In September, a Congressional bill was introduced that would reduce the amount Internet radio providers will have to pay in royalties. It's not entirely unreasonable, as the current laws stipulate a royalty structure astronomically higher than cable or satellite radio. Pandora (NYS: P) easily stands to gain the most if the bill goes through, but the question is: Does the very future of Pandora rely on this piece of legislation?

Why Pandora needs help
Before even looking at the royalty issue, let's take a step back and examine the competitive landscape. Frankly, Pandora already faces intense competition; its rivals range from some of the biggest tech players in the game to specialized music services just beginning to get popular.

Sirius XM (NAS: SIRI) , while a satellite-radio company, has decided to jump in the ring with Pandora and will begin offering its customized Internet radio service within the next few months. Sirius has always been seen as a threat, but the threat becomes much more immediate with this move. 


Microsoft (NAS: MSFT) is also making a serious charge into Pandora's space, launching its Xbox Music initiative earlier this week. If executed properly, the service could be a major boon to Microsoft, and a serious threat to Pandora. Xbox Music enjoys a potential customer base of 67 million Xbox owners, not to mention customers who buy Windows 8 and Windows RT products, which include Microsoft's new Surface tablet. Not only is Microsoft offering a catalog of 30 million songs for free streaming, but the service will also be replete with monthly subscription options, downloadable content, and cloud storage come 2013.

Last but not least, Apple (NAS: AAPL)  decided last month to enter the personalized streaming music industry as well. Not because Apple thinks it will be an enormously lucrative enterprise, but because, according to fellow Fool Rick Munarriz, Apple just wants to take market share from Google's (NAS: GOOG) Android operating system! Add to that list Spotify and iHeartRadio, two newer personalized music services springing up as challengers to Pandora's throne, and suddenly the area looks quite crowded.

The fact that the announcement of what amounts to an Apple side-project caused Pandora to shave 20% off its market cap in a single day tells me that Pandora is a very fragile company in an area with almost negligible barriers to entry. Which is why its future may lie in the hands of Congress.

My sincerest apologies to Pandora shareholders.

How the bill would be a bailout
Pandora, sadly, is a victim of its own success. Listeners played more than 1.15 billion hours of music in September, 67% more than last year, while total listeners surged nearly 50% to 58.3 million. For any normal business this would be great news. Unfortunately, under the rules governing Internet radio, Pandora has to fork over about $0.02 for each hour of music played on its site -- either that, or 25% of its revenues, whichever is higher. As it turns out, those pennies add up to more than 25% of revenues -- a lot more. Pandora shelled out about 50% of its revenues last year to pay royalties under the current rules. 

Contrast that with satellite radio, where royalties are capped at 8% of revenues, and cable music, where the caps are 15%. Sirius pays only about 6% of gross revenues to content royalties, while AM and FM stations don't pay direct royalty fees at all. You can see why Pandora founder Tim Westergren himself says the current dynamic "is not a recipe for a sustainable industry," and that the fee structure has a "destructive stranglehold" on Internet radio. He's right.

The only way to change that -- remember, it's the law -- is through legislation, and the bill in question isn't up for discussion until 2013. Still, if the bill passes, it would be a huge win for Pandora and would level the playing field significantly. But if investors want to play for a team that doesn't need fourth-quarter Hail Marys to stay in the game, they should start looking elsewhere.

The tech world is fiercely competitive and always changing, and it's important for investors to stay on top of the current landscape, especially when it concerns what industry leaders are doing. Our Motley Fool analysts have put together a premium research report on Apple, complete with updates about the recent iPhone 5 launch, as well as ongoing guidance as key news hits. Claim your copy today by clicking here now.

The article Does Pandora Need Government Help to Survive? originally appeared on Fool.com.

John Divine has no positions in the stocks mentioned above. You can follow him on Twitter, @divinebizkid, and on Motley Fool CAPS, @TMFDivine. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Arielle Smith

Pandora is a victim of its own success, so much so that it has become blind to the needs of the artists and musicians, or the reason for their success. The new bill will cut artist royalties substantially. It's equally shocking that Pandora has seemed to refuse to even try to find middle ground with artists when it comes to royalties. Instead, they are trying to railroad a bill through a lame duck congress.

