A year ago, Matt Najdowskilike many business managers for top artists, was regularly reviewing royalty statements when he discovered an unusual drop in revenue.
For years, Pandora, the Internet radio streaming service, had paid 50 percent of song royalties to artists through an aggregation company called SoundExchange. But suddenly, artists signed to Universal Music Group were getting a much lower percentage, similar to what they got from on-demand streaming services like Spotify or YouTube. And payments were now arriving directly from UMG.
Najdowski investigated further and learned that UMG was able to change the way it reported Pandora's revenue because Pandora itself had changed. In 2016, the streaming service began to evolve from webcasting to a Spotify-like “search and play what you want” model. Because Pandora now offers an interactive service, rather than a non-interactive webcaster, it has had to make new deals with labels rather than relying on a government-mandated license at a set price.
As a result, UMG and other labels were able to change the flow of royalties, so they collected and paid them directly — rather than having SoundExchange distribute them to artists, as required by law under these mandatory licenses. UMG's policy change last year made it the first and only company so far, according to sources, to benefit from the change. With that, the royalty split for artists also changed, from a 50% split through SoundExchange to whatever, often less, percentage dictated by their record deals for on-demand streaming revenue. That's significant as the world's biggest record label contributed $135 million to SoundExchange as part of Pandora's share of artists, according to Advertising sign estimates based on financial reports and other public information.
“That particular royalty stream can range from a few hundred dollars a month to a few thousand. It can be a significant amount of money,” says Najdowski, director of rights for Farris, Self & Moore. This change in accounting, he adds, “pretty much takes money away [artist’s] pockets.”
Perhaps most notably, Najdowski discovered that UMG's many unrecovered artists—meaning they haven't yet earned the money the label spent on recording, marketing, and other expenses—were getting an alarming amount: zero. These acts were previously paid directly by SoundExchange, so their non-refundable status with UMG was not a problem for these royalties. “A lot is withheld and it's like the labels are missing money,” he says Heather Gruberdirector of rights for Fineman West, a business management firm that represents artists.
Although Pandora has struggled in recent years — monthly users fell from 81.5 million in 2014 to 46 million in 2023 — it remains a powerful outlet for hitmakers like SZA, Megan Thee Stallion and Lil Durk, as well as singles like contemporary – Christian singer-songwriter Lauren Daigle's 'These Are the Days'. Younger artists also rely on exposure, and Pandora's royalties have provided significant revenue while absorbing touring and merchandising costs. “If you're making millions of dollars, it's not going to have a big impact on you,” he says Harold Papineau, co-counsel with King, Holmes, Paterno and Soriano, representing Metallica and others. “But if you're living paycheck to paycheck, then that's a major problem. Now you've lost money you could rely on to pay your bills.”
In a statement, a UMG spokesperson responded by explaining the difference between interactive (like Spotify, YouTube and Apple Music) and non-interactive streaming services (like internet radio). For the former, recording rights “are subject to direct negotiations between an individual rights holder and the service,” the spokesperson said, adding that Pandora “has fundamentally changed its functionality to become an interactive service where users they can select custom tracks.” In other words: The label has every right to make this change.
But UMG didn't fully change the way it reported royalties to artists until 2022, surprising many business executives and music lawyers. “It kind of happened overnight,” he says Mike Merriman, director of operations for the PARR3 label which represents DJ Alison Wonderland, singer 6lack and producer Louis Bell, among others. “It creates some ambiguity and a lack of transparency.”
When Pandora's makeover first began, business managers were confused about the streaming service's identity. “We're still running analysis on that,” he says Erica Rosa, owner/service of royalties and contract compliance at FBMM, a business management company representing top artists. “I've asked a lot of questions to lawyers and various industry figures: 'How would you define Pandora? Would you consider it an interactive or non-interactive stream? I don't know if anyone has given a clear definitive answer yet.”
Additional reporting by Glenn Peoples.
