By paying royalties under Section 801(b) of the Copyright Act, cable and satellite radio stations pay lower royalty rates than Internet radio services (e.g., Pandora) do. IP Value Wire has discussed the predicament Pandora finds itself in … huge popularity, rapidly growing revenues and negative margins, with royalties (due the artists) the number one factor that makes their model unsustainable.
The Internet Radio Fairness Act, co-sponsored by Rep. Jason Chaffetz (R-Utah) and Sen. Ron Wyden (D-Ore.), was introduced to make it so the Pandoras of the world pay the same royalty as the SiriusXMs of the world. The bill is supported by Pandora, the Consumer Electronics Association, and the Computer and Communication Industry Association.
There is now competing proposed legislation, presumably supported by the musicFIRST Coalition and the AFL-CIO, introduced by Rep. Jerrold Nadler (D-N.Y.), that would reverse the process, and make the cable and satellite radio companies pay the royalty rates now faced by Internet radio.
Valuators in this space need to watch this legislation closely. Without favorable congressional action, Pandora and similar Internet radio companies will need a radical alteration in their business models in order to succeed. However, successful passage of the Internet Radio Fairness Act will also serve to bring down a significant barrier to entry, and Apple is waiting in the wings to launch its own version of Internet radio.