for subscriptions. The current rate is 14 cents.
The decision, which takes effect next year, means that Pandora — the largest Internet radio service, and the music industry’s primary antagonist over two years of litigation — will pay millions more in royalties to record labels and performing artists to use their songs. Last year Pandora paid 44 percent of its revenue, more than $400 million, in royalties for recordings.
But the rate set by the judges on Wednesday was also much lower than what the music industry wanted. In filings in the case, SoundExchange, a nonprofit licensing agency that represented the record companies, had asked the judges to set a rate of 25 cents per 100 plays.
In a statement, Brian P. McAndrews, Pandora Media’s chief executive, called the decision “a balanced rate that we can work with and grow from.”
“The new rate structure will enable continued investment by Pandora to drive forward a thriving and vibrant future for music,” added Mr. McAndrews, who is also a director of The New York Times Company.
Investors reacted positively to the news, which was announced after the close of the market. In after-hours trading, Pandora’s stock rose more than 20 percent.
“Certainty is positive for any share price,” said Laura Martin, an Internet and media analyst for Needham & Company. “We now know what the costs of content are going to be for the next five years. That allows Pandora to run their business.”
SoundExchange expressed disappointment.
“It’s only fair that artists and record labels receive a market price when their music is used,” the group’s statement said. “We believe the rates set by the C.R.B. do not reflect a market price for music and will erode the value of music in our economy. We will review the decision closely and consider all of our options.”
The decision applies only to Internet radio services, which let people hear a set of songs tailored to their tastes, but not so-called on-demand services like Spotify, which let people choose exactly which song to listen to. The judges’ decision also does not cover songwriting rights, which are set separately.
For years, Internet radio services have operated under two different rate systems: one for so-called pureplays like Pandora — businesses that operate mainly on the Internet — and another for traditional broadcasters like the radio giant iHeartMedia that also have web streams. As a result of a settlement with the music industry in 2009, the pureplay companies paid record labels a lower royalty rate for web streams than the broadcasters did.
The rates announced by the copyright judges on Wednesday eliminate that distinction, aligning the web rates of companies like Pandora with those of commercial broadcasters. So while Pandora’s rate for its free version — which has advertising — will increase to 17 cents from 14, for outlets like iHeartRadio, the rate will decline from 25 cents.
For their paid subscriptions, webcasters will pay 22 cents per 100 performances, which is also down from the current rate of 25 cents.
The judges’ full decision is still confidential while it is being reviewed by the parties in the case, and is expected to be released in full in the coming days.
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