SoundExchange

Webcaster and on-demand subscription service Slacker last week revealed it's reaping the fruits of its February relaunch in the form of surging audience growth. The company also claims it's attracting Pandora users shut out by that company's recent 40-hour/month listening cap on free mobile streams.

What's more, CEO Jim Cady says his company is "gross margin profitable" on every listener in part because "direct" royalty deals have made it less expensive for Slacker to license music than for its competitors.

In a press release, Slacker says since its February relaunch (including a redesign of its web site and mobile apps), more than six million new listeners have registered, including over 100-thousand paid subscribers. And the amount of time the average user listens has jumped 25%. Among new listeners, 3.5 million listen via mobile devices. Its user penetration on Apple devices has more than tripled.

Slacker partners for content with ABC Radio. Its general manager Steve Jones told USA Today, "Our audience has grown 3% to 4% every week since February. We're thrilled."

And they're ready to bring on even more users. According to paidContent, Slacker is close to sealing a deal with "a major telco provider" -- a move Cady predicts could be worth "millions of paid subscribers" to his service. Last week we covered news (here) that Slacker had entered a partnership with Vodaphone which would enable them to enter the UK market, but it's not clear if this is the deal of which paidContent wrote.

Early in March, leading webcaster Pandora announced, as an effort to reduce music royalties, it would limit mobile listeners to 40 hours per month of free, ad-supported listening (paid listening by subscribers is not limited, nor is listening on Pandora.com). While services make significantly less on advertising to mobile listeners, music licensing costs remain the same -- meaning heavy users of free ad-supported mobile streams are hardest to monetize for webcasters.

Cady says his service has gained listening partly due to Pandora's move. Adding to that, he tells numerous sources (like VentureBeat), Slacker's "proven business model" enables Slacker (unlike Pandora) "to monetize users with free accounts" -- even mobile users.

First, Slacker simply runs more ads than Pandora. Wedbush Securities analyst Michael Pachter explained this to USA Today: "Slacker is one-sixth the size of Pandora, and both run ads. Slacker does three minutes per hour, Pandora one per hour. It's that simple."

But perhaps even more interesting is that Cady (pictured) says his "direct deals" with record labels and publishers save the company big money. Slacker told Evolver.fm it doesn't pay SoundExchange -- the music industry body that collects and distributes royalties for those services that operate under statutory licenses. Slacker claims their direct deals enable them to pay a lower royalty than do SoundExchange customers (like Pandora).

Slacker, which launched its digital music service in 2010, has raised $50 million in investment. The company also recently expanded its operations, opening offices in Palo Alto, CA and New York.

Read more in coverage from paidContent here, USA Today here, VentureBeat here, and Evolver.fm here.

Digital Music News today revisits the topic of radio broadcast groups forging licensing deals with small record companies that effectively discount streaming fees for a small revenue share for on-air play.

Clear Channel is the largest radio operator engaged in these deals, with label groups like Big Machine, Glassnote, and more. Other broadcasters with similar deals include Entercom and Beasley.

While the terms of these deals aren't public, Digital Music News writes, "In return for getting royalties for airplay, rumoured to be around 1% of revenue, the labels agree to bypass SoundExchange and so cut their online royalty rates to what's rumoured to be around 3% of revenue." [Most AM/FM radio stations pay nothing to use sound recordings on-air. This year most broadcasters will pay $0.0022 per song, per listener for songs streamed online. See more in our royalties round-up under "Commercial Broadcasters" here.]

If it's true radio sees the end of free broadcast use of sound recordings coming, broadcasters might be trying to stay ahead of government regulators by voluntarily entering deals, rather than waiting for the Copyright Royalty Board to set a less favorable rate (see "Internet radio"), as the article suggests.

"The reason (Clear Channel would agree to these terms) must be to drive down the overall royalty rates it has to pay," Digital Music News reasons.

After the news source gets its customary digs against Pandora and Clear Channel in, it points out that while these deals do give recording copyright owners (labels) a bit of a royalty for on-air play (for which they're legally entitled to nothing under current U.S. law), they may not be ideal for performers. For one, there's no guarantee of a consistent rate from deal-to-deal.

And record companies have an extra incentive to forge these agreements: unlike SoundExchange payments, labels aren't legally required to share them with performers.

Industry legal expert David Oxenford has some excellent analysis of these deals in Broadcast Law Blog here.

Read more in Digital Music News here.

The National Association of Broadcasters has reportedly formed a dedicated task force in anticipation of upcoming negotiations on streaming music royalties.

The NAB reached a streaming royalty deal with SoundExchange (the music industry body that adminsters royalties for the online use of copyright recordings) in February of 2009 (ending in 2015), the top-level terms of which are here under "COMMERCIAL BROADCASTERS".

Inside Radio reports Beasley Broadcast Group CFO Caroline Beasley will head the task force. As chair of the NAB Radio Board, Beasley "was actively involved in 2010's performance royalty negotiations," Inside Radio wrote.

Her company is one of the ownership groups which, like Clear Channel and Entercom, have entered into royalty deals outside of the NAB/SoundExchange deal, with some smaller labels. Though the terms of the deals are never made public, it's commonly understood that in exchange for significant royalty discounts on the music they stream, radio groups pay a small royalty on the broadcast use of the labels' recordings (which the radio groups characterize as an "advertising revenue share").

Part of the NAB's deal with SoundExchange, by the way, waives limits on music use imposed by the Digital Millennium Copyright Act, known as the “sound performance complement,” which presumably makes online channels like iHeartRadio's two-artist "Beatles & Stones" stream (see our coverage here) legit.

