John McDuling

[Commentary] 2014 marks the 15th anniversary of the launch of Napster, the file sharing service that disrupted the music business and conditioned a generation of consumers to expect to be able to listen to their favorite songs for free.

Pandora has been seeking to lower the amount it pays to publishers in royalties to be in line with that paid by terrestrial radio stations -- 1.7% of gross annual revenue.

The American Society of Composers, Authors and Publishers (ASCAP) has been seeking to increase rates to as high as 3% of Pandora’s gross revenue, citing the much higher rates paid by other digital services, such as Spotify. The court ended up ruling in March 2014 that the rate would stay unchanged at 1.85%.

But the tactics used by the music industry against Pandora were the really interesting part. But one piece of information about the songs in the Genome Project library -- “the most sophisticated taxonomy of musical information ever collected” according to Pandora -- remains lacking: Who actually owns them. And for Pandora, this would soon prove to be a massive problem.

In November 2012, Pandora commenced legal action to get the dispute with ASCAP resolved. Mindful of the fact that if they did not come to an agreement with Sony, which owned the rights to large swathes of music in Pandora’s play catalog, Pandora in early November 2012 requested from both Sony and ASCAP a list of Sony tracks available for license so it could remove them from its service.

According to the ruling, Sony “quite deliberately” withheld this information to weaken Pandora’s hand in the negotiations. A couple of months later, Universal also withdrew its digital rights from ASCAP, seeking a similar outcome. ASCAP denies that it was involved in any “troubling,” coordinated behavior against Pandora. But it is clear that this fight is far from over.

The numbers: Google reported first quarter net income of $3.45 billion, slightly up on 2013, but well shy of consensus estimates for $4.3 billion, according to FactSet.

Revenue was $15.4 billion, up 19% on 2013, but only $12.2 billion once commissions paid to partners for traffic were taken out. FactSet expectations were for revenue of $12.4 billion, after the partner commissions. With a miss on both profit and revenue, Google shares have sunk by about 6% in after-hours trade.

The takeaway: The average cost per click for advertisements (a measure of how much Google charges advertisers in its auction-based systems) fell by 9% during the quarter, while traffic acquisition costs -- the amount it pays to partners for traffic (for example to Apple for default Google searches via the Safari browser on iPhones) rose to $3.23 billion compared to $2.96 billion in 2013.

One of the byproducts of Americans’ ongoing love affair with the automobile is the enduring strength of their relationship with radio -- especially the old-fashioned terrestrial (AM/FM) kind.

While the number of Americans that listen to some AM/FM radio has shrunk marginally over the past decade, it has also remained firmly above the 90% threshold -- an astonishing level of penetration when you consider the number of alternatives (MP3s, streaming music services, satellite radio) that have emerged over that period.

And old fashioned radio continues to trounce the most comparable of those -- satellite radio and Internet radio -- in terms of its share of listening hours. Business wise, it’s a similar story.

According to analysis by Macquarie Capital, terrestrial radio’s share of the advertising market since 2011 has remained fairly stable at about 10%, in contrast to the sharp falls experienced by other legacy media segments like newspapers and magazines. It’s arguably best explained by the fact that most listening takes place in the car, where old fashioned AM/FM radio still reigns supreme. 44% of all radio listening takes place in the car, where terrestrial radio has an 80% share, according to Macquarie.