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Pandora to buy radio station to piggyback onto cheaper costs

The Internet's biggest radio service goes terrestrial with a deal to buy a South Dakota station, which will shave some royalties but serves more as a shot over the bow of copyright holders.

The leading online radio service took its first step offline Tuesday, but don't expect Pandora to make many more steps in the direction of traditional airwaves.

The company agreed to purchase KXMZ-FM, a Rapid City, S.D., terrestrial radio station. Its first foray into traditional radio broadcasting, the move has little to do with strategic shift and everything to do with royalty costs.

Pandora pays two royalty streams, one for actual sound recordings and another to composers for publishing rights. The sound recording fees make up the lion's share of its content costs. But by buying a terrestrial station, Pandora piggybacks onto a settlement that gives better rates on that smaller fee stream.

That's because a settlement last year put to rest a long dispute between radio operators and one of the big entities that represents publishers -- known as ASCAP -- by rolling back rates for terrestrial stations and their digital arms too. It let, for example, radio giant Clear Channel enjoy the lower rates at its iHeartRadio online offering because it had terrestrial stations as well.

By buying a single radio station in South Dakota, Pandora can qualify for the lower rates.

In an opinion blog post on The Hill on Tuesday, Pandora lawyer Christopher Harrison said the purchase "makes sense even beyond the licensing parity," adding that the company is excited to personalize radio for an entire community.

But don't expect Pandora to be snatching up stations en masse. Buying more stations won't bring Pandora any greater cost benefits.

And Pandora's costs savings will be small. The preferential royalty rates are expected to snag savings worth less than 1 percent of its revenue versus the rates it is currently paying. Based on last year's top line, that equates to less than $5 million.

A Pandora spokewoman said the company has been approached a number of times about opportunities in terrestrial radio. It is only buying one now as a measure against publishers that "discriminate against Pandora" with significantly higher rates.

The paucity of cost savings underscores how the move is also a symbolic protest on Pandora's part. Pandora has been fighting to get its radio costs at parity with traditional stations. It is suing ASCAP for discrimination and anticompetitive tactics. It also lobbied Congress to pass an Internet Radio Fairness Act that would set up a panel of judges to set rates.

Harrison, in his post, lamented how traditional music-industry organizations are using "unprecedented royalty increases" to stunt Pandora.

But the license holders fire back that Pandora is the one taking advantage. ASCAP President Paul Williams said in an e-mailed response that songwriters and composers are struggling to be paid fairly as digital listening increases, and "Pandora is trying every trick in the book to brazenly and unconscionably underpay."

Pandora, not surprisingly, doesn't see it that way. "Certain powerful music incumbents see Internet radio as a threat to the status quo," Harrison said. "Internet radio must be embraced -- not discriminated against."