Increased Royalty Rates Force Pandora to Implement Listening Cap

Pandora has introduced a cap on the amount of hours users can listen to the service for free each month.Implements Listening Cap

After any user hits the 40 hour mark listening to the service across all devices in a given month, they will have to pay $.99 to continue listening or sign up for the unlimited and ad-free service Pandora One, said Pandora Founder Tim Westergren in a blog post.

This is not a huge concern for the average Pandora listener — in fact, Westergren points out that that a minimal percentage of users will ever hit the 40 hour mark. However, the reasoning for the cap is worth taking note of, as it reveals a little about what is taking place behind the scenes in the financial corners of the digital music world.

Westergren writes that his company’s per-track royalty rates have increased over the past three years, and they have increased in this year alone. He also says that the rates are scheduled to continue to rise — up an additional 16 percent over the next two years — and that the 40 hour cap is part of the company’s effort to cover those costs with “minimal listener disruption.”

“In short, this is an effort to balance the reality of increasing royalty costs with our desire to maximize access to free listening on Pandora,” writes Westergren. “We will be sure to alert any of our listeners that start getting close to the 40 hour limit.”

Westergren has been extremely vocal about his feelings that digital royalty rates are too high, and has implied that the major record labels are the only ones benefiting from the service, not the artists or the digital music services.

The Pandora founder was in Washington, D.C. recently speaking to the Heritage Foundation about digital royalty laws that he called “discriminatory.”

“Our objective is not to pay as little as we can,” he said at the event. “We just want something fair.”

At the event, he also called for legislation that would alter the way standard royalty rates are calculated, which would reduce the payments Pandora makes. Last year, representatives introduced the Internet Radio Fairness Act, and Politico.com reports that the measure will be reintroduced this year as a reworked version.

Last year’s bill changed the standard by which internet royalty rates are calculated, exactly what Westergren is calling for. If passed, the bill could reduce royalty obligations of digital music services by hundreds of millions of dollars.

The bill, however, is opposed by many groups with large sway in Washington, including the Recording Industry Association of America. The bill was not passed before the end of the 112th Congress in January, so it will have to be reintroduced this year to be considered. Sources have not said what changes the reworked version will hold.

As for Pandora, it will remain to be seen how receptive listeners are to paying for going over the listening cap. For the digital industry in general, it will be interesting to see what happens in legislation during the next year (and probably for many years to come), and if those rates gets reduced to the point where online listeners don’t have to worry about additional caps in the future.