CMU can exclusively reveal that Universal Music last year changed the way it pays Pandora royalties to artists, and an increasing number of managers are expressing concern about the change. The lack of communications around the new policy has also garnered criticism, with some Universal-signed artists possibly still unaware that their share of Pandora income is now calculated and paid in a different way than before.
Pandora, a subsidiary of Nasdaq-listed Sirius XM Holdings Inc, is a US-based personalised radio service. Previously Universal - like other record labels that have a direct licensing arrangement with the digital firm - allowed the performer's share of Pandora income to flow through collecting society SoundExchange, with everyone being paid at industry-standard rates.
However, Universal now treats Pandora income like any other streaming income, which can significantly cut the share of the money the artist receives.
Speaking to CMU, one artist manager noted that some artists - especially heritage artists - "rely on their SoundExchange money to survive", and a big chunk of that has traditionally come from Pandora. Universal's policy change, therefore, is "like waking up one day and seeing your pension or pay-cheque disappear without warning or explanation".
How Pandora payments work
Personalised radio services like Pandora can rely on a compulsory licence in the US when it comes to accessing recordings.
That means they do not need to negotiate any bespoke deals with record companies or music distributors, with the rates they pay under the compulsory licence set by the Copyright Royalty Board. SoundExchange then administrates that compulsory licence.
Under US copyright law, when money flows through SoundExchange, 50% is paid through to whoever owns the copyright in a sound recording, with the other 50% being paid to performers, both featured artists and session musicians.
So, basically, it works the same as with broadcast and public performance in the UK, where 50% of the money flows directly to performers as equitable remuneration, with up to a third of the performer share going to session musicians.
Though - with SoundExchange - of the total amount, 45% flows to featured artists and 5% to session musicians, the latter via the union-run IP Fund.
For non-US artists, the same system applies if their music is used by an American service under the compulsory licence. If they are not a direct member of SoundExchange, their royalties will flow through their local collecting society. So, in the UK, that’s PPL.
However, services do not have to use the compulsory licence and can instead negotiate deals directly with labels and distributors.
In the mid-2010s, after becoming a massive player in the US digital market by utilising the SoundExchange managed licence, Pandora came under considerable pressure from the record industry to go the direct deal route, so that more bespoke terms could be negotiated.
As a result, Pandora did direct deals with the majors and some others. As those deals were being done questions were asked about what it meant for artists, because those direct performer payments at industry standard rates are only a legal requirement when the SoundExchange administered licence is employed.
However, to avoid any controversy that might unfold if their insistence on direct deals negatively impacted on performer payments, the labels kept the existing system in place even once they had direct deals with Pandora. So 50% of the money those deals generated continued to flow directly to performers through SoundExchange.
Universal's new approach
Last year, without any formal communication, Universal dropped that approach. Instead it is now paying Pandora royalties through to artists itself, seemingly employing a contractural streaming rate rather than the industry-standard of 45%.
It’s not clear on what basis the change was made. Some managers have been told that changes to the Pandora experience - with some extra functionality being added - prompted Universal to reclassify the service and therefore adopt a different royalties system. Though given that Pandora still relies on the SoundExchange administered compulsory licence for catalogue not covered by its direct deals, any new functionality has not changed the service’s official classification.
Universal’s change of approach can have a significant impact on artists. If an artist is being paid a 15% royalty on other streaming income - as some artists on older deals are - they will now get 15% of whatever Pandora pays over, rather than 45%. Even when the admin fee SoundExchange charges is taken into account, that is still a significant cut in earnings for the artist. And some heritage artists have a contractural royalty less than 15%.
Another issue is recoupment. Under record contracts, labels can recoup advances and sometimes other upfront costs from an artist's royalties. But when money flows directly to performers though the collective licensing system, those payments are not affected by unrecouped balances. Which means - not only will artists potentially see a lower cut of Pandora income under Universal's new system - that money can now be set off against unrecouped costs.
That said, CMU understands from sources that Universal will actually still pay Pandora royalties through to artists who are unrecouped for a period of two years. And, for artists that signed deals prior to 2000, there is a general commitment to pay through digital income to unrecouped acts.
However, for many performers, once Universal does start using Pandora income to set off unrecouped balances, then this revenue stream will be - in practical terms - lost entirely. And while Pandora is not as dominant a player in the US digital music market as it once was, for some artists it is still a decent revenue generator.
One prominent artist manager told CMU: “This unannounced change by Universal is really difficult for artists, especially older artists who can’t tour. They rely on their SoundExchange money to survive. It’s like waking up one day and seeing your pension or pay-cheque disappear without warning or explanation. And if they can’t tour, they have no way to make up this lost money that will ultimately be applied to some old unrecouped balance".
"The major labels make the majority of the money from record sales", they added. "It’s just the way it is. But does a huge public company like Universal really need to take these pennies away from the artists?”
There are other things to factor in too. Mike Merriman from business management firm PARR3 notes: "This move by Universal adds one more thing we need to check when reviewing our clients’ royalty statements. We make it our job to constantly hunt for errors in labels accounting to artists and we find a lot. SoundExchange has an efficient and clean way of reporting digital performance royalties and we prefer all digital performance royalties to flow through them".
Another prominent business manager adds: “We are very concerned how this featured artist income for Pandora, that historically flowed directly to our clients, administered by SoundExchange, is now being accounted for and that it will be used against unrecouped accounts. Historically, many of our clients were receiving these rather relevant funds at a pass through rate from SoundExchange with UMG recoupment status being a non-issue".
The change in policy also effects session musicians, as under the old model 5% of the total revenues paid by Pandora to Universal Music flowed to the IP Fund run by American unions AFM and SAG-AFTRA. Given the ongoing campaign within the session musician community to secure a share of general streaming income, this backwards step on Pandora payments will not be welcomed at all.
Communicating the change (or not)
With the lack of any formal communication around Universal's Pandora policy change, it was left to the business managers and royalty specialists employed by artists to figure it out. That included the team at London-based Y Royalties, who work with more than 100 artists who are SoundExchange members.
The company's Head Of Data, James Miles, explains: "By analysing all our clients' royalty statements across both recording and publishing revenue streams, we can find discrepancies at both the grand scale, and the minute track and work level".
"In this instance, we automatically detected a significant drop in Pandora income in our royalty data. We then connected this to the fact that the performer's share of income from Universal's deal with Pandora was no longer flowing through SoundExchange".
"Our contacts at Kollective Neighbouring Rights - which manages revenue streams like this for its clients - then confirmed Universal’s change of heart with regards to Pandora allocations in the US".
The lack of transparency around streaming deals and digital income has been a big part of the economics of music streaming debate and, in the UK, a transparency code is in the final stages of being agreed as a result of a government-instigated working group.
That code will see labels and distributors commit to make more information about streaming deals and royalties more readily available to artists and their managers.
Some within the record industry have questioned the degree to which transparency is really a problem. But Universal making a significant change to what is, for some artists, a key revenue stream, without consultation or communication, demonstrates that there remains very little transparency for artists and their managers when it comes to digital income.
UK artists and managers are hoping that the new transparency code can kickstart a complete culture change in this domain. Whether that can then be exported across the Atlantic to the US industry remains to be seen.