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One of the major concerns that investors have with Pandora (NYSE:P) is the fact that the company spends such a large percentage of its revenue on music royalties. The Internet radio service pays royalties on a per-song/per-listen basis. This means that the more people listen, the more the company pays in royalties. If listenership grows faster than advertising and subscription revenue, the company is digging itself into a hole.

All that may now change as ASCAP and the Radio Music License Committee have come to a Settlement In Principle about exactly how music royalties will be paid. The good news for companies like Pandora is that the royalty fee structure is moving to a percentage of revenue rather than a flat fee per-song/per listen basis.

The settlement impacts rates between 2010 and 2016, encompassing seven years. Perhaps the most important line in the press release was this:

"... it would end ongoing Federal Rate Court litigation and provides for a return to a revenue-based fee structure as well as expanded coverage to accommodate the radio industry's newer distribution platforms for reaching listeners by means such as Internet websites, smart phones and other wireless devices. It also greatly simplifies the reporting process and administrative burden through electronic filing."

Pandora had previously negotiated a percentage of revenue deal, but that deal dealt with the per-song/per-listen rate or 25% of revenue, whichever number was greater. Pandora has never had enough revenue to make the 25% figure, and could really only do so by building the subscription model or getting a lot more in advertising revenue, a task that has challenges of its own.

While ASCAP is only one place Pandora pays revenues, the move here is substantial in that it shows the sector that right holders have an understanding that Internet radio can be a friendly medium to the music business, and that it is better to have viable Internet radio businesses than to strip every dime away from them for royalties.

"This is a gratifying result for the radio industry, which reflects the current realities of our industry and puts the industry back on sound footing insofar as its licensing relationships with ASCAP are concerned," commented RMLC Chairman Ed Christian, CEO of Saga Communications. "We appreciate the good will which ASCAP has demonstrated in working with our industry to get this resolution."

While a more realistic royalty structure will indeed help Pandora, it will also assist the competition represented by companies like Sirius XM (NASDAQ:SIRI), Slacker, MOG and Spotify. Perhaps more than anything, this is a win for consumers, as it makes the business model of streaming music over the net or to mobile devices more sustainable.

ASCAP is the first and leading U.S. Performing Rights Organization (PRO) representing the world's largest repertory totaling over 8.5 million copyrighted musical works of every style and genre from more than 425,000 songwriter, composer and music publisher members. The RMLC represents the vast majority of the nation's radio stations (over 10,000 radio stations).

While full details are not available, the fact that ASCAP published a press release is pretty telling. If the trend continues to other rights holders, it could mean that the audio entertainment sector just got a nice boost.

Sirius XM has previously announced that they are trying to cut direct deals with the labels.

Disclosure: I am long SIRI.

Additional disclosure: I have no position in Pandora.

Source: Royalty Settlement May Be Music To Pandora's Ears