Streaming Hits a Dam: Taylor Swift Says “Not So Fast,” Sirius XM Loses Again and Flo and Eddie Sue Pandora

Stephen Carlisle November 12, 2014

The last month has not been kind to the streaming industry. Sirius XM lost a key decision in its lawsuit with the Recording Industry, ¹ Flo and Eddie, fresh off their victory against Sirius XM, ² sued streaming service Pandora, ³ and Taylor Swift put the issue of the microscopic royalty payments made by Spotify in the national spotlight. ⁴

Like the Flo and Eddie lawsuit, the RIAA sued Sirius XM in California state court over its refusal to make royalty payments on pre-1972 sound recordings. The legal underpinnings of the case were discussed in an earlier blog post. ⁵ What was notable was that the Judge here had made a preliminary ruling that indicated she was going to rule in favor of Sirius XM. ⁶ However, after reading the opinion of Judge Gutierrez in the Flo and Eddie case, she wrote that she found the Judge’s ruling “persuasive.”

“Plaintiffs ask the court to take judicial notice of the order granting summary judgment in Flo & Eddie Inc. v. Siruis XM Radio, Inc,” (citation omitted), a district court ruling entered after this motion was argued and under submission. While a federal trial court opinion is not binding on this court, the court finds the logic applied in that order interpreting Civil Code §980 to be persuasive. Unlike Blue Beat and Heilman…the Flo and Eddie decision squarely addresses the issue of public performance rights in pre-1972 recordings.” ⁷

So now, two Judges, one California State Court Judge and one California Federal District Court Judge have both ruled in the same way. It seems that a resolution of the issue by the California Supreme Court is likely. The problem is that this will take years, and the potential damages owed by Sirius XM will continue to pile up in the meantime. If there ultimately is a ruling against Sirius XM, the results could be devastating. Remember that rates paid by Sirius XM and Pandora are regulated by the Copyright Office’s Copyright Royalty Board. Pre-1972 recordings are completely unregulated, and the holders of rights to those recordings can ask for virtually any fee they wish. “Flo & Eddie alleged that damages against Sirius XM would be at least $100 million.” ⁸

So, in the wake of their legal victory, Flo and Eddie now take on Pandora, on a set of virtually identical facts, in the same District Court that has already ruled in their favor. For their part, Pandora seems to be whistling past the graveyard. “A Pandora spokesman said … that the company was confident in its legal position.” ⁹ Flo and Eddie’s latest action against Pandora seeks at least $25 million. ¹⁰

Streaming has been hailed as the savior of the music business. That initial optimism seems to be seriously in doubt. Musicians have long decried the miniscule payouts from the streaming services. ¹¹ Even the New York Times had to sit up and take notice. ¹²

“Late last year, Zoe Keating, an independent musician from Northern California, provided an unusually detailed case in point. In voluminous spreadsheets posted to her Tumblr blog, she revealed the royalties she gets from various services, down to the ten-thousandth of a cent…. After her songs had been played more than 1.5 million times on Pandora over six months, she earned $1,652.74. On Spotify, 131,000 plays last year netted just $547.71, or an average of 0.42 cent a play.” ¹³ The amounts are indeed fractions of pennies, sometime hundredths of pennies. ¹⁴

“On its transparency website, spotifyartists.com, the company disclosed late last year that the per-stream payout for a song streamed on its service is between 0.006 cents and 0.0084 cents.” ¹⁵ You read that right. At this rate, a musician would need to have 4,053,110 plays per month on Spotify to earn the equivalent of the U.S. monthly minimum wage. ¹⁶

And there is also the fear that streaming services, especially “on demand” streaming services such as Spotify, cannibalize downloads and album sales. After all, why buy it, if you can listen to it any time you want? Which brings us to Taylor Swift.

She made headlines last week by refusing to release her new album on Spotify, and also pulled her entire catalog from the service. ¹⁷ So far, 2014 had been notable in one regard, there had not been one certified platinum album, which means no album sold more than 1,000,000 copies all year. ¹⁸ This had never happened since the platinum award was established. Taylor Swift’s new album, “1989” sold more than 1.2 million copies in the first week. So, just maybe, making it available for free is not the best strategy.

“That theory is lent credence by other scarce albums that have had huge debuts over the past year, including Beyoncé’s self-titled surprise album last December (617,000 sold in three days) and Coldplay’s Ghost Stories this May (383,000 sold in one week), neither of which was released to Spotify.” ¹⁹

For her part, Taylor Swift had this to say:

“If I had streamed the new album, it’s impossible to try to speculate what would have happened. But all I can say is that music is changing so quickly, and the landscape of the music industry itself is changing so quickly, that everything new, like Spotify, all feels to me a bit like a grand experiment. And I’m not willing to contribute my life’s work to an experiment that I don’t feel fairly compensates the writers, producers, artists, and creators of this music. And I just don’t agree with perpetuating the perception that music has no value and should be free.” ²⁰

Predictably, the tech interests rushed out to bash Taylor, calling her dumb or greedy, and sometimes both. ²¹ Spotify also shot back.

