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Pandora Has 'No Comment' About 'Steering' Payola In Direct Deal With Naxos Records

Pandora is bringing back the $50 handshake by striking another "direct" deal this week with Naxos Records; and is looking for any pre-ruling leverage that they can find, according to David Lowery of The Trichordist.

(Ed note – The $50 dollar handshake was record industry slang for the age old practice of illegal payments by record labels to radio stations for preferential airplay. The technique was for a record promoter to palm a $50 bill to a DJ concealed in a handshake.)

Pandora announced another “direct” deal this week, this time with Naxos Records. Remember, Pandora is in the middle of a rate setting proceeding for the webcasting royalty at the Copyright Royalty Board (CRB) in Washington. This is no accident that Pandora is trying to get as many of these direct deals done as possible before the CRB rules on its statutory webcasting rates that Pandora will pay–sound recording owners. Record labels like Naxos have the ability to “opt out” of the statutory rate set by the CRB if they make a direct agreement with any service including Pandora.

And you know there’s always a trick with Pandora, so here it is. If Naxos did nothing, they would get the statutory rate. If they make a direct deal, they presumably got “something” better than the direct rate.

But why would Pandora make a direct deal with Naxos (or Merlin for that matter) and pay a higher rate than the one they get from the CRB? It’s unlikely they did. They have no incentive. It only makes sense that Pandora got a lower-than-statutory rate and in exchange Naxos (like Merlin) got “something else” in exchange for taking the lower rate.

Be sure you don’t miss the point here–Pandora is trying to show these direct deals with Naxos and Merlin as evidence of what royalty rates should apply to the rest of us. So Pandora wants the royalty rate to be lower than the rate that SoundExchange is asking for so they can use the Naxos and Merlin deals as examples of “free market” agreements between a “willing buyer” and a “willing seller”.

As the Radio and Internet Newsletter (RAIN) explained:

Pandora’s p]rivate licensing deals are significant for another reason. The CRB process of setting government-mandated rates has been distorted, some audio publishers believe, by a lack of real-world deal-making examples which could establish a value of licensed music that isn’t theoretical. Pandora used its Merlin deal as an anchor example in its initial argument brief. Presumably, the Naxos agreement could bolster Pandora’s case during this year-long lead-up to new rates.

So again why would Naxos and Merlin agree to a rate that helped Pandora lower the royalties paid to everyone else? There’s probably an easy answer to that.

Very likely because they got each something else that made it worthwhile. And if by taking that vigorish it hurts the rest of us–well, it’s a cruel world, don’t you know.

Now what might that vig be?

In the case of Merlin, they accepted a lower rate in part in exchange for Pandora “steering” listeners to Merlin artists. If this sounds a little like payola you wouldn’t be the first to question this practice.

Pandora Says No Comment

Steering” payments are a different beast–these are payments that benefit Pandora by triggering a lower royalty rate if Pandora plays more of the label’s artists. That consideration that flows to Pandora is a lower royalty rate–the benefit to Pandora being the difference between what they would pay under the presumably higher statutory rate and what they do pay under the steering arrangement. You know, consideration for airplay.

Consideration for airplay…isn’t that payola?

Was there a steering payment in the Naxos deal? RAIN also noted:

We reached out to Pandora to ask whether the Naxos licensing agreement includes similar “steering” as with Merlin, and received a polite “no comment.”

Now why would that be?

Let’s recap a little history. One trick that Pandora is trying to fool us with was originated by their in-house lawyer, Christopher Harrison when he was at DMX. David Lowery noted that Billboard called out Harrison on the issue:

Ed Christman did his homework on this part of the story, too and called Pandora lawyer Chris Harrison on the bullshit he pulled while he was at DMX that shafted songwriters and that Harrison is trying to duplicate for Pandora to shaft artists, musicians and vocalists. Ed got that exactly right.

Here’s how Mr. Christman described DMX’s dirty tricks on songwriters:

Back in 2007-2010, when ASCAP and BMI rate court judges were involved in litigation between DMX and performance rights societies, the judges examined the direct licensing deals DMX cut with publishers.During that process, judges did not review the advances or any of the other aspects of the deal, and only looked at the reduced per-store royalty rate Consequently, in the case of BMI, this resulted in the per-store negotiated rate falling from $36.36 to a per-location fee of $18.91, much to the chagrin of the publishers, who stayed a part of the PROs’ blanket licenses. The ASCAP rate court returned a similar finding.

(Did we mention that Pandora vp of business affairs and assistant general counsel Chris Harrison was DMX’s vp of business affairs at the time of the rate court ruling in a lower per-location blanket fee?)

Oh yes…the advances. There is usually money involved after all. We don’t know if Naxos or Merlin got any advances, or better yet for a label, nonrecoupable payments from Pandora–the kind they don’t share with artists. (This is a variation on “breakage”, being payments that are so large there’s no chance that the label will ever recoup during the life of the license.)

But we do know that when Pandora filed the Merlin agreement with the CRB as evidence in their rate proceeding, there was a whole bunch of stuff blacked out so we couldn’t read it and know what the deal was. What do you bet that had something to do with M-O-N-E-Y.