October 25 2012 at 9:39 AM Report abuse rate up rate down Reply
Tom

Part of the reason that Sirius shouldn't pay lower royalties than Pandora is that Sirius has a very high percentage of content that they have already paid for (talk channels, sports channels, etc.) that are not music (or comedy) channels. The music channels on Sirius and cable are more analogous to FM radio stations in that they play curated content, not individual driven play lists. Live music events have their own rights fees.

Pandora's fees should be closer to a rental fee for the music, and two cents per listener.hour or 25% of revenues seems like a very reasonable amount to pay under that model (Sirius monthly subscriptions probably are paying closer to 25 cents per hour).

Pandora's problem isn't that their royalty costs are too high, it's that they don't have enough paying subscribers to cover the costs incurred by the non-paying customers. FM radio should really be paying some amount for their music as well (probably lower than Sirius rates as they do typically produce other content such as news, etc.) because the current music industry model doesn't benefit enough from radio exposure (and why should radio be different than other curated music outlets).

October 21 2012 at 8:14 PM Report abuse rate up rate down Reply
Richard K Price

NOTE TO EDITOR; Please add viewer edit to the software, as you can see the unedited copy's went out without author control. This is a recurring problem with many who write comments. It is, as you should understand, critical that these stories and comments be edited by the writers.
Thank you.

October 21 2012 at 2:52 PM Report abuse rate up rate down Reply
Richard K Price

The R.I.A.A. and M.P.A.A. using corrupt politicians like Lamar Smith to pass laws strictly for greedy profit. Why is Congress setting these rates anyway. This bill has been handed over to the House Judiciary Committee, This is chaired by Lamar Smith the bough and paid for politician of these groups.A direct violation of any form of ethical behavior. This only shows the lack of scruples of anyone who supports these people.Yet these crooks are allowed to proceed without restriction.The market will find its own way. Trying to resist progress will not work. We all lose. I personally am tired of signing petitions to undo and resist these unfair laws. This is just one more underhanded trick by these corporations and government to control the INTERNET.. Pandora has been the target of legal extortion by these political lobby groups. Pandora is a great station and the Genome project could l be the music venue of the future if given a chance. I pay for the added features of this service. Living within a tight budget, it is easier to chisel a statue of Michaelangelo than to chisel a dime from me. If I pay for it, it has to be exceptional. I am willing to fight to keep that reject button.Companies like Netflix and Pandora are most of the answer against online piracy and should be given a fair chance, These greedy corporations and even greedier politicians are far worse then a few high school and collage students who illegaly download music and video.

October 21 2012 at 1:42 PM Report abuse rate up rate down Reply
Richard K Price

The R.I.A.A. and M.P.A.A. using corrupt politicians like Lamar Smith to pass laws strictly for greedy profit. Why is Congress setting these rates anyway. This bill has been handed over to the House Judiciary Committee, This is chaired by Lamar Smith the bough and paid for politician of these groups.A direct violation of any form of ethical behavior. This only shows the lack of scruples of anyone who supports these people.Yet these crooks are allowed to proceed without restriction.The market will find its own way. Trying to resist progress will not work. We all lose. I personally am tired of signing petitions to undo and resist these unfair laws. This is just one more underhanded trick by these corporations and government to control the INTERNET.. Pandora has been the target of legal extortion by these political lobby groups. Pandora is a great station and the Genome project could l be the music venue of the future if given a chance. I pay for the added features of this service. Living within a tight budget, it is easier to chisel a statue of Michaelangelo than to chisel a dime from me. If I pay for it, it has to be exceptional. I am willing to fight to keep that reject button.Companies like Netflix and Pandora are most of the answer against online piracy and should be given a fair chance, These greedy corporations and even greedier politicians are far worse then the pirates who download music and video.

October 21 2012 at 1:37 PM Report abuse rate up rate down Reply