“We started Spotify because we love music and piracy was killing it,” wrote CEO Daniel Ek in a post on Spotify’s official blog. Ek said that Spotify had paid a total of $2 billion to music labels and their associated artists since Spotify launched in 2008, a sum he argued wouldn’t exist had fans downloaded the music through pirated websites.” ²²

Daniel Ek should know, and the irony is obviously wasted on him.

“It is not widely known, but Spotify’s CEO, Daniel Ek, was an early employee of Bit Torrent and helped to make Bit Torrent and its uTorrent software a raging success. Spotify’s representatives …pointed out that uTorrent and Bit Torrent are not pirate sites they are data transfer platforms that happen to be used for piracy.” ²³ I guess they missed the part that 99% of all BitTorrent traffic is infringing. ²⁴ So why on earth should I be excited about getting into business with a guy who helped destroy my business?

Understand that a songwriter or artist has no choice whether to be on Pandora or Sirius XM. As a subscription, but not “on demand” service, they both have blanket licenses with rates set by the CRB. But Spotify, being an “on demand” service, must negotiate individual licenses. Most recording artists do not own their own recordings, so they appear on Spotify if their record companies want them to. Taylor Swift apparently owns her masters and can make her own choices. So Taylor Swift’s decision to pull her music from Spotify was a business decision, nothing more. She wanted to have her music available only on the premium areas of Spotify. They refused. As her label president explained to Rolling Stone:

“They take [the music], and they say, ‘We’re going to put it everywhere we want to put it, and we really don’t care about what you want to do. Give us everything that you have and we’re going to do what we want with it.’ And that doesn’t work for us. . . . They just need to be a better partner.” ²⁵

Sadly, this is the ethos of the modern internet business: “Give us your content for free, or next to nothing, so I can be a multi-millionaire.” This is the idea behind YouTube, Facebook, Reddit, SnapChat, you name it, not to mention the pirate sites.

So Spotify, the company that pays 0.006 cents per play, has a chairman whose net worth is estimated to be between $310 million ²⁶ and $400 million. ²⁷ He has stated that Spotify will be worth “tens of billions of dollars” in the future. ²⁸ Mr. Ek has never disclosed what his compensation is, or how much of Spotify he owns. This is a privately held company, so even the claim that Spotify pays 70% of revenue to the labels and musicians cannot be verified.

Not so with Pandora, a publically traded company, which, along with not paying the owners of pre-1972 sound recordings, is also mounting a campaign in Congress to vastly reduce the amount of royalties they do pay, under the guise of the Internet Radio Fairness Act. ²⁹ Pandora’s founder, Tim Westergren’s share of the company is valued at nearly $20 million dollars. ³⁰ In recent years, Pandora has paid its CFO $1.1 million, the chief technology officer, $3.4 million, its chief marketing officer $2.7 million and its chief revenue officer $4.6 million. ³¹ All of this for a company that has never turned a profit in all of its years of business. ³² In fact, as recently as the first quarter of 2014, Pandora lost $20 million in one quarter. ³³

So in the eyes of Pandora, the real solution is not to stop paying millions of dollars to bungling executives who year after year oversee the loss of millions and millions of dollars, but instead attempt to right their balance sheet by paying less to the people who make their service attractive in the first place, namely musicians and songwriters.

Or, as Eriq Gardner of the Hollywood Reporter put it: “Welcome to the new world of establishing new laws — where lawmakers examine the “fairness” of whose paycheck is too heavy and whose paycheck is too light.” He quotes music business legend Irving Azoff as saying “[i]t’s horseshit. The market cap for Pandora is like $1.8 billion. That’s roughly the market cap of Live Nation, and they are whining about wanting to pay artists less.”

I have pointed out before, that artists who cannot make a sustainable living will stop making art. A recent Ars Technica article by micro-photographer Alex Wild detailed how the careless pirating of his work has forced him to quit professional photography. ³⁴

The standard barb of the internet is “you have a failed business model.” Well, the music industry as a whole may be a shadow of its former self, but it still does make money. Pandora has never made money and loses millions of dollars on an annual basis. The exception here is, if you’re a top executive of Pandora, you take home million dollar salaries while your company bleeds red ink.

So tell me again, why should musicians and composers take a pay cut to prop up your failed business model?