Pandora Thinks Outside the Box

Cheer up, Pandora Music fans. Your music-discovery site will live to stream another day.

Pandora was one of the many music-streaming sites to receive a reprieve yesterday, when SoundExchange -- the nonprofit company that collects royalties on behalf of the recording industry -- agreed to relax rates that were set to skyrocket next year

Internet radio providers that agree to the new deal will pay up to 25% of their revenue to SoundExchange, a sweeter scenario than what Pandora was looking at last year, with payouts of 70% of to the music industry.

This is a win-win scenario. Pandora is popular, second only to Sirius XM Radio (Nasdaq: SIRI) on Apple's (Nasdaq: AAPL) App Store in terms of current popularity of music apps, even though Pandora's been freely available since the App Store's launch last summer. Despite the success, Pandora's future was threatened by the throat-squeezing royalty increases.

The industry wised up, I guess, considering that 25% of something is better than 70% of nothing.

Are music royalties fair? Terrestrial radio stations don't have to pay them directly to record companies, but satellite radio stations and music-streaming sites, which do an even better job of widening musical palates, with fewer commercials, do have to pay. Go figure. One has to wonder how much further music sales would fall if our exposure to tunes were limited to the FM dial.

Playing nice with Pandora may pay sweet dividends for the tattered music industry. Pandora now has more than 30 million registered users. A press release yesterday emphasized the ad-supported site's success in securing effective marketing campaigns. It specifically mentioned a Bay Area ad in which Pandora promoted a new Whole Foods Market (Nasdaq: WFMI) lunch menu. The 15-second audio ad targeted only those who were within seven miles of a Whole Foods organic supermarket.

Riding on the back of savvy tastemakers may be the music industry's best move in years. Warner Music Group (NYSE: WMG) isn't projected to turn a profit until 2011 at the earliest. Major artists are dumping their labels and choosing the open-ended potential of direct distribution. Striking revenue-sharing deals with Internet radio and sites such as Google's (Nasdaq: GOOG) YouTube will never be enough to fill the void of diminishing CD sales, but that's a point of no return. Non-terrestrial radio and video sites offer convenient promotional platforms. Profiting from them through revenue-sharing deals is gravy, at a time when the industry's meat and potatoes can use a little more sauce.