So if Naxos did a deal that is so great for their artists (including symphonies and conductors), why aren’t they singing it from the rooftops? If Pandora only has the artist’s best interests at heart, then why isn’t Pandora singing it right along side Naxos? Of course in a way, anyone doing a direct deal with Pandora is driven to it by the threat of having to take the statutory license if they don’t–the implication being that the statutory license that the rest of us have to live with will be worse than whatever deal Naxos made that did not rely on the statutory license. So what could make it better?

The Merlin deal had “steering” payments in it…why would Pandora say “no comment” about a component of the Merlin deal that Pandora did sing from the rooftops at the time.

Why oh why oh why?

And right there you should understand what is really rancid about these direct deals. If nothing else, the CRB rate setting process is transparent. Artists, musicians, vocalists and sound recording owners are represented by SoundExchange and have more or less equal voting power on the SoundExchange board. Three judges set the rates after hearing from all sides in the process. Unlike the ASCAP and BMI rate courts, you don’t have a situation where a single judge can decide to just ignore a vital part of the evidence the way each of the single rate court judges did in the DMX case–not doubt to the great glee of Christopher Harrison.

Not only that, but who knows if Naxos is going to apply the artist share of webcasting against unrecouped balances of their artists, or simply keep the artist share of royalties.

SoundExchange hasn’t allowed labels to collect the artist share of statutory royalties. Artists, musicians, vocalists and labels are all paid at the same statutory rate. No under the table shenanigans, no side deals, no payola. Plus SoundExchange audits these services on behalf of everyone. There’s definitely some significant benefits to artists from staying in the SoundExchange system particularly as SoundExchange pays out hundreds of millions.

Instead of the relatively transparent CRB process, Pandora is repeating the sleazy DMX charade and is trying to hide the ball. Would we prefer that the government wasn’t involved at all? Would we prefer if everyone made their own deal? Probably. But we also like the idea that all the cards are on the table and appreciate the benefit of collective licensing. (And we know it’s a good thing because Pandora tried to stop it in the infamous Internet Radio Fairness Act.)

But You Can Give Them to the Birds and Bees

What about this steering payola? There’s a real question of whether these steering deals are even legal, particularly if Pandora is the service. That’s because Pandora bought a radio station, and payola laws definitely apply to FCC licensed radio station owners. David wrote about this before (“@Billboard is Demonstrably Short on Pandora Payola: Just Read FCC Website“) so let’s read an important long quote from David’s post:

As we previously posted, Pandora’s own high powered Washington DC lawyer, David Oxenford, wrote an article in 2008 about Internet radio and payola that everyone should read:

As Pandora lawyer Mr. Oxenford tells us:

“The payola statute, 47 USC Section 508, applies to radio stations and their employees, so by its terms it does not apply to Internet radio (at least to the extent that Internet Radio is not transmitted by radio waves – we’ll ignore questions of whether Internet radio transmitted by wi-fi, WiMax or cellular technology might be considered a “radio” service for purposes of this statute). But that does not end the inquiry. Note that neither the prosecutions brought by Eliot Spitzer in New York state a few years ago nor the prosecution of legendary disc jockey Alan Fried in the 1950s were brought under the payola statute. Instead, both were based on state law commercial bribery statutes on the theory that improper payments were being received for a commercial advantage. Such statutes are in no way limited to radio, but can apply to any business. Thus, Internet radio stations would need to be concerned.”

So as Pandora’s lawyer tells us, if the FCC can’t get jurisdiction over pureplay webcasters, state attorneys general may be able to under applicable state law commercial bribery statutes. That’s potentially what’s called a 51 jurisdiction issue (50 states plus federal law)….

And if payola only applied to cash money as Pandora’s CEO would like you to believe, would the FCC have looked the other way when broadcasters received the legendary “hookers and blow”? Vacation trips and clothes? You know, “other valuable consideration”? Do we really have to start quoting “Hit Men” or “Stiffed” here? Morris Levy is laughing his ass off!

I’m just not hearing a credible argument for why getting a below market discount on something–in this case, royalties in exchange for airplay–is not “other valuable consideration.” Therefore since Pandora is doing everything it can to buy a radio station (and is in front of the FCC right now trying to get their acquisition approved) you’d think they’d want to disclose receiving valuable consideration for playing Merlin artists. And they aren’t.

Billboard and I agree on this: stranger things have happened in the U.S. legal system. Far, far stranger things. The only one who can sort this out is the FCC–and good news! The FCC has a way to do that as part of its review of Pandora’s license for South Dakota radio station KXMZ that the FCC is reviewing right now. And until the FCC rules on the payola issue with Pandora, it’s hard to see why Pandora’s lawyer Chris Harrison should be able to use Pandora’s end run around the law to lower everyone else’s rates in the [CRB] rate hearing in Washington….And won’t it be interesting if it turns out that Chris Harrison filed an illegal contract with the royalty hearing on everyone else’s already putridly low Pandora royalties to try to drive Pandora’s payments even lower.

Sounds like “no comment” is the safest thing that Pandora and Naxos could say at this point.