According to a guest columnist in Audio4cast today, nearly 50% of the over half a billion dollars SoundExchange collected from services last year came solely from Pandora!

SoundExchange is the music industry body that collects and distributes royalties for the digital use of copyright sound recordings. When services like webcasters, satellite radio (SiriusXM), cable radio (Music Choice), and business establishment services (DMX) perform copyright sound recordings, they pay SoundExchange, which then distributes money to copyright owners (labels) and performers.

SoundExchange last week released its 2012 financial report (here), revealing it had collected $502.2 million total from services last year (up 35% from 2011's $372.2 million). Digital media attorney Angus MacDonald compared the SoundExchange report with Pandora's most recent 10-K filing (here) and concludes that the top webcaster alone accounts for all of SoundExchange's 2012 revenue growth.

"Pandora paid 55.9% of its revenues to SoundExchange for the fiscal year that ended January 31, 2013," MacDonald wrote in Audio4cast today. "Pandora’s total revenues last year were $427.1 million. Based on the above figures, Pandora paid SoundExchange over $238.7 million ($427.1 million multiplied by 55.9%)" in that fiscal year. "That $238.7 million figure represents 47.53% of SoundExchange’s total royalty revenues ($502.2 million) in 2012," says McDonald.

Pandora paid about $132 million more for royalties in 2012 than in 2011. So while SoundExchange's collections increased by $130 million in a year, that means Pandora completely footed that increase (and a little more). MacDonald also points out that Pandora's FY 2013 royalty bill ($238.7 million) was close to its total revenue for the previous year ($274.3 million for FY 2012).

Pandora strongly backs legislative efforts (such as the Internet Radio Fairness Act, more here) to reform the process that determine royalty rates, in the hopes of decreasing that obligation. Recording industry groups like SoundExchange and the RIAA have strenuously opposed such efforts.

"With Pandora’s ever-surging listening hours and royalty payments, SoundExchange (as well as the record labels and artists who split the royalties collected by SoundExchange) need a healthy Pandora as much as Pandora needs a reasonable Pureplay-like rate for the next royalty term (2016-2020)," MacDonald concluded.

RIAA CEO Cary Sherman recently told The Verge's Greg Sandoval, "Access models" (industry terminology for services that license digital recordings, like Pandora, but also Spotify and YouTube) "are our present and our future... [This] underscores how vital it is to protect these increasingly important revenue streams."

Read MacDonald's guest column in Audio4cast here.

The RIAA issued its revenue report recently which showed $462 million of its 2012 digital revenue -- about 45% -- came from non-interactive digital services like Pandora and SiriusXM (see more in RAIN here).

Yesterday (in this article) we alluded to RIAA financial statements that revealed streaming revenue from sources like Pandora, Spotify, and YouTube (known as "access models") amounted to $1.0328 billion in 2012, accounting for 15% of total industry revenue.

$462 million, or about 45% of the digital total, came from non-interactive digital services operating under statutory licenses (Internet, satellite, and cable radio) via SoundExchange.

Physical retail sales (CDs/vinyl) amounted to about $2.584 billion, down 18.5% in a year. Downloads amounted to $3.02 billion.

See the RIAA revenue summary sheet here.

The Verge columnist Greg Sandoval cites an RIAA report and statements made by SoundExchange (which collects sound recording royalties from licensed webcast services and satellite radio) to report "Pandora contributes about 25% of all the money the labels receive from the access models. (Incidentally, SoundExchange's revenue was up 58% last year.)" ("Access models" is label terminology for licensed streaming services.)

And this, according to Greg Sandoval in The Verge, is precisely why the labels need to play hardball with Pandora and Internet radio.

"Access models" "are our present and our future," RIAA CEO Cary Sherman told The Verge. "[This] underscores how vital it is to protect these increasingly important revenue streams."

In other words, the labels need to avoid destroying these revenue sources -- yet maintain the upwards pressure on royalties because they also need to maximize profit (and these services are labels' only bright spot right now). Rocco Pendola, columnist for TheStreet, says this shows "the music industry needs Pandora just as bad as -- or, dare I say, worse than -- Pandora needs them. Same goes for the rest of Internet radio."

"If access models fail," Sandoval writes, "the labels risk ending up back in a world where a single player like Apple holds all the power." Industry sources told The Verge that Apple and labels are increasingly close to a deals that would pave the way for an Apple "iRadio" streaming service.

In fact, should the record label give Apple royalty rates that are actually more affordable than the statutory streaming rates, Pandora would have "plenty of ammunition to argue on Capitol Hill that web radio is getting screwed."

Despite this, The Motely Fool is warning investors against Pandora. In a posted video, Motley Fool CTO Jeremy Phillips says Pandora is open to competitive disruption because it doesn't own the content it streams, and any deep-pocketed competitor can easily enter the business. In fact, companies like Google, Amazon, or Apple could operate streaming services at a loss to widen the market for their other businesses.

TheStreet's Pendola strongly disagrees, saying Pandora's Music Genome (its proprietary database of human collected characteristics about each song it plays that drives its algorithmic music programming) is a great example of intellectual property that can't easily be duplicated by a competitor. He also points to the fact that Pandora has been assembling both national and local sales forces to compete with broadcast radio, another accomplishment that won't be easy for a competitor to duplicate.

He writes, "Competitor after competitor has come in and done absolutely nothing to slow Pandora's growth. In fact, the growth has never stalled. In terms of listener hours and revenue, particularly on mobile, the company is as healthy as it has ever been. Don't expect that trend to reverse, even if Apple hits the market with an iRadio product."

Read Sandoval in The Verge here, see video from The Motely Fool here, and read Pendola in TheStreet here.