Pandora Free users are “able to listen to particular sound recordings on-demand whenever they choose”, which means the US streaming service must pay mechanical royalties for all usage on its free-tier, says collecting society the MLC in a new lawsuit filed with the courts in Nashville.
The MLC accuses Pandora of underpaying royalties, with its CEO Kris Ahrend adding, “Our team repeatedly sought to resolve this issue directly with Pandora, but Pandora has refused to correct their reporting or royalty payments”.
The dispute between the US mechanical rights society and Sirius XM-owned Pandora centres on how ‘personalised radio’ services are defined, and whether they exploit the mechanical rights in songs, as well as the performing rights.
Traditionally radio broadcasters only needed a licence covering the performing rights because DJs would play music from records or CDs, which would then be transmitted over the airwaves. Crucially no copying took place, which is when a mechanical rights licence is required.
In some cases, online and even personalised radio services also only require a performing rights licence, although the rules differ from country to country. In the US, the mechanical rights compulsory licence, which the MLC administrates, provides the relevant rules. It distinguishes between interactive and non-interactive online services, and says interactive services exploit the mechanical rights.
With personalised radio - which is the core of Pandora’s product - it’s typically understood that if a user gets a curated stream of music, but can’t pick specific tracks or albums on-demand, then this falls under the non-interactive bracket and a mechanical rights licence is not required
Under Pandora’s Premium subscription plans - which do pay out to the MLC - users can skip and replay songs on-demand, without any limits. On Pandora Free, the ad-supported service, users get “a limited number of skips per day” but “may be given the option to unlock more skips by engaging with an advertisement”. Those listeners will also be “prompted to watch a video ad” when they want to replay a track. Marketing blurb also makes a point of this saying that users can “search and play what you want”.
That functionality, says the MLC, means Pandora Free is also an interactive service, and therefore mechanical royalties are due. "Users of Pandora Free can select and receive streams of particular sound recordings on-demand at any time", its lawsuit states. "Even if a Pandora Free user decides to listen to music in a 'lean back' mode such as a playlist or custom-made webcast, they remain able to listen to particular sound recordings on-demand whenever they choose".
Pandora acknowledges that when a free-tier subscriber uses the extra skip or replay functionality, that is interactive. But the rest of the time, it reckons, the service is non-interactive. Therefore, when reporting its revenues to the MLC - so that society can calculate what royalties are due - it doesn’t report all its free-tier revenues.
The MLC lawsuit explains that Pandora has “excluded revenue derived from non-interactive services on the Pandora Free configuration” because it believes those elements are “beyond the scope” of the compulsory licence. Even though, the MLC adds, Pandora has admitted that it increased the on-demand functionality of its free service in order to compete with the likes of Spotify, which offer more interactivity. And Spotify pays mechanical royalties on its entire free tier.
When the MLC sent a letter to Pandora insisting its exclusions of revenue were not allowed, the streaming service responded by disputing the society's interpretation of US copyright law and the compulsory licence, and also stated that it’s not the job of the MLC to decide whether a service is required to pay mechanical royalties or not.
Commenting on the lawsuit, Ahrend concludes, “We have brought this action to ensure that our members receive all the mechanical royalties they are due in connection with the use of their songs by Pandora on the Pandora Free service".