Pandora caps its free radio streams -- again

Trying to cut its burgeoning royalty costs, Pandora announced this week that it would limit customers to 40 hours of free streaming music per month.

If that sounds familiar, the popular online radio site imposed a 40-hour cap in July 2009 for the very same reason, only to lift it a little more than two years later. The initial cap applied to all listeners; now it applies only to those tuning in on a smartphone, tablet computer or other mobile device. But mobile is hardly a sidelight for Pandora; according to the company, more than 75% of Pandora’s streams go to “mobile and other non-traditional devices.”

Founder Tim Westergren said in an interview Thursday that the point of the new cap is the same as the old one. Pandora’s explosive growth in usage has outpaced its ability to monetize its streams, Westergren said, so it’s trying to slow down the growth and let advertisers catch up.

It’s a common complaint by Web-based media companies -- advertising dollars aren’t following audiences as they move to new digital services. The Wall Street Journal reported last year that less than 2% of U.S. marketing dollars were spent on mobile advertising, even though mobile devices were generating more than 10% of Internet traffic.

Nevertheless, the market research firm Gartner projects that mobile advertising revenue will nearly triple in North America by 2016. And according to Paragon Report, Pandora was second only to Google in the mobile advertising market, with an estimated share of almost 9%.

So, as hard as it’s been for Pandora to generate profits, the trends in mobile looks promising, assuming it doesn’t drive off many subscribers with the new cap. According to Westergren, the limit imposed Wednesday is expected to affect less than 4% of Pandora’s listeners, a much smaller percentage than the broader cap in 2009 was projected to affect.

Nevertheless, the company continues to urge Congress to put webcasters on a level playing field with its competitors in the radio business, particularly satellite operators and cable TV music services. In a blog post Wednesday, Westergren lamented, “Pandora’s per-track royalty rates have increased more than 25% over the last 3 years, including 9% in 2013 alone, and are scheduled to increase an additional 16% over the next two years.”

He’s been lobbying for a bill dubbed the Internet Radio Fairness Act, which would have a federal royalties-setting panel use the same criteria for webcasters as it does for other digital radio services. Significantly, it would have the panel consider the webcasters’ investments, technological contributions and risks, as well as the markets they open for recording artists. The proposal is vigorously opposed by numerous musicians and record companies, which argue that it would undervalue their copyrights and force them to subsidize companies like Pandora.

These opponents note that Pandora has built a very large business on the strength of their music’s popularity. And some will no doubt point to the service’s new caps as a better and more appropriate answer to the company’s financial challenges than lower royalty rates.

To Westergren, though, the music industry should bemoan the caps, not celebrate them. “I think it’s deeply counterproductive for artists to limit radio,” he said. “One of the great values is the exposure it provides artists. Limiting it is not in the interests of rightsholders at all.”

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Healey writes editorials for The Times. Follow him on Twitter @jcahealey