The New Economics of the Music Industry

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After years of fighting over pennies, Internet radio services reached an agreement with artists, music publishers and record labels a few years ago on royalty payments. The rates go up every year, but the broad formula is that big "pure play" companies, such as Pandora and Slacker, pay either 25 percent of their total revenue per year, or a little more than $.001 per song -- whichever is greater. These payments go to a music-business collection agency known as SoundExchange, which then pays 50 percent of it to the copyright owner (usually a record label like Warner or Sony), 45 percent to the artist and 5 percent to non-featured performers. Smaller Internet radio companies pay slightly lower rates.

Anu Kirk, product lead for MOG, said at the recent Digital Music Forum in Los Angeles that Pandora winds up paying out much less than that – about a tenth of a penny per play. "It sucks that right now that artists are getting paid so little money by subscription services, but it sucks that artists are getting paid so little money by everyone," Kirk said.

David Hyman, CEO of MOG, won't divulge his subscriber numbers, but he offers broad royalty estimates that apply to both Pandora-style radio and MOG-style subscriptions. "Let's say MOG has 1 million subscribers and everyone's paying $10 per month. And let's say the labels got 60 percent of that. Now, each label gets their piece of 60 percent based on frequency of plays. So if Warner [Music, a major label] was 30 percent of all plays in a given month, then Warner gets 30 percent of that 60 percent," he says. "Then they get a wad of money. Once they get that wad of money, how do they distribute it internally? I have no idea."


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